Forex vs Stocks

I'm often asked why should any trader choose forex trading over stock trading. One of the biggest reasons is called forex leverage.
Leverage
In stock trading, you can trade with leverage 2:1 usually, and you have to fill out an application and be approved and there are very specific regulations on who can trade with leverage, etc.
Forex trading is very different. To qualify to trade with leverage you merely have to open a forex trading account and you're good to go. In the United States, you'll be stuck with 50:1 leverage, but in other countries you can get as much as 200:1 leverage for your trading. Regardless of the amount of forex leverage you can use in your country, it's going to be so much more than you would have been able to use in stock trading.
When you trade stocks, you are trading shares of companies that cost anywhere from a few dollars to hundreds of dollars. There is a reasonably limited amount of stock on hand, and you only have to be concerned with the company's ability to make money.
Trading currencies is another world compared to that. The supply of a country's currency can fluctuate, and there is always a large amount of currency available to buy or sell, this makes currency buying or selling extremely liquid. In currency trading, currencies are always quoted in pairs, so not only do you have to be concerned with the economic health of an entire country, but you also have to take into consideration the economic health of the country you are trading against.
Fundamental Considerations
When it comes to forex trading vs stock trading, the fundamentals are handled different. For instance, if you buy a share of Intel stock, all you have to care about is whether Intel stock will get more valuable, or if Intel will at least continue to make the same amount of money in the future. When you want to trade a currency whether it's buy or sell, you have to consider the country you are comparing it against. Does one country have more job growth than another, or better GDP, or political prospects? These are all things that can impact the value of a currency.
Liquidity
As mentioned before, outstanding shares of stocks are limited compared to the amount of a currency that might be out there floating around. A large stock purchase might be 10,000 shares, which may actually impact the stock price a little when you buy it. On the other hand, when it comes to currencies, it may take a 10 billion dollar purchase to impact the price of a currency.
Currency markets are also open much more often than stock markets. When trading stocks you are limited to whatever the hours of the exchange are. Forex trading can be done 6 days a week, 24 hours a day because there is no centralized exchange. This makes it much easier to get in and out of currency positions on a whim.
No Bear Markets in Forex Trading
When a stock market declines, you can make money by shorting, but it can be ultra risky and the regulations are very specific. In forex trading, you can go short on a currency pair just as easy as you can go long with no particular regulation restrictions. When one currency is in a "bear market" the other currency in the pair may be in a "bull market" so there are really no bear markets in currency trading.
More Freedom
Stock trading has many regulations and limits, forex trading does not have the same issues. There are some regulations in forex, but nothing like what regulates the stock market. Forex traders are free to make trades the way they want to, going long or short on a whim, and trading as large as they want to. With stock trading, there are limits on when you can place trades, how you can trade, and what you can say about it. Forex trading on the other hand is very unrestricted, and you have the advantage of using leverage.
It's your choice
When it comes down to it, it's your choice and sometimes it's just easier to trade what you know. Trading forex provides more opportunities than other similar markets, but requires a bit of learning curve for investors. It's something that every investor should at least consider as part of their overall trading plan.

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What Is Forex Trading?

Forex, or foreign exchange, trading is an international market for buying and selling currencies, just like the stock market is for shares of a company. Like the stock market, you don't actually take possession of the currency. It is a way to profit from the changing value of these currencies based on their exchange rate. In fact, the forex market is how currency exchange rates are set.
Foreign Exchange Trading Is Growing:
Forex trading kept growing right on through the 2008 financial crisis. Since 2007, trading skyrocketed by nearly 40%. According to the Bureau for International Settlements, average daily forex trading in 2010 was $4.4 trillion, compared to $3.2 trillion traded per day in 2007. Even this was up 30% from $2 trillion per day traded in 2004. (Source: Bureau for International Settlements, Trienniel Central Bank Survey of Foreign Exchange and Derivatives Markets, December 2010)
Why Does Forex Trading Keep Growing?:
There are several reasons for this incredible growth. First, there is simply more hedging by corporations. Multi-nationals must trade in currencies to protect their sales to foreign countries. If not, then if that country's currency declines, the multi-national's sales will, too -- even if the volume of products sold increases.
Second, currency trading by hedge funds and other investment companies is increasing. This is a source of revenue for these banks that saw their profits decline after the sub-prime mortgage crisis. These investment companies are constantly looking for new ways to invest profitably. Currency trading is a perfect outlet for financial experts who have the quantitative skills to invest in complicated arenas.
Fourth, there is more trading in emerging market currencies as they have become more important global economic players. The "BRIC" countries -- Brazil, Russia, India, and China -- were left relatively unharmed by the recession. As a result, forex traders see their economies as less risky than before. Furthermore, as global trade with these markets increases, so too does the need to hedge exposure to their currencies.
Why Didn't the Recession Reduce Forex Trading?:
Despite these long-term trends, the BIS was surprised that the recession didn't affect the growth of forex trading, like it did for so many other forms of financial investing. The BIS survey found that 85% of the growth was because of increased trading activity of "other financial institutions." A lot of the trading is done by just a few high-frequency traders. Many of them work for banks, who are now increasing this portion of their business on behalf of the biggest dealers. Last but not least, is an increase of online trading by retail (or ordinary) investors. It has become much easier for all of these groups to trade electronically.
This shift is compounded by algorithmic trading, or program trading. That means computer experts, or "quant jocks" can set up programs that automatically transact trades when certain parameters are met. These parameters can be central bank interest rate changes, an increase or decrease in a country's GDP, or a change in the value of the dollar itself. Once one of these parameters are met, the trade is automatically executed.
An Underlying Reason -- Lower Volatility:
In addition to the reasons mentioned above, a long-term trend is that forex volatility is declining. This includes historical volatility (how much prices actually went up and down) and implied volatility (how much future prices are expected to vary, as measured by futures options). In the late 1990s, volatility was usually in the teens, sometimes as high as 20% (U.S. dollar vs yen). Today, volatility, especially with the euro and the yen, is below 10%.
Why Is Volatility Lower?:
One reason volatility has been lower is that inflation has been low and stable in most economies. Central banks have learned how to measure, anticipate, and adjust for inflation. Second, central bank policies are more transparent, meaning they signal more clearly what they intend to do, so markets are less likely to overreact. Third, many countries have also built up large foreign exchange reserves, which discourages speculation in their currency. Speculation creates volatility.
Fourth, more countries are adopting flexible exchange rates, which allow for natural, and gradual, movements. Fixed exchange rates are more likely to let pressure build up. When market forces finally overwhelm them, it causes huge swings in exchange rates. Fifth, better technology allows for faster response on the part of forex traders, leading to more natural currency adjustments. The more traders, the more trades, contributing to additional smoothing in the market.
How Forex Affects the U.S. Economy:
Lower volatility in forex trading means less risk in the global economy than in past decades. Why? Central banks have become smarter, while the forex markets are now more sophisticated, and therefore less likely to be manipulated. This means that dramatic losses based on currency fluctuations alone (like we saw in Asia in 1998) are less likely to happen.
However, the global recession means fewer opportunities for trading and profitability in other areas, such as the stock market, commodities futures and real estate. This means traders may start speculating more in the forex market. This could create a bubble that could be as damaging as the ones in those other sectors. Because of the trillions traded in forex, even larger losses could be incurred.

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Finding a Forex Strategy

Finding a forex strategy is not a simple task. It will depend on many different factors that have to be tailored to the individual trader.
The first question that you have to ask yourself is, what do you want to get out of forex trading?
Are you an investor or a daytrader?
If you are an investor, your goals might be longer term stability rather than short term profits. This means you must have a tight risk management plan and a larger fundamental grasp of what is happening with the currencies that you are investing in. Fundamental trading strategies are most suitable for this type of trading.

If you are a daytrader, you might look for a way to take advantage of daily currency fluctuations regardless of the long term fundamentals. As a daytrader, a system based on technical analysis would probably be the most suitable system
Trading Psychology
No matter what your strategy for trading, the bottom line is that you need to feel comfortable with it. Always spend time testing your strategy out on a demo account. If you are taking a system from another trader, spend time analyzing their trading with the system. If the system you want to use is a technical system that you developed yourself, try backtesting the strategy with a program like metatrader.

Finding a forex strategy is a personal decision. Each trader uses their own discretion when it comes to executing trades. Results may vary between two traders using the same system. Take your time when deciding on trading methods and developing a system. The forex market isn’t going to dissapear, it will still be there when you are ready to commit to live trading. The better you understand the nuances of your trading system and the forex environment, the better your chance for long term success.

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Forex News

If you are a fundamental forex trader that believes that the moves in currencies reflect the fundamentals, it's important to keep your finger on the pulse of forex news.
In the early stages you will find that some forex news will affect the market as a whole and some will affect certain currencies specifically. You're job as a forex news trader is to figure out what news is important to the currency pair you are trading.
Typically, employment reports, interest rate decisions, and GDP numbers are what is considered important news for a countries currency. Once you have established which reports are important, you'll need to watch the markets reaction to the numbers for awhile. This is a trader's least favorite part, because it means waiting. It's important though because sometimes currencies do not act as you would expect to reports and information. At times, currencies will react opposite of what you would expect due to market expectations or market sentiment.
Once you figure out how a report will affect a currency, you can prepare for a live news trade.
One problem with news trading is that every forex broker has a different policy on how they handle trading during volatile news time. Some brokers have what is called a variable spread and some have a fixed spread.
News Trading with a Fixed Spread
The issue that you will face with fixed spread brokers is that sometimes you get price slippage, or a requote. Either way, it can make it pretty pointless to have even made the trade if you're looking to get out short term.
News Trading with a Variable Spread
With a variable spread broker the problem with news trading is that when markets get volatile, the spread can increase exponentially. This can cause your trade to be immediately negative, even if you technically recieved a good price on your entry.
Keeping these two issues in mind, it's important to understand your brokers policy on news trading. You may want to consider trying it in on a demo account first to get a reasonably good simulation. Reputable forex brokers have a demo system that is a full replication of the live system so it should be no different than live trading.
News trading can be profitable, but it is also dangerous. If you underestimate the impact of the report, or things don't quite go as planned, your account can be adversely affected.
Overall, I don't recommend that you trade at news time unless you are trading long term. That said, everyone has their preferred method and it is possible to make profit trading the news short term, if you pay close attention and are quick and nimble.

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What is a Forex Brokerage?

A forex brokerage is an entity that connects retail forex traders with the forex market. The forex market is traded on the "interbank" which is a fancy way of saying banks trade electronically with each other at various prices that may change from bank to bank.
A forex trading account is something like a bank account were you can purchase currencies and hold them. Currencies are specifically purchased in pairs. If you buy the EUR/USD, you are holding for the US Dollar to become worth less in Euro's over time. The Euro must become worth more money in dollars, in order for you to make a profit.
A forex brokerage offers you a way to get into the mix with the banking network and purchase a currency pair to hold in an easy manner. Before there were forex brokers, people wishing to trade in foreign currency needed to have a large amount of money and a special relationship with a bank in order to buy foreign currencies.
Forex brokers make their money by taking a slice of the pie when you make a trade. The change in the relationship between two currencies in a pair is measured in pips. When you make a trade the forex broker charges you a few pips before actually putting your trade on the market. The market might be trading at 1.3100 EUR/USD as a buying price, and when you enter your trade the broker may put you in at 1.3102. If you immediately closed your trade, the forex broker collects the profit between the "market price" and the price you paid. This is called the spread.
You might wonder why the forex broker would pick such a small item to make money on. The easy answer is that most people don't think about a few pips of difference when they are trading. This makes the fee feel "transparent". The way a forex brokerage really makes money is that they allow you access to forex leverage. When you use leverage, you can control a larger amount on the market than what you actually have in your account. If you are trading 10:1, you can control $1000 on the market with only $10 in your account. Not only does this increase your chance for profit (or loss), but it also makes each pip worth significantly more money, which makes the spread you pay, worth more money. Whether you win or lose while trading, the forex broker will continue to make profit on the difference between what you pay, and they actual "market price" that they are paying. The main job of a forex brokerage is to provide you easy access to the forex trading market, and make some money in the process. Many of them will even help you learn a bit about how to trade. There are many forex trading brokerages out there, some big, some small, but they all work in a similar fashion. Not to mention that they are regulated by the NFA (in the U.S.).
If you are searching for a forex broker, you can start with this forex brokers list. Take your time, open a forex demo account with each broker you're interested in and try them out for awhile. Take your time, if you plan on continuously trading forex, you need a reliable forex brokerage to work with.
If you are new to forex trading, take the time to get a forex trading education and learn a bit about what you're doing. Forex trading is not hard, but it feels hard early on in the learning process. With a little patience and persistence anyone can learn how to do it.

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Understanding Foreign Exchange Trading

Foreign exchange trading is essentially the trading of the currency from two countries against each other. The pairs are predetermined by brokers, who may or may not offer a match for the currency pair that you want to trade.
For example, a popular pair that is widely traded is the EUR/USD. The EUR/USD is the European Dollar, also known as the EURO, and the USD, which is the US Dollar. When the Euro becomes worth more money in dollars, the pair goes up, when it becomes worth less money in dollars, the pair drops in value.
If you were to speculate that the USD was going to drop in value compared to the Euro, you would buy the EUR/USD and wait for it to start rising. This is called going long. If you thought the
Dollar would gain in value compared to the Euro, you would go short on the EUR/USD pair. All of this trading is done through forex brokers. A forex brokerage is an intermediary that takes on your trade and puts it on the open market. Foreign exchange trading is not done through any centralized market, so all forex broker rates may not be exactly the same at the same time. Forex brokers deal with networks of banks and the trading is carried out electronically within fractions of a second when orders are placed.
The whole purpose of trading forex online, for most people, is to make money. Corporations sometimes use it to offset a contract or future purchase that they plan to make. Retail traders trade in the forex markets to make money on changes in the values of currencies over time.
Added Fun
One thing that really adds to the fun is that forex brokers offer forex leverage to help you in your trading. Trading with leverage is basically the forex broker allowing you to trade more on the market than what you actually have in your account. This is an advantage for them because they collect fees based on the size of the trades that you make. The larger the trade, the larger the fee. Every time you make a trade with a forex broker they collect what they call the spread, which is a tiny piece of your trade.
Trading with leverage seems like it would be a really great advantage, and it can be, but it can hurt you just as much as it can help you. Many new traders start out using as much leverage as possible and that typically leads to quick losses and an account blow up. This is a good reason for new traders to take them time learning to trade forex and start out using as little leverage as possible when trading.
When it comes down to it, trading is simple. You look for currencies that will appreciate versus other currencies. Wait for a good time to buy, and then be patient. This simple forex trading system can make you into a forex winner with ease, but it's harder to achieve than you might think. Most people jump into forex trading with the expectation that it's an easy way to get rich. This causes them to make mistakes because of their expectations, and fail. Once they've failed, you'll hear various excuses such as the market is rigged and fraudulent. The truth is that stocks and other markets are traded in very similar ways, the difference is the effect of using leverage. Forex trading is a good way to make money, but it's just like other forms of investment. It takes some education and patience. If you keep your head together, you can make some money.

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How to Read a Forex Quote

A forex quote always consist of two currencies. A base currency and a quote currency. The second currency is always the base currency. So for example, if the quote for EUR/USD is 1.36, the USD is the base currency, this quote says that the Euro is worth 1.36 US Dollars.

BID PRICE

There are two parts to a forex quote. A bid price and and asking price. The bid price is the price that you will receive if you place an order to go long on a currency pair.
ASK PRICE

Forex quotes include a bid price and an ask price. The ask price is the price that your order will be filled at if you sell or go short on a currency pair. In the quote above, the asking price for the EUR/USD is 1.3640, this is the price your order will be filled at if you decide to go short. This is also the price your order will be closed at if you are closing a long that you had open.

Spread

The difference between the bid and ask price is called the spread. The spread is the way forex brokers make their commission on your trades. If you place a long order you will receive the bidding price. When you close that long order, you will receive the asking price. The forex broker will collect the difference. If you opened and immediately closed an order, without any movement in price, you would have paid the spread to the broker.

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What is Forex Trading?

Forex Trading is trading currencies from different countries against each other. Forex is acronym of Foreign Exchange.
For example, in Europe the currency in circulation is called the Euro (EUR) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Euro while simultaneously selling US Dollar. This is called going long on the EUR/USD.
Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2012, it would have cost you around $1,200 USD. Throughout 2012 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,300 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $100 gain.
Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

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