Nowadays, investors have access to an ever-increasing number of trading instruments, including blue chips, indices and Forex markets, so choosing which market to trade isn’t always a simple decision. For this reason, traders got to consider variety of things so as to form the simplest choice.
Probably one of the most important aspects is a trader’s risk tolerance and their style of trading. For example, long term investors may be more suited to trading the stock market, whereas short-term traders may prefer markets where the effects of price volatility are felt to a greater extent. With this, let’s explore the reasons why the majority of traders usually opt for trading Forex over stocks.
The Advantages of Forex over Stock Trading
There are several reasons why traders would want to seem at Forex instead of “traditional” stock trading and these are as follows.
Manageable Amount of Trading Choices
The ease of choosing a currency to trade instead of choosing from thousands of stocks is one of the key factors. Stocks can decline even in a bull market if it’s not the best stock in its peer group or if a trader is not in the right sector. Quite often, a sector or stock will fall whilst the overall market rises, so an investor must be excellent at choosing stocks or simply plain lucky.
The currency market with its far fewer choices makes a trader’s job much simpler. As we’ve seen, most Forex traders stick with the main pairs and it’s a incontrovertible fact that most currency trading is between the euro and therefore the US dollar. Even leaving EUR/USD aside, there are only a few other major pairs and by watching those, traders are essentially watching the world. Even if a trader expanded their Forex trading into other sorts of currency pairs, it’s a drop by the ocean compared to the tens of thousands of stocks that exist. Hence, in this respect, currencies are easier to follow.
Currency markets are much larger than equity markets, with the daily trade volume in Forex estimated to be the maximum amount as 10 times larger than the combined volume of all of the world’s stock markets, making it a really liquid market. Due to the high liquidity of the Forex market, margins are low and leverage is high. It is impossible to seek out such low margin rates within the stock exchange because the majority of margin traders got to have around half the worth of their investment in their margin accounts. Forex traders, meanwhile, only require an amount as low as one percent.
The Forex market is a market that trades around the clock. This means that if the price spikes after hours and you are a short-term trader, you can adjust your existing position or enter a new one without having to wait until the market opens the next morning. Forex market liquidity stays deep for most traders around the clock; there are of course, moments when currencies are less liquid, but for most participants, liquidity is fine even then. Spreads also stay tight with the euro-dollar exchange rate typically being 2 pips or less and although they may go to 3 pips when liquidity is not as high, there is rarely a major widening in spreads.
Flexibility to Go Long and Short
Forex offers the pliability to travel long and short with ease which does not happen with stocks. Trading opportunities exist with Forex no matter whether a trader is long or short, so traders always have equal access to trade a rising or falling market. Stock markets on the opposite hand can frequently hit a lull, leading to declining volumes and activity, making it difficult to open and shut positions when a trader would really like to. Furthermore, in a declining market it is only with extreme dexterity or luck that a stock market investor can make a profit. Forex offers the opportunity to profit in both rising and declining markets as, with every trade, a trader is buying and selling at the same time and short-selling is, thus, a part of every trade.
The Forex market experiences a lot of volatility which is ideal for aggressive traders. In addition, currencies are also well-known for staying with the trend for a long time, despite their volatility.
Commissions in the stock market tend to be a lot higher than in the Forex market. Traditional stock brokers charge commission fees on top of their spreads, as well as fees that have to be paid to the exchange. Most Forex brokers do not charge commission or additional transaction fees to trade currencies online.
Generally speaking, Forex trading costs tend to be lower than in other markets and the majority of brokers receive payment for their services by means of the bid/ask spread.
Overall, there are several reasons why traders often like better to check out Forex instead of stock trading. Quite simply, the advantages of trading currencies within the globally accessible Forex market are huge and outnumber those of stock trading. Ultimately though, it is a matter of a trader’s personal preference and risk tolerance.