Thursday, June 29, 2017

What is FX Trading?

dollar signsMost traders will tell you that the New York Stock Exchange is, hands down, the largest and most heavily traded market in the world. Forex currency trading, also known as FX Trading is largely and incorrectly considered a third or fourth tier trading instrument by most retail traders.

But the reality is that the Forex spot market absolutely dwarfs the NYSE in daily volume. This tremendous volume is what creates liquidity for small investors (people like you and me) to easily get in and out of trades without getting killed by transaction costs and large bid-ask spreads that are typical pit-falls for small stock traders.

So what exactly is The Foreign Exchange Market and FX trading?

The Forex market and online currency trading constitute the largest financial market in the world with an average volume of 4 trillion dollars per day.

Compare this to the anemic 74 billion dollars traded on the NYSE every day and you can begin to see who is the real powerhouse when it comes down to sheer volume and liquidity (liquidity is good).

There are many differences when comparing stocks to currencies.

These differences, in my opinion, make FX trading a much better market for small retail traders. Reviewing all of the reasons that currency pairs are a superior trading vehicle would be beyond the scope of this report, but I will touch on five of the more important and useful differences that will clearly show the advantages to trading forex over stocks.

fx trading options1. Stock vs currency selection:

Consider that between the NYSE, the Nasdaq and the AMEX their are over 10,000 stocks to choose from. Each of these issues requires detailed research if you intend to be an informed investor. Even if you narrow down your watch list to only include the most liquid and highest rated companies you are still looking at over 3000 stocks within this filtered basket. Compare that to the dozens of currencies traded in the Forex and that the majority of FX trading is done
with only 4 pairs, you can begin to appreciate how much easier it would be to research 4 currency pairs instead of 3000 stocks.

2. 24 hour market:

Currency markets are open 24 hours a day all over the world. Most brokers are open from Sunday at 4:00PM until Friday at 4:00PM EST. This enables the individual trader to enter and exit trades anytime they want. If you work all day… you can run your trading business at night.

In the stock market, if you are holding a stock that has negative news after the market has closed you have very little options for a favorable or quick exit.

3. Lower transaction costs:

Unlike stocks, the majority of Forex brokerage firms do not charge commissions or transaction fees. Additionally, the bid-ask spreads are generally very tight and transparent. This transparency reduces slippage costs that are frequently experienced by stock and option traders.

4. Short selling:

With the exception of exchange traded funds, stock prices require an uptick before your broker can fill a sell order. This rule was established to reduce panic selling of stocks and to prohibit automated sell orders from the big hedge fund managers. But if you are looking to sell a stock in a rapidly falling down market… the up-tick rule could cost you a lot of money.

Currency pairs are structured so that if one currency is going down in value, the other currency has to go up. This changes the directional bias as defined by the short selling of a stock thus allowing opportunities for profit in either direction when FX trading without being hampered by an up-tick rule.

5. Leverage:

The Forex markets allow a trader to control a much larger amount of currencies with a small deposit. This leverage can allow the trader to experience greater profits with a smaller account while still controlling risk. For instance, if the leverage on a trade is 20 to 1, then $100.00 on a margin deposit will control $2000.00 worth of currencies.

These margins can provide a very attractive risk/reward profile for traders with small accounts as long as they exercise discipline and proper money management rules.

As you can see, the Forex markets offer traders many opportunities that are difficult to find when trading stocks, options or futures contracts. Despite these advantages, if you have never traded currencies before, education and training are crucial.

Enrolling in a recommended Forex course will allow you to learn and fully understand price quotes, margin requirements, risk and proper money management rules.

Once you have learned the basic fundamentals of how the forex market and currency pairs are structured you can then begin to focus on learning various trading strategies and systems.

FX trading can be very profitable when entry and exit signals are generated by a proven, backtested trading system. This is the path that most successful traders follow. A robust trading system that generates buy and sell signals, cuts losses and protects profits will allow the currency trader to make decisions because of arule based strategy rather than emotions.

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