Noob here. Please bear with me. Not trying to pick a fight. Just honestly confused…
I’m just trying to make sense of why people are so excited about Forex. Of the advantages commonly stated, I’m really not seeing where the upside is that great. Some commonly promoted benefits:
24 hr markets
Liquidity
Fixed spread (if you are willing to pay for that)
Low trading costs
Frequently trending pairs
Ease of flipping between long/short/long/short
Ability to use leverage
24 hr markets.
Okay. This one I do agree with. Overnight gaps against an equity position can ruin your day. This one I will firmly put in the Plus column, with the caveat that an equity trader can take steps to minimize gap threat.
Liquidity
Unless you are a HFT I don’t see this as a big reason to choose Forex. And if you are a HFT Forex trader, how the heck are you making any money with all the trading costs involved? I only see traders who work for banks and get inter-bank rates as being able to profit from HFT. Or maybe if you are rich and have a special deal with some bank.
Fixed spread (if you are willing to pay for that)
I suspect that brokers who offer this also have a lot of fine print you need to agree with that might allow them to wriggle out of this obligation in a pinch.
Low trading costs
I’m not seeing this one at all. The costs to trade Forex seem to be very similar to my costs to trade equities or futures.
Frequently trending pairs
There are many markets that frequently trend. No advantage to Forex IMHO.
Ease of flipping between long/short
Hmm. Unless you are high frequency, I really see no big advantage here.
Ability to use leverage
This one does not seem to be as wonderful as it initially sounds. Say I use 10:1 leverage going long EURUSD and it actually moves 100 pips in my favor. 1.3588 + .0100 = +.007% x 10 = a +7.4% move. A 7.4% move is nothing to write home about. I see this daily in many ETFs that you can purchase without any leverage.
I freely admit I may be missing something. Which is why I’m asking for input. Maybe someone can help me understand the advantages of Forex because I’m not really seeing it.
Thanks,
Burt
PS And then there are those rollover/carry charges.
Well, forex is attractive for those traders and investors who have a natural interest in macro-economics and politics. Equities can be more nuanced, and you may need to research esoteric aspects like management philosophy, quality of competition, industry outlook etc. Kinda hard for the little guy to research for himself (no management team will bother to be interviewed by a retail trader). However, macro-economic data like GDP, unemployment, central bank statements etc are widely available to the public.
I don’t think forex is better than equities. Soros trades currencies, Buffet companies, but both are successful in their own fields.
I agree with Kevin that Forex is attractive to newbies because it offers less distraction in terms of research and speculation. As for your question, I too think that most advertisment is just a market gimmick and nothing more. For me, the real attraction is focusing on the broader aspects of a currency pair i.e. where it is going to end in future instead of thinking about the sector, company financials etc (as in stocks).
Here’s my 2 cents. I agree with the above. I think it’s kind of like eating a burger with the burger being the “instrument you choose to invest in,” some like mustard on their burger, some like ketchup, some like onions. The goal is the same “a taste-e burger” How you get the taste you like, is personal preference depending on your experiences and perceptions.
I think one of the common misunderstandings on leverage is about the reason to use it.
Most people think it is there to enable you to trade in higher percentages. But, no. If I had $1mio, I would use leverage to be able to take 3 or 4 trades with 1:1 (i.e. no leverage per each trade bigger than the account size).
Example:
Account: $1,000,000
Position 1: USDCHF 10 lots (requires $1mio margin without leverage)
Position 2: USDCAD 10 lots (requires $1mio margin without leverage)
Position 3: USDJPY 10 lots (requires $1mio margin without leverage)
Required margin for each trade is $1mio. But thanks to 1:3 leverage, the trader is able to take 3 positions on comparably independent instruments at the same time.
But in our case which pertains to most retail traders with just several thousand dollars, it’s a game of high risk offering great percentages to win/lose while a millionaire isn’t bothered by the amount of profit/loss but by the percentage on a consistently profitable long haul.
Now think of this guy with an account of 7 or more digits. He can use 1:10 leverage in order to position himself on 8 instruments, targeting 5% profit on each one of them a year, risking only 2%. If he wins on 5 of them while the other 3 loses, his account grows 19%. That’s $190,000 profit a year for a $1mio account.
But 19% growth a year is nothing if you have only $10K in your account. We have to double, triple or quadriple our accounts taking more and more positions every month, every week, even every day in our tiny spectrum of so-called “market analysis”. Marking and carefully watching every S/R level, attaching a great deal of importance to pseudo-scientific methods of price measuring toys, reading tons of stuff to stay up-to-date, etc… For what? Only to survive the small account that is not blown yet.
What’s especially nice about this is for people from different timezones to have access to the same market. Live in Asia-Pac and thus never awake for US stock market / CME futures pit open? No worries, you can still trade FX. The problem is despite being technically open 24 hours, there are very clearly times where you’d probably avoid. And, no coincidence, it’s the aforementioned times anyway. Getting sucked into trading when there’s nothing happening can be problematic.
But anyway, of all the points listed, I agree with you in this being a potential plus.
Yeah, most retailers don’t have to give a damn about liquidity. I mean if you’ve got a decent account and are trading some penny stock, yeah you might hit slippage because you don’t have enough people to take your other side at the current price. Otherwise, this is never really an issue in other markets for those people either.
Agreed, see below
Alongside the topic of fixed spreads and whatnot, the costs of trading oftentimes boildown to very similar anyway once you see the net amounts. The only exception that comes to mind is trading individual equities where you can often have a flat rate commission. If your account is small, this is a killer and can seriously turn you off from bothering to trade in the first place, but get a sizable enough account and that flat rate becomes a much smaller percentage cost.
Yeah, this is just silly haha
I would say the ease of being able to go short in the first place. Futures have no problem with this, either, but if you want to trade equities you’ll have to get a margin account with the broker and it can be a bit of a hassle
Yeah, this tends to do way more harm than good. Even with individual equities, you can get leverage of 2-3 depending on which stock you’re trading, and futures inherently function on leverage as well. In any event, it’s ridiculously common (damn near guaranteed) that the overuse of leverage will be the root of a trader’s downfall
Funny enough, I actually like this part because it was a mere footnote yet is the one distinct advantage that is very hard to get anywhere else: carry trading/interest rate differentials. While it certainly isn’t for everyone and the specifics ALWAYS need to be considered (the devil’s in the details), it can provide some very nice opportunities.
Finally, the only real other major advantage - hands down - is the ability to commit less capital and still trade effectively. Wanna trade futures? Well at $5-12 per tick movement with a single contract, it’s best advised to be working with at LEAST $10,000 to allow for reasonable stop loses that lead to reasonable % account losses.
Wanna trade equities? As mentioned, the flat rate commissions will kill you if the account is smaller, not to mention if you want to be an active trader, you have to have the $25,000 account minimum since you’ll end up being registered as a pattern day trader.
Meanwhile, college kids and working class citizens can put up $50-100 and still take a swing at forex, not to mention the advertising to public is easier with regulations rather loose compared to futures and equities.
Hopefully that helps clear that up a bit. Most importantly it requires much less capital, it also can be used for carry trades, and the 24 hour thing might be an advantage sometimes.
Nice way to put it. One is not better than the other and it really depends on what the individual prefers to trade. Those who do not see the benefit or advantage of forex may want to look at other markets and if they still do not see/understand it than they may be best advised not to trade at all.
You seem to contradict yourself. First you say that, yes, choosing a market to trade should be based on your tastes. But then you say that if you can’t see why Forex is superior then you should not trade at all. If there is a clear advantage to trading Forex please let me know. I don’t understand your comment, unless you accidentally typed it wrong. Thanks.
Just wanted to also add that for certain equities, namely penny stocks and similar, your broker won’t allow you to short them at all even with a margin account
Thanks. Appreciate the detailed response. I do like the fact that I would only have one gap potential to face each week (a potential gap between Friday close and Sunday open) rather than the infuriating gaps that can happen in equities on an almost daily basis in some volatile markets. I am also now seeing that being able to short rapidly with no delay or flip from long to short instantly could be a serious advantage. The author of ‘Hedge Fund Market Wizards’ likes to say that a good trader is able to cut his losses quickly when wrong… but a great trader is able to (if necessary) completely reverse direction when he is wrong.
I appreciate your comments. I think some of your remarks also apply to equities and futures. This game is not easy. Costs for the small retail trader make it even more challenging.
I think you worked with forex on no profit no loss base .Your trading skill is not enough to maximize your profits. All forex qualities are useless until you are not experienced and skilled in trading. invest a smart amount then feel advantage of forex market.
yes be might see it that way, but it might be because you are not making much profit, there are many people who rely on forex and many who take forex as a part time trade…
At the same time, understanding all the nuances, factors that influence sentiment, and the mindset of the participants of that market can take a good amount of experience in dealing with that market specifically.
I think there is another one which is to do with MetaTrader and the rise of forex robots. A whole community has formed around building forex EA’s. I agreee that trading forex is both cheaper and with smaller initial trade size than stocks
There is no advantage by trading forex over other markets and it depends on what you prefer and understand better. There are good forex traders just like there are good equity traders and it depends on what you prefer. In case you do not see an advantage in any market then you may be better off not trading at all. I hope that clears it up a bit.
I collected more evidence that moving from equities to a 24hr market like forex might not be the worst idea.
Thursday I had a nice equity position that had advanced to the point where my entire brokerage account was up over 3.3% in just a few days. So I carefully set triggers at reasonable levels to scale out of the position if price began to backtrack. The only thing that could hurt me was a big opening gap down.
Friday morning’s gift to me was a big gap down - well below my original purchase price. All my triggers were hit (which is okay) and my position ended up with an overall loss (which is decidedly [U]not[/U] okay).
I’m not sure there is a word in the dictionary to describe how I felt.
Going to second LB’s reply, equities and futures are quite different from forex market, btw nice thread - at least it is different from the usual “Where can I find the holy grail?”…