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The Benefits of Forex Trading

Reprinted with permission from World Link Futures

What are the benefits of Forex Trading?

No Brokerage Commissions:   Transacting in the FOREX market does not require a brokerage commission expense. As any experienced trader knows, equity transactions and futures transactions both require brokerage commission that, in some cases, constitute a significant expense. For example, brokerage commission in the futures market may fall anywhere from $25 to $75 per contract. The absence of brokerage commission is an immediate cost savings to the FOREX trader. Small transaction fees may apply when FOREX trading, but these are typically in the neighborhood of one dollar per transaction.

Minimum Starting Balances:  The minimum starting balance for both the Flexi and Mini accounts is $300 and this places FOREX trading within reach of those individuals who have only a modest amount of risk capital. Furthermore, there is an operational FOREX policy to automatically close all open positions the moment that margin in the account drops below the required level, and this helps to ensure that the trader never loses more than the money that was originally deposited.

Streaming Real-Time Quotes:  In the FOREX market, traders execute directly off streaming real-time bid and offer quotes meaning that there is very little uncertainty of the fill price of an order. The bid or ask that you see quoted is typically the price at which you are able to deal. While there may, on rare occasion, be a slight discrepancy between the two, it should be noted that in most other markets, a trader faces greater uncertainty of the fill price of an order, especially when transactions must be executed on an exchange floor to which the trader does not have direct access. Streaming real-time FOREX quotes ensures that market, limit and stop orders are typically executed without partial fills and without slippage.

Open 24 hours a Day: The FOREX market operates continuously from its open at 2pm Sunday afternoon New York time with the Sydney-Auckland market until its close at 5pm Friday in New York. FOREX trading follows the day around the world: from Sydney to Tokyo to London to New York. The seamless 24-hour nature of the FOREX market enables the trader to react to news as it occurs - regardless of the time. And it gives the trader the flexibility to set their own hours of the trading day.

Real Time Reporting: In the Forex market, traders can see the value of their positions and account equity move up and down with the market in real time. This key information for every account is re-calculated and updated every time the exchange rates change. Traders have immediate access to detailed information regarding every open position, open order, and the generated profit/loss per trade. This means that a trader never has to approximate account equity or be uncertain in regards to available margin.

High Leverage:  Margin is required to trade FOREX but the margin is not a down payment on a purchase of equity, as is the case in the stock market, but rather it serves as a performance bond or good faith deposit, as in the futures market. The margin is required to ensure your ability to handle the financial risk of the trade. With FOREX, the required margin is only a very small percentage of the market value of the position being traded. For example, margin of the mini contracts typically is under $200. (Margins vary.) This is referred to as leverage. In other words, by using leverage, a trader can hold a position much larger than the account value. High leverage means that a change in FOREX prices will have a much larger impact on the dollar value of the account and this can work both in favor of the trader and against the trader.

Real-Time Charts and News:   The availability of real-time charts and news - along with streaming real-time quotes - enables the FOREX trader to react immediately to developments as they unfold. There is no need to wait until the market opens before taking appropriate action. In other markets, real-time quotes, charts and news are available only at considerable cost, in some cases, hundreds of dollars per month.

Flexible Unit Sizes: FOREX traders can choose among three types of accounts:

  1. Standard - In this account, the size of a trade can be 50,000 units or 100,000 units of foreign currency. The latter is referred to as a "standard" contract and is similar in size to a typical futures contact.
  2. Mini - In this account, the size of a trade is 1/10 the standard contract, or 10,000 units of foreign currency. This is referred to as a "mini" contract. Profit and loss is one-tenth the amount of the corresponding standard contract.
  3. Flexi - In this account, the size of a trade can be 1,000 units or 5,000 units of foreign currency. The Flexi account has the smallest contract sizes and, consequently, the smallest risk.

There is no differe nce in price or liquidity between the different unit sizes. The only difference is that the smaller unit sizes have smaller risk and, therefore, smaller margin requirements. The trader has the flexibility in selecting a contract size that is appropriate to their amount of trading capital and tolerance for risk.

Automatic Closure:   An important element of risk management when FOREX trading is the automatic closure of all customer positions in the event that funds in the account fall below margin requirements. This prevents a trader's account from falling into a negative balance.

High Liquidity:   Every three years, the Bank for International Settlements conducts a Central Bank Survey of Foreign Exchange and Derivatives Market Activity. The most recent survey was done in April 2001. According to this Survey, the average daily turnover in traditional foreign exchange markets was $1.2 trillion, or $1,200 billion, making it the largest and most liquid market in the world. This market can absorb trading volume and transaction sizes that dwarf the capacity of most other markets. Of the currency pairs, EUR/USD was by far the most actively traded and captured 30% of global turnover followed by USD/JPY with 20% and GBP/USD with 11%.

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