Compared to other financial markets, the forex market offers many advantages, such as 24h trading, no commissions and margin trading.
Most of the advantages forex trading offers are listed here below.
Advantages of forex trading
Although the forex market is by
far the largest and most liquid in the world, day traders have
up to now focused on seeking profits in mainly stock and futures
markets. This is mainly due to the restrictive nature of bank-offered
forex trading services.
Advanced Currency Markets (ACM) offers both online and traditional
phone forex trading services to the small investor with minimum
account opening values starting at 5000 USD.
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 at least 3 pips on EURUSD which is the most widely traded and liquid currency pair. ACM offers a 2 pip spread on EURUSD. In stock trading, only liquid stocks offer tight spreads. Those spreads often represent on average between 0.04% and 0.06% of the value of the stock. In comparison ACM offers a 2 - 3 pip spread on all major currencies, this equates to approximately between 0.015% and 0.025% on the underlying dollar value.
Exact percentages at current rates (November 2008):
EURUSD 2 pips 0.015%
GBPUSD 3 pips 0.02%
USDJPY 2 pips 0.020%
USDCHF 3 pips 0.025%
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. Forex trading commissions
ACM offers forex trading commission free. This is in
sharp contrast to (once again) what stock and futures brokers offer.
A stock trade can cost anywhere between USD 5 and 30 per trade
with online brokers and typically up to USD 150 with full service
brokers. Futures brokers can charge commissions anywhere between
USD 10 and 30 on a round turn basis.
3. Forex trading margins requirements
ACM offers a forex trading with a 1% margin. 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.
4. 24 hour forex trading
Forex trading market 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.
5. No Limit up / limit down
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.
6. Sell before you buy
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.