The first key advantage of Forex trading is the cost of leverage. Forex margin requirements are only about 1% compared to 5% for Futures and 50% for Stocks. So by pledging a small amount of collateral (margin) in Forex trading, you can control a much larger currency value. A mere $1000 of margin controls $100,000 of foreign currency assets. Hence, a Forex trader can gain potential profits on an asset base that’s 50 times greater than a stock trader and 5 times greater than a futures trader.
So if you’re willing to design an investment strategy based on margin, Forex trading can be very profitable. But thoroughly understanding the risks involved is fundamental. Learning how a margin account functions by first thoroughly reading your margin agreement from your clearing firm is a prerequisite to delving deeper. Your account representative’s job is to understand your objectives and should be your first recourse for any questions of your own.
If your available account margin falls below a predetermined amount, it’s likely that your account would be partially or completely liquidated to restore legal levels. Your positions can be legally liquidated even before you receive a margin call. Consequently, you need to monitor your margin balance regularly and limit downside risk by employing stop-loss orders on every open position.
Exchange fees and brokerage fees are mandatory when trading futures. However, another key advantage of the Forex market is that you can trade commission free, though spreads are somewhat higher compared to futures trading. The instantaneous matching of buyers and sellers is a unique feature of trading currencies, as well as the worldwide inter-bank marketplace.
Limited risk in Forex trading is another uniquely attractive feature as compared to Futures trading. For example, when Mad Cow Disease was discovered in US cattle, live cattle prices fell dramatically, moving the limit down for several days. You entire account equity could have evaporated in such an environment. Furthermore, as prices kept falling, you would have been obligated to deposit more money to restore the legal margin requirements in your account.
Also, since futures contracts expire periodically, you must make prior decisions as to whether to roll over your trades into the next contract. Similarly, Forex positions expire every two days, so to maintain your positions, you must rollover each trade.
As the largest marketplace on earth, Forex trades 24 hours a day, Monday through Friday, transacting over $4 trillion each day. In fact, Foreign Exchange is 46 times larger than all the futures markets combined. Indeed so large that Governments have great difficulty in controlling the price of their own currency because so many people do Foreign Exchange trading daily. In contrast, the futures market is only open a few hours each business day. So breaking news that often heavily impacts the Futures market, can only be acted upon in the next daily trading session.
The unique aspects of the Forex market discussed thus far, make it a highly attractive alternative to futures, commodities and stock trading. But it is necessary to secure the services of an professional Forex broker. By carefully following the directions shown below, you’ll find the whole process much more simple.
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