A lot of reasons have proved why we must choose forex trading over trading stocks. To begin with, the forex market has the highest daily transaction volume and it is very liquid, if not the most liquid. Forex market is always opened 24 hours a day. You enjoy more leverage when you use the Forex market than you could when you use stock trade.
According to the Bank for International Settlements (BIS), the daily trading volume of Forex market exceeds the US $5 trillion. A large market makes it difficult for traders and institutions to manipulate the price. The two markets have their number of trading alternatives although stock markets have more. Most Forex traders concentrate on seven different currency pairs. EUR/USD, USD/JPY, GBP/USD, USD/CHF are the four major currency pairs. Currency trading is easier to follow compared to having to pick from 10000 stocks to find the best value. Forex traders just need to follow up the economic and political news of these eight countries.
Stock markets can result in shrinking in volume and activity after hitting a hull. This makes it difficult for you to open and close positions at any time you like. Equities investors make a profit with extreme ingenuity and sometimes as a result of luck in a declined market. Strict rules and regulations can make short-sell difficult in some countries stock market (USA). On the other hand, Forex makes it possible to profit in both rising and declining markets with ease because you buy and sell at the sometimes on every trade.
10 Good Reasons Why Trading Forex is Better than Stocks
These are the reasons:
Robust Liquidity
24-Hour Availability
Substantial Leverage
Larger Trade Volume
No Enron, no WorldCom, no Tyco
Always Active
Minimal or no Commission
Short-selling without an Uptick
Analysts and Brokerage Firms are less likely to influence the Market
Buy / Sell Programs do not dictate the Market
1. ROBUST LIQUIDITY
As we all know that the Forex is very large, traders enjoy significant liquidity. This makes it easy for traders to exchange assets from one to another. In the Forex market, traders can enter and exit positions anytime any day. You enjoy lower transaction cost as you will be charged less by financial institutions to set up trades. Price manipulation is being prevented by the highly liquefied market.
Changes in price will not be experienced when there is an increase in trade volume. This is what a market with high liquidity enjoys. A Forex market is a decentralized market; it does not have a physical location. Currencies are being bought and sold electronically. Approximately $5.3 trillion was traded as of April 2013. It shows that the Forex market is the biggest market and the most liquid market in the world. This accounts to the trading volume being high and the rate of buying and selling to be high.
One advantage of a liquid market like Forex trade is it simple to trade. It tends to follow the behavior of crowds which is easier to determine that the behavior single investor less liquid markets (stock market). A liquid market is more logical and strict. It also keeps up with price patterns like trends. Liquidity reduces losses. A wrong side of a trade in an illiquid market is one of the worse places to be. You cannot imagine yourself being on a long stock and then it opens with a lower gap of 200 pips the next day. This kind of thing is not common with forex.
The fluctuation of price in a liquid market is lower than that in a less liquid market. Which means their spreads are much smaller compared to the spreads of illiquid markets. We can have a spread as low as 0.2-0.3 pips in most liquid pairs (EUR/USD and USD/JPY). Big companies that trade in the stock markets, normally spread at an average of 20 – 30pips. This is not so for forex, as normal brokers spread at an average of 1.5 – 2.5 pips. This is made possible as a result of high liquidity in the forex market. Through this, traders have been able to trade with ease using different trading strategies that cannot be applied to when using the stock market.
2. 24 HOURS AVAILABILITY
When trading forex, you are opened to currency market 24 hours a day. Currencies are being traded all over the world by investors. No company can partake in international trade without currency. This demand is being serviced by many intermediaries (banks, broker-dealers and other financial institutions). 24-hour access simply means a greater option for individual traders. With Forex market being opened 24 hours, investors can combine this kind of trading with part- or –full-time work. For instance, if you work on a full-time job between 8AM and 4PM in your time zone, you can trade after you close at work.
Forex market is opened from Sunday at 4:00PM EST till Friday at 4:00PM EST. Customer service is available 24/7. You have the ability to trade during US, Asian and European market hours so you can customize your trading schedule.
Reasons why Forex Market Trade 24 Hours a Day:
Over the counter (OTC) trading is one of the main reasons the Forex market is opened 24 hours a day five days a week. There is no particular central location where Forex is being traded. Electronic communication networks (ECNS) is what is used to carry out Forex trading in different locations around the world. Whereas physical exchange is how the stock is being traded. As a trader of stock, you must adhere to the operating hours of the exchange.
What 24-Hour Forex Trading Involve?
The time of highest liquidity is when traders should trade the Forex market; New York session, London session, and Asian session. The spreads at this time will be very low indirectly making volatility high. Traders should also trade during overlap. Overlap is a period of time from 8AM ET to 12PM ET. There is always an increase in liquidity and volatility (in the market) when New York session and London session overlaps.
3. SUBSTANTIAL LEVERAGE
Traders with forex enjoy greater leverage than those of stocks. Investors can borrow money to trade knowing they can potentially enjoy stronger returns. For instance, when you trade on 400:1 margin, you can make $4000000 trade with only $10000 in the margin. 0.25% of the trade is only needed to be put down as margin. You get stronger returns when you apply this approach.
You must not forget that leverage is a double-edged sword, it greatly amplifies losses too. You need to seek the consultant of a financial adviser or another qualified financial professional before using leverage.
The benefits of leverage are likely missed when you trade stock physically. You trade on margin when you use CFDs (Contracts for Difference) to trade stocks. It is so unfortunate that the best leverage offered is 1:10.it is no surprise that forex brokers can offer 1:50 leverage. Retail and professional clients enjoy up to 1:30 and 1:500 leverage offered by Admiral markets respectively. You are able to command a larger position for a given cash deposit when you use greater leverage. You have to actually know how big your underlying position is and point out the risks involved.
4. LARGER TRADE VOLUME
The market with the largest volume in the world is the forex market. An approximate $10 billion in volume is what stock market trades daily. 1% of forex market trades more than this daily. An average of $8 trillion dollars of a currency a day is what Forex market trades. No markets in the world come close to this figure.
Traders viewed that the capitalization of large Forex market lends to less volatility as the price of the market is not impacted by large trade. Large institutions/traders can influence smaller markets; however, this impact is comparatively diluted within the forex market. The forex market is made up of key constituents. Banks are one of the most influential constituents. Within currency space, the largest volume of foreign exchange trading is found within the interbank market. The major share of this market is controlled by US banks. Central banks, investment managers, hedge funds, corporations, and retail traders control the remaining part of the market.
Currency speculators generate roughly 90% of this volume when using intraday price movements. Currency pairs like EUR/USD and USD/JPY responsible for about 41% of all trades yearly. This is a great percentage putting into consideration the scale of all overall forex market size. 85% volume of forex trading is done using the US dollar.
5. NO ENRON, NO WORLDCOM, NO TYCO
The strength of a nation’s economy determines the value of these currencies, not the report of one company. Every market has risk and forex is not exempted. No stable country falls overnight.
A man got into stock trading; he had a personal stock portfolio worth six figures when he was 27. Most of them were Mc Cloud, Enron, and MCI WorldCom. Because of false stock reports from CEOs, his worth was less than $20000 overnight. Things like this cannot happen in forex. It is true that economies go up and down but technical and fundamental analysis will assist you in identifying currency that is going to drop ahead of time. Fine, forex trading contains risks but is telling you corrupt CEO is not one of them.
Since we deal with currency pairs in forex, going down of one currency leads to going up of the other in the pair. This means you can still be fortunate in a country undergoing miseries when you are on the right side.
6. ALWAYS ACTIVE
The stock market is always closed daily this is not the case with the forex market as it is opened every day, except on Saturdays. Forex market is closed just once in a week. Meaning you can trade anytime any day when you think you have got the ability to trade. So, therefore, you can decide how, where and when to trade because of this great flexibility. You always get a good feeling when you know you can trade during US, Asian and European markets coupled with good liquidity anytime any day; is a great advantage to traders that might limit their trading activity.
As a forex trader, you are not limited to the time factor. You can enter the market anytime (except Saturdays) you want. This is not the case for stock trades. This will help you in taking the time to study the forex market very well before making any trade. Forex offers you freedom; you are not under tension to buy or sell your assets.
7. MINIMUM OR NO COMMISSION
Forex market is not like any other exchange-driven markets. They do not collect exchange fees or regulatory fees, no data fees and no commission. This is attractive to new traders. No transaction cost during trading is obviously an advantage. Forex investors make their money through bid-ask spread. Exchange-based markets buy on the bid or sell at the offer. No additional fees or commissions are added when price clears the cost of spread in forex.
Let me show how forex broker fee is being evaluated. Brokers in forex make use of three forms of commission. As I said earlier, investors make money through the spread. They offer a fixed spread, variable spread and sometimes charge a commission according to the percentage of the spread. Spread is simply just bid price versus ask price. When you see “EURUSD–1.5955 – 1.5958”. It means there is a spread of three pips and this is got from the difference between 1.5955 bidding price and 1.5958 asking price. Three pips are three pips any time you encounter a market maker who offers a fixed spread of three pips instead of a variable spread irrespective of the market volatility.
You can expect a spread as low as 1.5 pips or as high as 5 pips any time you are dealing with a broker that offers variable spread. It is controlled by currency pair being traded and the market volatility level.
8. SHORT-SELL WITHOUT AN UPTICK
In the equity market, there is a restriction on short selling in the currency markets. This is not the case in the forex market. Whether a trader is long or short, or whatever way the market is moving does not affect trading opportunities in the currency market. In forex, the market is not structurally biased as currency trading always involves buying one currency and selling another. So you are being given the same opportunity in a rising or falling market. You are “Going short” when you believe that the value of a currency will fall.
In stock, you borrow some particular shares you do not own and you agreed to pay for those shares later. You make a profit which is the difference between the two values; original value and the fallen value after you execute the short sale. Both forex and stock have the same way of “Going Short” but the major difference is that currencies are paired in forex. All forex transactions used to have a long position in one currency, a bet that the value will go up, and in the other currency there is a short position, a bet that the value will go down. You are placing an order on a currency pair when you go short in forex.
Paired currency always has base currency and a quote currency. For example, USD/JPY =100.00. in this case, USD (US dollar) is the base currency and GPY (Japanese yen) is the quote currency. This quote explains that one US dollar is equivalent to 100 Japanese yen. You simply are going short on the Japanese yen when you place a trade on this currency pair.
9. ANALYSTS AND BROKERAGE FIRMS ARE LESS LIKELY TO INFLUENCE THE MARKET
Analysts and brokerage firms influence the stock market. Did you hear of a prestigious brokerage firm being accused of keeping its recommendation (such as buy) when there was a decline in stock? This happens often and often. The government has done a lot in trying to discourage this act but it seems we have not heard the last of it. Companies going public and brokerage houses have big business in IPOs. Analysts in foreign exchange (forex) have no other business than to just analyze the forex market. They do not influence the market as they have very little effects on exchange rates.
10. BUY/SELL PROGRAMS DO NOT DICTATE THE MARKET
The stock market is very susceptible to large fund buying and selling that you hear that “Fund A” has sold “W” or bought “Z”. This is not the case with forex trading. The way the forex market is being set up, the possibility of any one fund or bank taking control of a particular currency is very low.
In forex currency markets where liquidity is unprecedented, the likes of banks, hedge funds, governments, retail currency conversion houses and large net worth individuals are just mere participants.
CONCLUSION
As outlined, many reasons have shown why we should opt for forex trading over stock trading. The forex market has a larger market in scope than the stock market. As a matter of its size, you enjoy greater liquidity that it offers. Greater flexibility is being offered by forex market than the stock market. Forex market is opened 24 hours a day, meaning you can combine forex trading with other responsibilities.
Lastly, you enjoy greater leverage in the forex market than in the stock market. This factor has the potential to increase gains as well as losses.
