From well-known stocks of blue-chip companies to futures on commodities, there are numerous instruments for trading available to individuals looking to achieve success through their market knowledge and analytical skills.
Among all these markets, forex generates the largest turnover. This market with an approximate daily volume of $5 trillion, has unique characteristics that give it an edge over traditional equities and futures markets. So, what are the differences between forex trading and other market investments?
A Market that Operates 24/7
The forex market operates 24 hours a day. Trading through the inter-bank market occurs across the globe in different time zones. So there are buyers and sellers all the time, somewhere around the world, who are actively trading forex. Traders can respond to breaking news on an immediate basis and after hours earning reports do not affect P&L. This is quite different from other markets, such as futures, where trading times depend on the underlying commodity, market or asset.
No Restrictions on Trading
Unlike trading in futures or equities on a regional exchange, where markets have limited availability for a small part of the day, forex trading has no such restriction. You can enter, exit or modify a trade at your convenience.
The forex market gives superior liquidity amongst all other markets. The sheer size of the market and staggering number of market players leads to huge trading volumes. This allows traders the ability to enter and exit rapidly at fair market prices. The liquidity of major currencies helps ensure price stability.
Lower Transaction Costs
One key difference between forex trading and other market investments is that forex trading is cost-efficient. Most forex accounts trade without commission, expensive fees or data licenses. The bid-ask spread, which is the cost of trading, is transparent. While in other markets, you must pay commissions to brokers alongside the spread amount, forex brokers often offer trading tools and market information as part of their free services.
The forex market also offers the highest leverage levels. Leverage can enable clients to trade much higher amounts than their actual deposits. Sometimes, the actual size of transactions is 500 times the margin put into account. This contrasts with other markets, where you must deposit substantial amounts to begin trading. Forex trading can be done with lower deposits, which makes the market accessible to all types of traders. However, leverage is the risky aspect of trading, and could wipe out an entire account. Much caution and research is advised before treading on this path.
Advancement in Technology
The huge number of market players and intense competition makes technology mandatory here. With widespread access to the internet and robust online trading platforms, such as MetaTrader 4, the market has become attractive to retail traders. In fact, they make up about 5% of the total market size. The software on these platforms is user friendly and can help traders make informed decisions through their technical analysis indicators and charting tools. Moreover, they have numerous currency pairs to choose from.
When looking at the differences between forex trading and other market investments it is important to note that although forex trading may be lucrative, the market is volatile. You should be informed about various fundamental factors like economic news releases, geo-political events and risk management before making any decisions.