Almost all currency trading is based on speculation even when financial and commercial transactions are part of the trading volume. This means that traders that buy and sell based on intraday price movements comprise most of the trading volume. The trading volume by speculators is estimated to be more than 90% in the forex market.
It is very easy for anyone to buy and sell currencies due to the liquidity being very high. People are always buying and selling currencies.
Liquidity is of the utmost importance in the eyes of an investor because it determines how easily price can change over a given time period. Huge trading volumes happen with very little effect on price or price action due to a liquid market environment like forex.
Several Ways to Trade Forex Risk Free
Currencies are traded “on the spot”, or immediately, using the current market price. This market is great because of round-the-clock operations, simplicity, liquidity, and tight spreads. It doesn’t take much to open an account with a broker, and they usually provide risk free trading information and market analysis.
Certain assets are bought at a specified price on a future date using contracts. The market is very well regulated and transparent since future contracts are standardized and traded though a central exchange.
This is when the buyer has an “option”, but not an obligation to buy or sell an asset at a specified price on the option’s expiration date. Options are also traded on an exchange. However, one disadvantage to trading options in the forex market is that the liquidity is not nearly as great as the spot market or futures and market hours are limited for certain options.
Exchange-traded funds, or “ETFs”, could contain currencies along with a set of stocks. They are the newest members of the forex world. Currencies combined with stocks allow the trader to diversify with different assets. However, just like options, the market isn’t open 24 hours. They are also have commissions and other transaction costs just like stocks.
Online Forex Trading Advantages
- No Middlemen - Trade directly with the market responsible for the pricing on a certain currency pair.
- No Fixed Lot Size - You determine your own lot or position size in spot forex. Traders can participate with accounts as low as $100.
- No Commissions - Most retail brokers make money through their services through the “bid-ask spread”. There are no exchange fees, brokerage fees, government fees, or clearing fees.
- Low Transaction Costs - This depends on your leverage, but most brokers have a retail transaction cost of less than .1% under normal market conditions. The spread could be as low as .07% with larger brokers.
- Leverage - With leverage, small deposits can control a larger contract value. Leverage keeps risk capital to a minimum while giving the trader the capabilities to make larger profits. Just remember that leverage works both ways so its important to have proper risk management to not inquire large losses. An example would be if a broker had a 100-1 leverage, and a trader deposits $100, the trader would actually be able to trade $10,000.
- Low Barriers to Entry - This makes forex trading more appealing to the average person who doesn’t have a lot of capital to start with compared to trading stocks. Many forex brokers offer “Micro” or “Mini” trading accounts that require deposits of $100 or less. This is not recommended though.
- Demo Accounts - Demo accounts are great to build your skills in trading and for general practice. It is advised for new beginners to first open up a demo account to really get the feel for the forex market. There is nothing to lose when you’re not risking real money, and if you are doing great, then you can go ahead and open up a live account.
Stocks VS Forex
With over 8,000 stocks listed on the NASDAQ and the New York Stock Exchange (NYSE), who has the time to keep up with all of those companies? The forex market has a few dozen currencies traded, but most of the trades are comprised of the 4 major currency pairs. That’s much easier to keep track of then thousands of stocks! Some other reasons to trade forex over the stock market are listed below:
- Minimal or no Commissions - There are no additional transaction fees to trade currencies online or over the phone. Brokers are compensated through their “bid-ask” spread.
- 24-Hour Market - Most brokers are open Sunday at 4 P.M. till Friday at 4 P.M. You can customize your own trading schedule and have 24/7 customer support whenever you need it.
- Instant Execution of Market Orders - The price that is shown to you when you execute your order is the price you get under normal market conditions.
- No Middlemen - Middlemen cost traders in either time or fees or both. While centralized exchanging have their benefits, they also have disadvantages. Spot currency trading is decentralized, so forex traders get cheaper costs and quicker access.
- Short-Selling without an Uptick - Regardless of whether a trader is long or short, trading opportunities exist in the currency market. There is no restriction on short selling unlike the equity market. Therefore in a rising or falling market, you always have equal access to trade.
- Buy/Sell programs do not Control the Market - The liquidity is unprecedented in the spot forex market with participants from hedge funds, banks, governments, and retail currency houses. This makes it very unlikely for any one of them to control a particular currency. However, the stock market is very susceptible to large fund buying and selling.
- Analysts and Brokerage Firms are Less Likely to Influence the Market - Foreign exchange analysts have little effect on exchange rates. Stocks on the other hand, have had analysts accused of keeping their recommendations quite frequently over the years despite the government trying to step in and discourage this activity. This is because the relationship between a stock analyst of a prestigious broker and the companies as clients are mutually beneficial. This catch-22 will never go away.
Forex VS Futures
Let’s now look at the advantages of forex over futures below:
- 24-hour Market - Future currency contracts in do have overnight markets, but they are not very liquid, thinly traded, and are quite arduous for the average trader to access. In the forex world, by the time the Sydney market closes, the New York market opens while having London and Tokyo opening in between. It is a 24-hour seamless ending market.
- Minimal or no Connections - Commission fees are very low compared to what you would pay in the futures market.
- Liquidity - The futures market only trades 30 billion a day compared to the 4 trillion a day traded on the forex market. Once again, it is the largest, most liquid market in the world. There is very limited liquidity in the futures market.
- Price Certainty - The price for fills for futures are far from certain even with electronic trading. Most often, the prices represent the last trade and not the price for which the contract will be filled. However with forex, you get rapid execution speeds and price certainty.
- Guaranteed Limited Risk - Traders are liable for any deficit in their accounts when trading futures and their position gets liquidated at a loss bigger than the amount they have in their account. However, in the forex market, traders have proper risk management from their platform. A margin call is generated if the margin amount exceeds the capital in your account. Open positions will be closed immediately.