By putting up a little amount of margin, a Forex trader can control a big amount of the currency similar to stock speculation and futures. The margin requirements for Forex is about 1% whereas the margin requirements for trading futures are around 5% of the entire value of the holding or 50% of the total value of the stocks.
For every $100,000, the margin needed to trade Foreign Exchange is $1000. Therefore, a currency trader's money can play with 50 times more than a stock trader's, or 5-times as much value of product as a futures trader's. For creating an investment strategy, this can be a very profitable way while trading on margin, but it is important to note that taking time to understand the risks involved is always helpful.
You should be fully aware of the way your margin account will work. Thoroughly read your margin agreement with your clearing firm before proceeding any further. If you have any doubt, talk to your account representative.
If the available margin in your account falls below an amount set in advance, chances are that your account could be partially or completely liquidated. You need not get a margin call before your positions are liquidated. For this reason, you should regularly monitor your margin balance and use stop-loss orders on every open position for limiting downside risk.
Paying exchange and brokerage fees is necessary when you trade in futures. The advantage of Forex is that you can trade commission free. Letting buyers to be matched with sellers instantly is a specialty of currency trading which is a worldwide inter-bank market. Although you need not pay commission to a broker to match the buyer up with the seller, the spread is higher than it is when you are trading futures.
Compared to trading futures, there is limited risk involved in Forex trading. After the discovery of Mad Cow Disease found in US cattle, the price of live cattle fell dramatically which moved the limit down for several days. This price fall could have wiped out the entire equity in your account. As the price continued to fall, you would have been compelled to find more money to compensate the deficit in your account.
Before the expiry of futures contracts, you have to think ahead whether to roll over your trades. Since Forex positions expire every two days, you have to rollover each trade so that you can stay in your position.
Trading in futures is limited to a few hours every day a market is open. Every time a major news story comes out when the markets are closed, you have no option but to wait until the market reopens. Forex market, on the other hand is a 24 hour market.
You can trade any time you prefer, Monday to Friday. With an average daily turnover of around $1.2 trillion, Foreign Exchange is the largest market in the world times as large as all the futures markets collectively. It is very difficult even for Governments to control the price of their own currency with the high number of people doing Foreign Exchange trade.
Forex trading is an excellent alternative to trading in futures and commodities. To get started successfully in trading currencies, you require some help unless you are a Forex broker. The whole process should be much easier if you carefully follow the directions given below.
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