This is the first of 2 articles taking a look at foreign exchange vs stocks from the viewpoint of the retail stock trader. Foreign exchange has been getting lots of publicity latterly and has attracted many new traders working at home, as well as many investors looking to diversify into currency trading. But what exactly is the foreign exchange market? How does it work?
World Market
foreign exchange trading is a global affair. You aren’t limited to dealing in the currency of your own country. Currency exchange is an OTC market and there isn’t any central exchange or clearing house. This gives the currency market several advantages over the stock market for a retail trader.
Transparent Market
The value of a stock is impacted by the performance of a company whose figures might be manipulated or known to insiders for some considerable time before it is exposed in public. Currency costs, on the other hand, are driven by the economic performance of a complete country. This is nearly impossible to manipulate and lots more clear. This indicates that a trader home working, out of the loop of non-public financial information, is on a much more level playing field in the foreign exchange market than in stocks.
Liquidity
Daily transactions in the foreign exchange market total almost $4 trillion each day. This is more than the total of all the world’s stock exchanges added together. What’s more, there are just a controlled number of possible currency pairs compared to probably hundreds of thousands of company stocks. With so much cash concentrated in such a limited arena, price management by the bigger players is much less of an issue, if it exists in any way.
As you can imagine, such high liquidity also means that it is intensely doubtful a trade in any of the major currency pairs would have problems getting matched, even in bad times. This is a big advantage, particularly if you’re trading large positions.
Signals
Currency market has a wide selection of signals software available for the traders. Signals like Forex Mercenary provide actual orders to be placed on the charts. While such convenience is also available in markets, it isn’t as generally used.
Development
So if currency trading has so many benefits, why is it that it isn’t been popular until recently? The answer is the market itself only began for real in the 1970s when exchange rates stopped being permanently pegged by the ‘gold standard’ and were permitted to fluctuate.
Even then, it was only the banks, hedge funds etc who were concerned in trading on the currency market initially. There was no history of personal speculators getting on the telephone to a broker to trade in currency because there was in stocks. This indicates that it wasn’t until the development of the internet the forex market opened up and foreign exchange vs stocks turned into a real choice for retail traders.
