Forex trading

On this page we will discuss the pros and cons of the Forex Market. In addition we will discuss the differences between the Forex and the Equity markets. We hope that this will help you to understand the Forex market better.

We already know that the foreign currency exchange sector is very successful; thanks to factors such as variability, size and global structure which have contributed to the success. The Forex market is the most liquid market in the world. People who wish to invest and hold a Forex position many times bigger than their own account can do so without having to worry about it having an effect on exchange rates. The margin to do this is fairly narrow which makes holding larger positions accessible for more people. An example: a Forex trader can hold a Forex position worth US$100,000 in their account by placing a small deposit such as US $1000 and asking a Forex  broker to back them up.

Investing in big Forex positions generates a great deal of leverage. This leverage functions as a double-sided coin; people who invest can receive huge profits from a small price changes, however there is also a loss-risk. The Forex Market will always harbour risks, but high leverages are very profitable and this is what keeps customers interested.

The currency market is really the only market that is available 24/7 and guarantees a good liquidity. It is an ideal trading market for people with a busy lifestyle. By looking at the figure below you will notice that large hubs of trading are located in various time zones. This means you will hardly ever be in a position where you can not make a trade because the market is closed! When the US exchange closes, the eastern markets only just start! This enables you to trade throughout the day.

The Forex market offers enthralling experiences, although the risks attached are often larger than when dealing in equities. The forex market has very high leverages. Ultimately this can go terribly wrong and you could lose a lot of money – or even your entire trading account – within a very short period of time. As a beginning trader it is very important to understand these things to prevent yourself from going down because of the quick currency rate changes. The rates change with a very fast rate due to huge cash amounts along with the numerous players involved and the people trading react quickly to any information that comes out. 

Based on percentages currencies do not shift as fast as equity does (the stock of a company can devalue in a short period after a small drop) There is a huge leverage in the currency market and this creates variability. If you have a 100:1 leverage on a $1000 investment, then you have $100,000 in your control. If you exchange $100,000 into another currency and the value changes 1% in the wrong direction the capital will devalue, leaving you with $99,000 - a loss of $1000. This $1000 is the amount of your initial investment, so this means you have made a total loss of 100%.

A lot of people trading on the equity market equity do not consider leverage when they build their strategy. This means that they only lose $10 with an initial investment of $1000 combined with a 1% value change. So thinking about the risks involved when dealing on the Forex market is very advisable before you actually start trading.

A big difference between these two markets is the amount of trading options. Forex offers very few options when compared to the equity market. The Forex market only focuses on currencies, we will give you a quick rundown of the main pairs that are traded on Forex: USD/CHF, USD/JPY, EUR/USD and GBP/USD and the commodity pairs: AUD/USD, NZD/USD and USD/CAD. The rest of the paired currencies that are used are various combinations of equivalent currencies. Therefore the trading of currencies is much easier than having to sift through thousands of different stocks to find the most profitable value. Forex traders have the easy job of keeping up to date with the most important 8 countries, both economically and politically. 

Markets dealing with equity also have their lows, this leads to a slowdown in trading, consequently this leads to traders not being able to close or open a bid on an exact position. When the market is at a low point, the more experienced and shrewd equity trader have a higher chance to still make profits. Due to tough guidelines and rules in the U.S market of equities it is hard to ‘go short’. The Forex market offers traders the chance to gain in markets, which are on the up, or going down, as you will always be selling and buying at the same time, so short selling is always part of it. Furthermore, the liquidness of the forex market means that customers don’t need to hold out for an uptick preceding entering a short sell, as they are always present. 

The Forex market is liquid and this results in smaller margins with a bigger leverage. You will not find low margin rates in the equity market. Many customers who deal with margins in the equity market require a minimum margin of half the investment value. Forex brokers require only 1% Which – In comparison – is a much smaller amount. In addition, the payable commissions are higher in the equity market than in the Forex market. Most popular brokers require commission payments in addition to the spread and exchange payments. Spot brokers only require spread payments.

At this moment you should have generated a bit of knowledge about the Forex market. Interested in reading more? Continue to tutorial 2!