How Does FOREX Compare to Other Investment Markets?
Carl's 2 Cents:
All is true except that
commission free statement. Yes, it is true
that many Forex brokers don't charge
commissions. However, that does not mean
there are no trading costs. One of the
trading costs is the spread. In a standard
account, 5 Pips of spread mean $50 per lot.
That is the cost we should consider. The
other trading cost is the interest. We may
get debited or credited interest based on the
currency pair we trade. For example,
Dollar has higher interest rate than Yen.
If we sell Dollar and buy Yen (i.e. Short USD/YEN),
interest changes will be taken from the account.
Commission-free trading:
In the equities and futures markets, individuals generally place their orders with a broker, who in turn routes the order to a market maker or exchange where the order is actually executed.
As a result, two parties charge fees: the broker charges a commission, and the firm who executes the order on the exchange charges a spread (a cost that is usually hidden in the equities and futures market, but is transparent in the FX market). In the FX market, you pay only a very small spread - and thus enjoy a much lower transaction cost.
Automated Margin Watcher:
Trading on margin, or with borrowed funds, in the equities and futures market is extremely risky, as the trader can be liable for more than their original deposit if the position goes against them.
In the FX market, though, trading on margin does not possess the same risk: traders' positions will be closed out if the position goes against them and their account value falls below their margin requirement.
Short Selling Without An Up tick:
Short selling, or the ability to enter a sell position and profit if the price goes down, is just as easy as buying in the currency market. While most equities markets have rules that hinder short selling - like the
up tick rule, which states that the last price must have been an upward movement before a trader can enter a short order - the currency market does not have the same rules. Traders who think the euro will rise in value can simply buy euros and sell dollars;
alternatively, those who think the euro will fall in value can sell euros and buy dollars, all through the same single trading account and with the same amount of ease. As a result, the currency market presents opportunities for profit regardless of economic cycles.
24 Hour Trading:
While most exchanges have limited hours, the banks and market makers that operate the currency market are open 24 hours a day for trading. With most Forex brokers, traders have access to the FX market from Sunday 5 PM EST to Friday 4 PM EST.
100:1 Leverage on Standard Accounts:
The leverage ratio, specifies the monetary amount a trader can trade above and beyond his/her initial deposit. The FX market allows for greater maximum leverage, and thus allows traders to more precisely customize their level of risk aversion.
About the Author
Toby Smitz is a full time Forex trader at fxtsp.com.
Written by: Toby Smitz
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