Have you ever wondered why professional traders prefer Forex to stocks? The fact is that Forex is a much faster route to riches than stocks. Liquidity, leverage, and no commissions make Forex the preferred financial instrument for profitable traders. Here you can find the top five reasons why trading Forex can make you richer faster than stocks.
#1 Highly Liquid
According to the Bank for International Settlements the average trading in foreign exchange market is $5.3 trillion a day in 2013. This make Forex the most liquid market in the world. No matter how much you are trading in Forex you will not influence the price. In contrast if you are trading in a micro or small cap stock your trade may actually impact the stock price when you buy or sell. This can make it difficult to make the kind of large trades that earn real stacks of cash.
Unlike stocks the Forex market doesn’t have centralized exchanges. This means that you can trade around the clock and get in and out of positions whenever you like. That means never having to hold a position overnight again and worrying about what price it is going to open at.
Most people find it difficult to hold a full time job and trade stocks. The NYSE is only open between 9.30am to 4.00pm ET. That’s when most people are at work. If you try trading stocks during your work hours you may find that you trade your way out of job even if you aren’t ready. In contrast you can trade Forex whenever is is appropriate. If you can carve out a few hours in the evening for trading you can be in and out of your positions before you go to sleep. Forex is perfect if you still need a full time income but want to trade as well.
#2 More Leverage
Trading in stocks severely limits your ability to use leverage. If you want to borrow to invest in stocks typically the most you be allowed is 2:1. Usually you will be limited to only certain stocks. These are often larger cap companies which lack the volatility needed to make big trading profits.
In contrast if you trade in Forex you can leverage your trades as much as 200:1, depending on where in the world you are trading. Even with more conservative trading environments 50:1 is standard. This means that you can control far larger positions with a lot less initial capital. If you are able to trade profitably you can find success much faster with Forex than with stocks.
#3 Fewer Factors To Consider
To beginner’s stocks seem to be simpler to evaluate, but this is actually not the case. When you trade stocks you need to look at both micro and macro considerations. Firstly there are fundamentals that affect the company itself, like whether they will hit their earnings targets. But there are also macro events such as the overall economy or the market sector which can influence the stock price. Even if you make the right call on a specific stock, your trade can become undone because of negative market sentiment. With Forex there are no micro factors that you need to consider in order to trade profitably.
#4 Forget The Bear
There are no bear markets in Forex. Because currencies are quoted in pairs, if one currency is down the other currency must be up. While it is possible to trade stocks in a bear market it is difficult and can be risky. When you short a stock your potential losses are potentially unlimited. There are also restrictions on how you can short stocks and which stocks you can short. This means that if you are in a bear market your trading style may be severely affected. When you are trading Forex you never have to wait out a bear market. This makes the road to fat bank balance much faster.
#5 No Commissions
If you are used to trading stocks one of the biggest surprises when you switch to Forex is that there are no commissions to pay. The relatively high commissions on stocks mean that even if you have a trading strategy that is profitable, by the time commissions are taken out you can actually end up losing money. Of course your Forex broker isn’t facilitating your trades out of charity.
They make their money on what is called the “spread”. This is the difference between the asking and bidding price of the currency pair. The “ask” price is what a retail Forex trader will pay for a position. The “buy” price is they can sell the position at. The spread for most currency pairs is very tight but the transaction sizes tend to be large, so the Forex broker is still able to make money. This is good news for both you and your broker.
Becoming wealthing trading Forex can happen much faster than trading Stocks Of course, trading profitability takes experience, discipline and appetite for risk no matter which financial instrument you choose.
Photo Credit: Flickr/Andreas Poike