The Pros and Cons
The rapid success of the forex market is due to its volatility, global structure and size. Even extremely large trades placed by investors or traders cannot affect the given exchange rates due to its high liquidity nature. There is a low margin requirement in the forex market that’s why large positions are available to traders and industry brokers. An example is for a trader to obtain a position of USD100,000 with just as little as USD1,000 while the remainder can be borrowed from the forex currency broker. This is what we refer to as leverage that can yield large possibilities for gain with just small changes, but also the risk of large losses.
Forex market is the only one that is open 24 hours a day due to the different time zones, which gives traders the chance to trade anytime of the day that they want.
Though more exciting, the forex market has higher risks when compared to trading equities as the extremely high leverage can turn immense profits to terrible losses that can close your account in just minutes.
Understanding how leverages and the forex market work can help you lessen these potential risks. The movement of equities is different with currencies, the volatility comes from the leverages offered. Look at this example – you use 100:1 leverage on your $1,000 means you get to control $100,000 capital. Should you place your controlled capital in currency and it moves 1% against you, you would have lost all your initial investment capital as that 1% movement would decrease your $100,000 to $99,000 – a loss of the $1,000 which depicts 100% loss.
Difference between Equities and Forex
Equities have over 10,000 stocks you can choose from, but not all are best in value. With forex, you can focus on seven currency pairs as the majority of the forex traders do – USD/JPY, EUR/USD, USD/CHF, and GBP/USD and commodity pairs – AUD/USD, USD/CAD and NZD/USD. Forex traders focus their attention on political and economic news of these eight countries to watch for rise and fall of currency values.
With equities, the market hits respites that lessen activity, making it difficult to close or open positions. Declining markets are also hard to bounce back from. In forex, there is an opportunity to profit whether the market is rising or declining because each trade conducted is both buying and selling. Meaning short selling is natural for every transaction.
In equities, 50% of the investment value is needed for margin traders, whereas in forex, the margins are really low – as little as 1% and high leverages.