mardi 21 juillet 2009

Benefits of Currency Trading vs. Equity Trading

Historically, currency trading has been a “closed” market, reserved primarily for major banks, multi-national corporations, and other large organizations. These institutions trade in large transaction sizes and high volumes and it has been next to impossible for smaller-scale, individual investors to participate in an equal and competitive manner.

This all changed however, as new technologies such as OANDA's proprietary FXTrade platform have made it possible for smaller investors to participate directly in the forex market. By lowering these traditional barriers, the forex marketplace is now open to a new group of forex investors.

Forex trading is rapidly winning favour as an alternative investment opportunity thanks not only to new trading tools pioneered by OANDA, but also because forex trading has several inherent benefits when compared to equity trading. This page lists some of these benefits.

Continuous, 24-hour trading
The currency exchange market is a true 24-hour market, operating five days a week. Equity trading, on the other hand, is restricted to the operating hours of the various equity exchanges. While after-hours trading for equities has become available to a limited degree through some electronic communication networks (ECNs), there are no guarantees that liquidity will be maintained after-hours or that trades can executed at true “market prices”.

High liquidity and greater efficiency
Key to any efficient market is high liquidity. After all, as a trader, you want to know that you have an active market with plenty of buyers and sellers looking to participate. Trading volumes in the currency market can be one hundred times larger than that of the New York Stock Exchange, and daily dollar amounts traded in foreign currency approaches $3 trillion compared to less than $100 billion for the NYSE. High volumes and “round-the-clock” trading ensures an active market for currency traders and greater liquidity.

The incredible volumes traded in the FX market also contribute to the integrity of the market—it is virtually impossible for an individual or group to manipulate prices. Compare this to the equity markets, where large price movements can be triggered with no warning should a major holder of a stock suddenly decide to reduce their holdings.

Intra-day volatility
FX trading is centered around a handful of currency pairs referred to colloquially as the big seven. The high volume and liquidity combined with fewer active instruments generates greater intra-day volatility than the equity markets where hundreds of stocks are actively traded. It is this volatility that can be profitability exploited by forex traders.

Low spreads
Currency trading offers spreads that are much lower than what can be obtained when buying or selling equities, especially during after-hours trading. Although exceptionally tight currency spreads were previously reserved for transactions involving $1 million or more, a shift towards tighter spreads for smaller transactions is gaining traction. Again, OANDA's FXTrade is an industry leader in offering tight spreads regardless of the size of the trade.

Margin-based leverage
Leverage—or margin based trading—makes it possible for FX market participants to submit trades valued considerably higher than the deposits in their trading accounts. Typically, margin ratios for trading currencies are higher than those permitted for equities, and this is primarily attributable to the higher level of liquidity within the currency markets.

To illustrate the power of leverage provided through the use of margin, consider a margin ratio of 20:1 coupled with a trading account containing $10,000. This means that you could trade amounts up to $200,000! Trading in larger volumes allows you to take better advantage of even small price movements (but can also dramatically increases your risk). Read about OANDA's margin policy.

Profit potential regardless of market direction
By definition, an investor with an open forex position is long one currency and short another. If you determine that a currency is about to fall in value, then you can sell that currency short and go long with another currency. No matter whether you buy or sell a currency pair, however, every trade you make involves the buying of one currency and the selling of another. Therefore, potential exists in the FX market regardless of whether the market is moving up or down.

Short-selling is much less common in the equity markets and there are many rules and regulations that you must abide by when shorting stock. This can make it difficult for you to take advantage of a declining share price or market trend. These same restrictions do not apply to the FX market, thereby allowing you to gain no matter which direction the market heads.

No commissions or transaction costs
A currency transaction typically incurs no commission or transaction fee outside of the quoted spread. This is in stark contrast to the equity market, where commissions for stock trades can range anywhere from $8 to $70 per trade, in addition to the quoted spread.

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