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Why do traders favor forex trading?

when it’s more complicated than stocks

By Mariam PagavaPublished 3 years ago 6 min read
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Why do traders favor forex trading?
Photo by Hans Eiskonen on Unsplash

Trading has become one of the most popular activities all over the world. With the time changing and the extremely dynamic flow of global events, people found it necessary to find a completely new way of investing their money and of course earning more. While investing in the banks and saving money on the bank accounts has long gone out of style, some new and the most popular ways of saving and investing have become stocks and forex.

Both stock and forex markets are two of the biggest industries in the world, which turned out to be the best alternative for traders. While the traders just step into the game, they often question themselves and others whether it is better to invest in stocks or in forex. This answer to this question shall probably define the prosperity of the trader's future and as well as the number of earnings. Thus, we will try to outline the key points of both markets, including liquidity, trading options, margins, leverage, and the main focus.

Stock/Forex Market

Before we start, you should know that while we will define both of them and stress the definite pros of both of them, the choice is still very individual.

The Forex market

The forex market is the decentralized system, which represents a trading network of participants from all around the world, so millions and millions of people. Those people mostly make predictions and their guesses regarding the currency pair exchange rate values and their changes. If the guess is correct and the currency pair exchange rate has changed according to the prediction, your position should win, yet if you were not right, your position shall close with the loss. The larger players in the Forex market, also include authorities like investment banks, central banks, commercial companies, as well as hedge funds.

The Stock market

This is more about the group of buyers and sellers of the shares or the stocks. The share of the company means automated ownership of the part of the company. Most often, such transactions proceed within the stock exchanges. Stock exchanges have an obligation to provide a transparent, regulated, and convenient marketplace for buyers to conduct business together with the sellers. The clearest example is the Wolf of the Wall Street story, which has been popular all over the world and has shown the reality of the stock market. Though now, the market has been relatively more digitized.

While both of the markets are huge, the forex market still managed to exceed the stock market in size, with a significant difference, becoming the largest financial market in the whole world. The bigger the market, the more is the liquidity.

Market Liquidity

As already mentioned, the forex market is extremely liquid, due to its immense size. This is a result of the vast number of participants involved in trading during any time of the day. Though this does not mean that the stock market is not liquid, large stocks can be very liquid. A great example of this can be Microsoft, though once you move away from blue chips, it may become significantly less liquid.

You might be interested in why liquidity means so much. Generally speaking, superior liquidity tends to equate to proportionally tighter spreads and lower transaction costs. To give you a very clear example of the importance of liquidity, let's take a real case with Microsoft from the stock market and the most popular currency pair of EUR/USD from the forex market.

When talking about Microsoft, the price of it is around $215 a share. The market spread might typically range from 5 to 10 cents for Microsoft in normal market conditions. Commission rates though vary from broker to broker, it might be 10 cents per share or more or even less. The commission is paid upon the opening and the closure of your position.

Now, while talking about the EUR/USD currency pair, which is the most common FX trading pair, it has no commission. This is the way most of the accounts in the FX market work. On these accounts, you might have to pay 1 pip of spread to trade with the currency pair, with no required commission. With EUR/USD trading at 1.1190, this is a round-trip transaction cost of 0.0001/1/1.1190. It's less than 0.01%. In the case of this comparison, the forex has the upper hand. The round-trip spread cost of trading the FX position is less than the market spread on the share.

Trading Times and Software

Trading is a very common activity, and thus many platforms and many software have been developed in order to make the activity even more reliable and easy. Both forex, as well as the stocks, have a bunch of available trading software options, which offer different features.

The most common stock trading software platforms are TradingView and Ninja Trader. TraderView is the best tool for market analysis and is one of the most advanced stock trading software. It comes with over 100 tech indicators and is capable of analyzing local as well as global data. As for the Ninja, it is one of the most customizable software trading platforms, offering charting, research, and trade simulator, perfect for training.

For the FX trading platforms, we can name some of the most common, which are MT4, MT5, and cTrader. MT4 is a platform with a number of technical indicators, graphic objects, and analytical features. The platform is compatible with the Android app. The MT5 is the upgraded and enhanced version of the MT4, with no basic differences. As for cTrader, if you read the cTrader review here, the layout of the software helps with managing larger risks and making sense of the chaos that is the FX market, which is the most important for successful trading.

When it comes to timing, the forex market works for 24 hours, 7 days a week, and has no central location, while the traders are all over the globe. On the other hand, the trading hours of the stock market are much more limited. Stock market traders must adapt to the hours of the stock exchanges, yet the stock traders can participate in pre and post-market trading periods.

Leverage

One more point goes to Forex trading in terms of leverage. The leverage means that a trader with a smaller amount of money can earn a larger profit in forex rather than in stocks. Though this process is vice versa, meaning that the losses can also be bigger with forex. Yet, if you are trading stocks whimsically, you will be left without the benefit of the leverage.

Usually, the best kind of leverage for trading stocks using CFDs which stands for Contracts For Differences is 1:10. On the other side, some of the top forex brokers can offer at least 1:50 leverage, while the leverage might also be as much as 1:500 and even 1:888, depending on the client. This gives you a chance to command the larger position with a relatively smaller cash deposit.

Summary

So one way or another, both of the trading markets have definite pros and cons against each other. While there is still way more to tell and define, those listed points should play a key role while choosing the way of trading. Remember, that while we might give you certain advice, the last word is on you. Go for the one that works for you better and that's the bottom line.

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