The Foreign Exchange Market, or Forex Market, is one of the largest and most globally integrated markets in the world. Individuals, institutions and the global financial system as a whole rely upon the ongoing effective functioning of this market.
Here are a few key advantages of trading Forex over stocks:
- Lower Transaction Costs mean that it is possible to trade profitably with less capital than required for stocks. Unlike stock trading, where discount brokers routinely tack on additional commissions to each trade, retail Forex does not include fees on each transaction.
- Trading Sessions for stocks are limited to exchange hours, generally 9:30 am to 4 pm EST M-F apart from market holidays. The FX market, on the other hand, is open for trading 24 hours a day, 5 days a week. This offers greater frequency of winning opportunities.
- Leverage in the United States, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in parts of the world even higher. Properly managed, significant profits can be made from minute price movements.
- Liquidity in the forex market is by far greater than all other financial markets. With an average daily trading volume of $5.5 trillion per day, it has approximately 30x the daily trading volume of the NYSE and NASDAQ combined. These numbers are increasing as interest by retail traders continues to expand.
- Access to cash is quick and easy. You can go to a cash position in your Forex account and have that cash arrive in your bank account typically within 48 hours.
- No middle men in forex trading means vastly increased efficiency. You can execute a trade in a millisecond from your smartphone directly with the market maker. By comparison, most online stock execution still needs to use a middleman. Even the very large Charles Schwab sends their orders to the floor of the NYSE which leads to slower execution, less efficiency and increased room for error.
- Manipulation of the FX market is not a consideration of risk as it is in the stock market. The FX markets are too large to be manipulated by any investor or group of investors. Even central banks cannot afford to continually try to manipulate the FX market due to its immense size. By comparison, manipulation by short sellers and hedge funds have been historically pervasive in stock markets.
- Taxes on capital gains in the FX market usually work out to 20-22% vs. straight equity day trading in the higher tax brackets of 33-39.6%.
- Technical and Robotic trading are much more ideal in the FX market due to the much greater volume and no daily open and closes. Since humans typically require about 7-8 hours of sleep per day, robotic execution of a managed portfolio of algorithms is often much more effective.
- No Love Lost: People typically will not fall in love with currencies. The same cannot be said for stocks. The key to trading success is emotional discipline. As Warren Buffett said, “If you cannot control your emotions, you cannot control your money.”