Ezy Forex Trading

Forex stands for foreign exchange market or foreign currency market and it is the largest financial market in the world. In short, Forex is a worldwide market for buying and selling currencies. Traders on the Forex include banks, financial institutions, governments, currency speculators and corporations.

The main difference between Forex and other financial markets such as the stock exchange is that Forex is so large, it is impossible for any one institution, corporation or even country to control it. Not only can no one control it, no one can determine its long term direction.

That is because so much money is changing hands daily on the Forex, that it would be impossible for any one body to control. There are simply too many players involved.

While other financial markets like the New York Stock Exchange have physical premises, the Forex does not. That means it is open twenty-four hours a day, five days a week and more or less all year round.

Traders who trade on the Forex basically buy one currency for an amount of money and should that currency appreciate on a given day, the buyer makes a profit.

Typically, quantities of currencies are bought in lots, for example 100,000 euros would be the equivalent to 1 lot. The most common traded currencies are Eur/Usd, Gbp/Usd, Usd/Jpy and Usd/Chf.

The function of the Forex is to allow foreign countries to trade as well as to assist international investment by allowing countries to convert one currency into another. So for example, a company in America that was buying stock from Britain can buy that product and pay in British pounds.

It also facilitates speculation as investors can buy up low-yielding currencies and lend out high-yielding currencies although this kind of speculation has been the cause of controversies as it is said to adversely affect poor performance countries leading to their loss of competitiveness on the global market.

The Forex market is said to be unique because of the following factors:

In economic terms, the Forex market is regarded as the closest model possible to perfect competition. According to the Bank for International Settlements, the average daily turnover for the Forex market as of April 2010 was close to 4 trillion.

The London market is the largest contributor to that turnover that equates to 34 percent of that total global turnover. Next in line is New York with Tokyo coming in third.

The top ten traders include Deutsche Bank, Barclays Capital, Royal Bank of Scotland, JP Morgan, Goldman Sachs and Morgan Stanley. These top ten traders are said to account for 77 percent of all trade on the Forex and they determine the buy and sell prices of currencies on the global market.

A Global 24-Hour Market

The forex market is unique in that traders can access a 24-hour market very conveniently, without having to wait for the markets to open. At any time, there is always a major financial center open where banks, hedge funds, corporations, and individual speculators are trading currencies. Traders can trade during anytime of the day or night, and do not have to wait for any markets to be opened before placing their trades. This is particularly beneficial to people who hold nine-to-five jobs since they can trade it without any problems in the evening or night. The market runs 24 hours for 5.5 days a week because markets around the world open and close at different times. In stock or futures markets, you can only actively trade for less than 7 hours a day.

With the stock and futures markets, one would need to have access to electronic communication networks (ECN) for pre-market trading, or would have to wait till the markets open. The chances of the prices gapping up or down against you are high, especially if there have been news while the markets are closed.

World’s Most Liquid Market

According to the Central Bank Survey of the forex market conducted by the Bank for International Settlements, as at 2004, daily trading volume reached an all-time record high of $1.9 trillion, up 58% from 2001. Do you know that this humongous daily trading volume is about 20 times that of the New York Stock Exchange and the Nasdaq combined?
With about 80 percent of foreign exchange transactions having a dollar leg, you don’t have to worry about liquidity issues when trading any of the these big-economy currencies, which are namely, USD, GBP, EUR, CHF, JPY, CAD, AUD and NZD. However with stocks, futures, options or commodities, you tend to be restricted by their illiquidity especially during after-hours.

Limited Slippage

Most brokers guarantee fills on stop-loss and limit orders on up to a certain number of standard lots, and provide instantaneous trade executions from real-time quotes which are displayed on the screen. There is usually no discrepancy between the displayed price and the execution price during normal market conditions. However, you may be subjected to slippage when you trade during news or during periods of high volatility. In the futures and stock markets, execution price can be vague because all orders must be done through the exchange, and slippage and partial fills are common especially in the futures market due to the chaotic open-outcry system.

Buy Or Short-Sell Anytime

When trading stocks, short-selling is only allowed with an uptick, so it can be very frustrating for traders to wait and see their stocks trend downward, while waiting for an uptick. In the futures market, there is a limit down/limit up rule which kicks in when the contract value declines or increases by more than a certain percentage from the previous day’s close. However, in the forex market, you can short a currency pair anytime without having to wait for any upticks, and this translates to a more efficient and instant order execution.

Profit In All Market Conditions – bull, bear or sideways

With forex, you can have the freedom to long or short currency pairs whenever the opportunity comes, since there are no exchange-enforced restrictions on daily activities, like for stocks or futures.

Flexible Leverage

The forex market offers the highest leverage available for any market. Leveraged trading allows forex traders to execute trades up to $500,000 with an initial margin of only $5000. That means you get as high as 100-to-1 leverage or more, offered by most online forex firms on standard-sized accounts. However, it is important to note that while this type of leverage allows investors to maximize their profit potential, the potential for loss is equally large. The good thing is, it is up to you to select the amount of leverage that you are most comfortable with.

Differences between Forex and Stocks