Foreign Exchange Benefits

As a foreign exchange trader you will always be attempting to make more profits than losses from the fluctuations of exchange rates between currencies in the foreign exchange market; in short, this is what is called foreign exchange trading. The good news is that nobody is going to ask you for a diploma, or somehow verify the amount of hours you've spent studying the foreign exchange market (FOREX). All you need is the proper training and the tools that will help you become a profitable trader. But this is not the only benefit you get when trading foreign exchange, compared to other ways of investment and speculation as stocks. You have other great benefits that will make you decide for foreign exchange and forget about stocks and commodities. Foreign exchange trading has many benefits in comparison with futures and stocks, some of which are listed below.

Foreign Exchange Benefits, No. 1: No Bear Market in Foreign Exchange.

One of the foreign exchange benefits is that you can have access to a mutually-inclusive (two-way) exchange of world currencies. In other words; currencies trade in "pairs" (for example, US dollar vs. Yen or US dollar vs. Euro). One side of every currency pair is constantly moving (up or down) in relation to the other one. Thus, when you buy a particular currency, you are actually simultaneously selling the other currency in that particular pair. As the market moves, one of the currencies will increase in value while the other will decrease proportionally. One of the most exciting foreign exchange benefits is the ability to generate profits whether a currency pair is 'up' or 'down'. A trader can profit by taking a 'long' position, (buying the currency pair at one price and selling it later at a higher price), or a 'short' position, (selling the currency pair and buying it back at a lower price). For example, if you think the US dollar will increase in value vs. the Japanese Yen then you will buy Dollars and sell Yen. If you think the Yen will increase in value against the Dollar then you will sell Dollars and buy yen.  It is up to you to choose the correct currency to be long or short. Since currency trading always involves buying one currency and selling another, it all means that you have equal potential for profits in both a rising and falling market.

Foreign Exchange Benefits, No. 2: Lower Margin and High Leverage

Just like futures and stock speculation, a foreign exchange trader has the benefit to control a large amount of the currency basically by putting up a small amount of margin. However, the margin requirements that are needed for trading futures are usually around 5% of the full value of the holding, or 50% of the total value of the stocks, the margin requirements for foreign exchange is about 1%, that is a 100:1 leverage.  For example, margin required to trade foreign exchange is $1000 for every $100,000. What this means is that in trading foreign exchange, a currency trader’s money can play with 5-times as much value of product as a futures trader’s, or 50 times more than a stock trader’s. When you are trading on margin, this can be a very profitable way to create an investment strategy, making it one of the most important foreign exchange benefits, but it’s important that you take the time to understand the risks that are involved as well. You should make sure that you fully understand how your margin account is going to work. You will want to be sure that you read the margin agreement between you and your clearing firm. You will also want to talk to your account representative if you have any questions.

The positions that you have in your account could be partially or completely liquidated on the chance that the available margin in your account falls below a predetermined amount. You may not actually get a margin call before your positions are liquidated. Because of this, you should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.

Foreign Exchange Benefits, No. 3: Most Price Movements Are Highly Predictable.

Many times currency prices in the foreign exchange market may be volatile, but they have the great benefit of generally repeating themselves in relatively predictable cycles, creating trends. The strong trends that foreign currencies develop are a significant advantage for traders who use the ‘technical’ methods and strategies.

Unlike stocks that sometimes seem to simply lay down in narrow price alleys, currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends. It is known that over 80% of the trading volume in foreign exchange is speculative in nature and, as a result, the market frequently overshoots and then corrects itself. As a technically-trained trader, you can easily identify new trends and breakouts, which provide for multiple opportunities to enter and exit trading positions.

Foreign Exchange Benefits, No. 4: No Commission and No Exchange Fees

When you trade in futures, you have to pay exchange and brokerage fees. Trading foreign exchange has the benefit of being commission free. This is far better for you. Currency trading is a worldwide inter-bank market that lets buyers to be matched with sellers in an instant.

Even though you do not have to pay a commission charge to a broker to match the buyer up with the seller, the spread is usually larger than it is when you are trading futures. For example, if you were trading a Japanese Yen/US Dollar pair, foreign exchange trade would have about a 3 point spread (worth $30). Trading a JY futures trade would most likely have a spread of 1 point (worth $10) but you would also be charged the broker’s commission on top of that. This price could be as low as $10 in-and-out for self-directed online trading, or as high as $50 for full-service trading. It is however, all inclusive pricing though. You are going to have to compare both online foreign exchange and your specific futures commission charge to see which commission is the greater one, and add this to your list of foreign exchange benefits.

Foreign Exchange Benefits, No. 5: Limited Risk and Guaranteed Stops

When you are trading futures, your risk can be unlimited. For example, if you thought that the prices for Live Cattle were going to continue their upward trend in December 2003, just before the discovery of Mad Cow Disease found in US cattle, you would have been unfortunate to find out that the price for it fell dramatically after that, which moved the limit down several days in a row. You would not have been able to leave your position and this could have wiped out the entire equity in your account as a result. As the price just kept on falling, you would have been obligated to find even more money to make up the deficit in your account. One of the foreign exchange benefits is that you are never 'stuck' in a trade. You can even set the online trading platform to automatically close your position at your desired profit level (limit order), and/or close a trade if a trade is going against you (stop order).

When futures contracts expire, you have to plan ahead if you are going to rollover your trades. Foreign exchange positions expire every two days and you need to rollover each trade just so that you can stay in your position. In the spot foreign exchange market, trades must be settled in two business days. For example, if you sell 100,000 Euros on Tuesday, you must deliver 100,000 Euros on Thursday, unless the position is rolled over. Some companies provide services to automatically roll over all open positions - that is, exchange the trade forward to the next settlement date (two business days).

With futures, you are generally limited to trading only during the few hours that each market is open in any one day. If a major news story breaks out when the markets are closed, you will not have a way of getting out of it until the market reopens, which could be many hours away. Amongst foreign exchange benefits, on the other hand, is the fact that it is a 24/5 market. The day begins in New York, and follows the sun around the globe through Europe, Asia, Australia and back to the US again. You can trade any time you like Monday-Friday.

Foreign exchange is indeed the largest market in the world with an average daily volume of $1.9 trillion US. That is more than 46 times as large as all the futures markets put together! With the huge number of people trading foreign exchange around the globe, it is very hard for even governments to control the price of their own currency. This also means that there will always be a demanding buyer or seller for all the major currencies both on the rising and falling edge.

Most online foreign exchange firms offer free 'Demo' accounts to practice trading, along with breaking foreign exchange news and charting services. These are very valuable resources for traders who would like to hone their trading skills with 'virtual' money before opening a live trading account. This is one of the greatest foreign exchange benefits allowing traders to practice trading tactics until confident and successful before they even part with a cent of their own money on the foreign exchange trade market.

One might think that getting started as a currency trader would cost a lot of money. The fact is, it doesn't. Online foreign exchange companies now offer 'mini' trading accounts with a minimum account deposit of only $200-$500 with no commission trading. This makes foreign exchange much more accessible to the average individual, without large, start-up capital.

Trading opportunities exist when prices fluctuate. If you buy a share for $2 and it stays there, there is no opportunity to make a profit. The magnitude and level of this fluctuation and its frequency is referred to as volatility. As a trader, it is volatility that you profit from. Large volume transactions and high liquidity combined with fewer trading instruments generate greater intra-day volatility in the currency market that can be exploited by day-traders. The high volatility of the currency market indicates that a trader can potentially earn 5 times more money from currency trading than trading the most liquid shares, making it one more of the many foreign exchange benefits.

Volatility is a measure of maximum return that a trader can generate with perfect foresight. Volatility for the most liquid stocks is in between 60 to a 100. Volatility for currency trading is at least 500.  In this respect, currencies make a better trading vehicle for day-traders than the equity markets.

Market transparency is highly desired in any trading environment. The greater the market transparency, the more efficient the market becomes. Unlike other markets where transparency is compromised, foreign exchange markets are highly transparent (i.e., analyzing countries, and having access to real-time research / news, is easier than companies).

Amongst foreign exchange benefits is that it offers the highest level of market transparency out of all the financial markets. Because of this, order execution and fill confirmation usually occur in just 1-2 seconds. Markets that do not offer executable prices and force traders to absorb slippage obviously compromise the trader's profit potential considerably.

In the foreign exchange world, order execution is all-electronic and because you'll be trading via an Internet-based platform, instantaneous execution is routine. There are no exchanges, no traditional open-outcry pits, no floor brokers, and consequently, no delays.

Another of the foreign exchange benefits over stocks is the advantage of trading focus; instead of having to choose between over 4,000 stocks you can deal with 7 main currency pairs. Any good business person knows that focussing on too many things is a recipe for financial disaster and this can hold equally true in the stock market. A stock trader also must grapple with the time issue doing research on all those potential stocks presents. It is also much easier to become familiar with 7 areas as opposed to 4,000. Focus is the name of the game.

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