FOREX trading can be done via day trading, but a very specialized form of it. Day trading is concerned with opening and closing market positions, or buying and selling securities on the same day. It is the job of day traders to buy and sell stocks rapidly throughout the day, and hope that, for the short time they own the stocks, which can be only a few minutes, or even seconds, their value will continue to climb or fall in order for them to make quick profits. However, day trading is a very risky form of trading, which can result in considerable financial losses over a short period of time. Their losses are all the more important, as day traders generally buy stocks on borrowed money, hoping to reap profits, but standing the risk of losses as well.
Day trading is not illegal or unethical, but it can be very risky. The bottom line is that day traders should not risk the money that they cannot afford to lose. Large losses can come as a result of owning stocks overnight, because the risk that their prices may change over this interval is extremely high. This is the reason why true day trading is not concerned with owning the stocks for more than a few hours, and definitely not from one day to the next.
Day trading is also a very stressful job, not only on account of the huge loss perspective, but also because it requires great concentration on the part of the traders, when they have to watch price fluctuations and ticker quotes in order to spot market trends.
The same potential for huge losses is present with FOREX trading as well. Traders have access to high margins with FOREX, which means they only need small outlays of cash to control large amounts of currency. This is why FOREX traders stand to gain huge profits, just as they run the risk of huge losses.
FOREX trading is unique for a number of reasons. One of them is that this market is impossible to manipulate, as it is free of any external controls. Another advantage is represented by the fact that the FOREX market is the largest liquid financial market in the world. The trading performed daily on this market reaches almost two trillion US dollars. The possibility to open and close positions in the market extremely quickly, due to its liquidity, is yet another advantage of FOREX trading.
Not all investors participate in the FOREX market for long-term hedge positions. There are FOREX traders who utilize margin trading in their attempt to gain large profits over a short period of time. This is the reason why the FOREX market has been associated with speculative investments. However, this combination of short-term and long-term investors, each with different investment strategies, generates an attractive environment.
Wednesday, July 29, 2009
Disadvantages Of Forex Trading
After discussing advantages of forex trading we should consider disadvantages as well:
1. Leverage
Today, you can leverage your investment with an online forex broker by 200, or even 400 to 1 and this creates tremendous profit potential. But it's a fact that most traders actually over leverage and lose.
With leverage you need to be very accurate with the execution of your trading signals and very careful with your stop loss protection. When trading on leverage if you are not careful, a quick equity spike will wipe your position.
In stock trading you can buy and hold and you only risk what you have paid for the stock and so long as it comes back you make a profit and you can wait.
In forex trading its different - you have losses that are open ended and they pile up quickly. You can't just sit back - you need to take action.
As most traders lack discipline, they very often hope a position turns around and don't have a get out point. A small loss soon ends up being a big loss and their equity is gone. Most traders hate admitting their wrong - they want the big profit potential leverage gives them but don't think about the downside.
2. Volatility
Forex prices are volatile and make big moves everyday - combine this with leverage and you have a powerful tool for profits which of course can also cause losses.
Most traders have no idea about how volatility affects their trading and how to deal with it. Most forex traders have never heard of, let alone understand "standard deviation of price" yet it's an essential part of any traders forex education.
You have to know what is normal volatility and what isn't, to have any hope of succeeding with your forex trading strategy.
Most traders make the error of placing stops to close to their entry point and they get taken out by normal volatility and this is because they are normally over leveraged. Most traders try so hard to avoid risk they actually create it for themselves.
Tuesday, July 28, 2009
Advantage Of Forex Trading.
There are many advantages to trading spot foreign exchange as opposed to trading stocks and futures. Below are listed those main advantages.
1. Bid/Ask Spread rates
Spread rates have tightened dramatically in the last years. Most online forex brokers offer a spread of 5 pips on EURUSD which is the most widely traded and liquid currency pair.
In the futures market spreads can vary anywhere between 5 and 9 pips and can become even larger under illiquid market conditions (which tends to happen substantially more often in futures currencies).
2. Margins requirements
Usually a foreign exchange trading with a 1% margin is available. In layman's terms that means a trader can control a position of a value of USD 1'000'000 with a mere USD 10'000 in his account. By comparison, futures margins are not only constantly changing but are also often quite sizeable. Stocks are generally traded on a non-margined basis and when they are, it can be as restrictive as 50% or so.
3. 24 hour market
Foreign exchange market trading occurs over a 24 hour period picking up in Asia around 24:00 CET Sunday evening and coming to an end in the United States on Friday around 23:00 CET. Although ECNs (electronic communications networks) exist for stock markets and futures markets (like Globex) that supply after hours trading, liquidity is often low and prices offered can often be uncompetitive.
Futures markets contain certain constraints that limit the number and type of transactions a trader can make under certain price conditions. When the price of a certain currency rises or falls beyond a certain pre-determined daily level traders are restricted from initiating new positions and are limited only to liquidating existing positions if they so desire. This mechanism is meant to control daily price volatility but in effect since the futures currency market follows the spot market anyway, the following day the futures market may undergo what is called a 'gap' or in other words the futures price will re-adjust to the spot price the next day. In the OTC market no such trading constraints exist permitting the trader to truly implement his trading strategy to the fullest extent. Since a trader can protect his position from large unexpected price movements with stop-loss orders the high volatility in the spot market can be fully controlled.
Equity brokers offer very restrictive short-selling margin requirements to customers. This means that a customer does not possess the liquidity to be able to sell stock before he buys it. Margin wise, a trader has exactly the same capacity when initiating a selling or buying position in the spot market. In spot trading when you're selling one currency, you're necessarily buying another.
6. Trade Forex 24 hours a day
Forex market never sleeps. In Forex trading, you do not need to wait the market to open, you can always response to world latest movement and news immediately.
Every Sunday 5.00pm in New York, Forex market starts its week from Sydney, followed by Tokyo, Singapore, Hong Kong, London, and New York. In Forex tradng, you can always response to the market trend a lot faster than in any other trading market.
Leverage trading in Forex market
Also, with the flexibility of Forex market trading time, you can work on your trade in Forex during your free time. This means you can start small and work as part time trader before going full time on FX trading.
Introduction Of Forex/Foreign Exchange.
The foreign exchange market (currency, forex,) trades currencies. It lets banks and other institutions easily buy and sell currencies.
The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.
In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime, which remained fixed as per the woods system.
The foreign exchange market is unique because of
-
- its trading volumes,
- the extreme liquidity of the market,
- its geographical dispersion,
- its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
- the variety of factors that affect exchange rates.
- the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
- the use of leverage
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