Wednesday, September 23, 2009

Online Forex Currency Trading Advantages


Here are the benefits online forex trading which has "levelled the playing field" for everyone looking for a way to generate a cash flow for themselves.

Do you feel that any (or all) of these appeal to you?

You can trade forex from anywhere

You can do forex trading from anywhere as long as you have a computer, and an internet connection. If you wish to travel to several places a year, or wish to settle in one place, either way, that’s fine. This frees up your time and place, which is what trading is all about!

No commissions

In forex there are no commissions.

This fact alone improves the profitability of any trading system. You won’t have to overcome the commission to gain a profit, you have to just overcome the spread. Note that with most other trading instruments you’ll have to pay a commission to open and close the trade.

Without commissions in forex, it means that your forex trading is scalable. If you want to try out a new forex trading system with small trades, you can do so and be profitable, as long as your forex provider doesn’t charge a fee for small trade sizes (many don’t).

And on the other side of the equation, you can keep compounding your profits, so you can keep increasing the size of your returns over time. This is one of the huge advantages for those who trade forex. And this does not represent a problem in getting in or out of trades because of the high liquidity in forex.

High liquidity

Many traders who now trade forex, used to trade other instruments such as shares, CFDs (contracts for difference), or commodities. With those other instruments, there were often problems with limited liquidity. That is, when the market had limited turnover, you may be getting into and out of stocks or CFDs with significant slippage. As well, you would not be able to take advantage of the effect of compounding to increase your profit sizes as your float increases.

However with forex, because of its very high liquidity, you can.

That is, you can increase your trading sizes in proportion to your float, as your float grows. With a profitable system, your absolute profit sizes will increase over time. As mentioned int he last point also, this feature alone has allowed many traders to replace their income with forex trading, and then to continue scaling up beyond that. The forex turnover is estimated to be 1.9 trillion dollars a day, many times larger than the largest stock markets in the world.

Leverage

There’s up to 100 to 1 leverage in forex trading.

What this means is that even with a modest float, you can make decent profits. This makes forex trading accessible as a trading tool.

For example, if you had a cash float of say $5000, then the value that you can trade with is $500 000, assuming 100 to 1 leverage. But remember, with leverage comes responsibility. You do have to have a good understanding of forex, trade a system that is profitable, and practice with a demo account to gain confidence that you know how to trade the system correctly.

In contrast if you wanted to trade stocks you’d either have to come up with the entire amount, or say 50% if you’re trading on margin, of the value of the stocks. For many people this meant that their profits would be too small as they weren’t able to trade sufficient trade sizes. And the profit they made would’ve been eaten up by the commissions as well.

With the 20 to 1 leverage in CFDs, it was better, but often the lack of liquidity would limit trade sizes, and therefore profits. And yes, there was also the occasional suspended stock or CFD, which would result in the trader unable to exit out of a trade, and the price of the stock or CFD being revalued at close to zero. This is unlikely to happen in the major world currencies.

Automated stop losses

You set automated stop losses with your online forex provider, and so they’re filled automatically when your stop loss price is hit. As mentioned, there is very high liquidity in forex, so that there’s usually currency traded at every price point the currency moves through, with the exception of the less traded “exotic” currencies.

But does slippage ever occur in forex? (Slippage occurs when the price you intend to enter or exit, is different from your actual entry or exit price). There are two situations where gapping and therefore slippage, may occur.

Firstly, after weekends, there may be gapping as the market reopens for trading on Monday. Some traders may exit their open positions on Friday night to re-enter on Monday if appropriate.

Secondly, after a major economic announcement, large moves of 50 to 100 pips may occur over minutes. Again, some traders may exit their open positions prior to a major economic announcement, and re-enter afterwards if appropriate, in order to avoid getting stopped out unnecessarily.

Benefit from rising and falling currency prices

You can go long or short with forex trading with equal ease.

That is, you can benefit from both rising as well as falling currencies. This increases the trading opportunities, and therefore increases the profitability of your forex trading systems. For those of you who have traded stocks, you would’ve realised that only a limited number of stocks can be shorted, which limits the performance of your systems.

24 hour a day market

The forex market does not close except for the weekend. This is because the forex market is worldwide. Somewhere around the world, there is a market open at any one time over the 24 hour period. So as the day starts in the international date line near New Zealand, the different countries trading begins one after another…

However, the times that you’ll see the greatest trading activity and liquidity in the market is when the major countries are open for trading. These are when Tokyo opens at 00.00 GMT, followed by the London open at 09.00 GMT (08.00 in winter), and then the New York open at 13.00 GMT (12.00 in winter). Your trading opportunities may be mainly at these times.

You can get to know the currency pairs well

There are 4 to 6 currency pairs that are the most popularly traded, including the 4 “majors” which are the EURUSD, GBPUSD, USDCHF and USDJPY, and also other currency pairs such as the USDCAD and AUDUSD. Because of this, you can get to know the currency pairs well and get a feel of their general behaviour, which helps when you’re learning a forex trading system.

While we’ve mentioned that there are no commissions in forex, there is a small amount that you may either receive or pay, if you hold forex positions overnight, called the rollover fee. If you buy a currency pair where the base currency has a higher interest rate than the terms currency, then you’ll receive interest, and vice versa. Usually this is a relatively small amount.

Remember, that there’s always risk involved in trading. Trading is about managing risk in order to make money with trading. So if you are properly trading a good forex system, and apply sound money management rules, then you will have an edge against the market.

On the other side, the risks in forex trading are:

Leverage

Your results are multiplied with leverage. So if you’re trading a good forex system, your profits will be leveraged. But if you do not trade with a system, and do not apply money management rules to your trading, you can lose your float.

Assuming your forex provider (many do) kindly exits your positions automatically when the position goes against you far enough to lose the total amount of your float except for the part of the float used as margin for the trade, then you won’t be able to lose more than your float. Leverage is certainly beneficial if you follow a good system, and have money management rules.

Volatility

If the economic or political climate of the world changes, there may be increased volatility in the forex markets, resulting in prices changing more rapidly, and even causing prices to gap, and therefore causeslippage if you’re stopped out. If this occurs, your stop losses may filled at a level beyond what you planned, resulting in a greater loss than expected for that trade.

Currency risk

This is the risk of holding an account in a different currency to the currency you would be spending the money in. For example if you live in Australia, and you hold an account in US dollars, then as the exchange rate changes, this will mean that the value of your account when you convert it to Australian dollars, will be subject to these changes.

Where we are now...

In the past, many traders would in the beginning trade stocks or CFDs, as these were more well known, and then move on to forex trading as they found out about it.

But because the "playing field" has been levelled, anyone with the desire, is able to take advantage of the forex currency trading courses on the internet, and the choice of online forex brokers. You can also now use providers of forex signals, and managed forex, to do the trading for you :)

If you have this desire, are willing to learn new skills, and are willing to persist, then you can do well in online forex trading.

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