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My goal for writing this article is to demonstrate to you the advantages of trading in the FOREX market. However, there is one myth that I want to dispel before I go any further. The myth is that there is a difference between trading and investing. To dispel that myth, I quote Al Thomas, President of Williamsburg Investment Company, who wrote “If It Doesn’t Go Up, Don’t Buy It”. He said “Everyone who invests is a trader, it’s just that the time is different.” It’s a lesson I took to heart after I took a beating in the stock market in 2000.
So now, let’s compare the characteristics of foreign exchange trading with those of stock and commodity trading.
Liquidity – The FOREX market is the most liquid financial market in the world at around $1.9 trillion traded daily. The commodities market trades around $440 billion per day, and the US equity market trades around $200 billion per day. This ensures better trade execution and prevents market manipulation. It also ensures easily executable trading.
Trading hours – The FOREX market is open 24 hours a day (except weekends) which means that in the US it opens at 3:00 PM on Sunday (EST) and closes on Friday at 5:00 PM (EST), allowing active traders to choose the hours they want to trade. Commodity trading hours are all over the board, depending on the commodity you are trading. Including extended trading hours, US stocks can be traded from 8:30 am to 6:30 pm (ET) on weekdays.
Leverage – Depending on the size of your FOREX account, your leverage can be as low as 100:1, although there are FOREX brokers that offer leverage as high as 400:1 (not that I would ever recommend that kind of leverage). Leverage in the stock market can be as high as 4:1, and in the commodities market, leverage varies with the commodity traded but can be quite high. Because commodity markets are not as liquid as the FOREX market, their leverage is inherently riskier. Although I have never been excluded from a commodity trade until the edge of the day, fear was always in the back of my mind.
Transaction costs – Transaction costs in the FOREX market are the difference between the buying and selling price of each currency pair. There are no brokerage fees. For both the stock and commodity markets, there are transaction costs and brokerage fees. Even when using discount brokers, these fees add up.
Minimum investment – You can open a FOREX trading account for as little as $300.00. It took $5,000 for me to open my futures trading account.
Focus – 85% of all trading is done in 7 major currencies. There are 40,000 stocks in the US stock market alone. There are just over 200 commodity markets, although some are so illiquid that they are not traded except by hedgers. As you can see, the smaller number of instruments allows us to study each one more closely.
Trade execution – In the FOREX market, trade execution is almost instantaneous. In both the stock and commodity markets, you rely on a broker to execute your trades and your results are sometimes inconsistent.
While all these features make trading in the FOREX market very attractive, it still requires a lot of education, discipline, commitment, and patience. All trading can be risky.
