Foreign Exchange Vs Stocks: What’s Different About The Currency Market

This is the first of two articles having a look at foreign exchange vs stocks from the standpoint of the retail stock trader. Foreign exchange has been getting a large amount of publicity lately and has attracted many new traders working at home, as well as many traders looking to expand into FOREX trading. But what exactly is the foreign exchange market? How does it work?  

World Market

FOREX trading is a world affair. You aren’t limited to dealing in the currency of your own country. Foreign exchange is an over-the-counter market and there’s no central exchange or clearing house. This gives the forex market a couple of advantages over the exchange for a retail trader.

Transparent Market

The value of a stock is impacted by the performance of a company whose figures could be manipulated or known to insiders for some considerable time before it is exposed in public. Currency prices, on the other hand, are driven by the economic performance of a complete country. This is incredibly difficult to manipulate and masses more transparent. This means that a trader working from home, out of the loop of personal financial information, is on a far more level playing field in the foreign exchange market than in stocks.

Liquidity

Daily transactions in the foreign exchange market total almost $4 trillion a day. This is more than the total of all of the world’s stock exchanges added together. What’s more, there are only a restricted number of possible currency pairs compared with probably many thousands of company stocks. With so much money concentrated in such a limited arena, price management by the bigger players is far less of a problem, if it exists at all .

As you can imagine, such high liquidity also means that it is intensely unlikely a trade in any of the major currency pairs would have problems getting matched, even in bad times. This is a massive advantage, particularly if you’re trading massive positions.

Signals

Foreign exchange market has a wide selection of signals software available for the traders. Signals like Forex Mercenary provide precise orders to be put on the charts. While such convenience is also available in stock exchanges, it is not as widely used.  

Development

So if foreign exchange trading has so many benefits, why is it that it’s not been favored until recently? The answer’s that the market itself only began for real in the 1970s when exchange rates stopped being permanently pegged by the ‘gold standard’ and were permitted to change.

Even then, it was only the banks, hedge funds etc who were involved in trading on the currency market at first. There was no history of private speculators getting on the phonephone to a broker to trade in currency because there was in stocks. This indicates that it was not until the development of the Net that the foreign exchange market opened up and currency exchange vs stocks turned into a real choice for retail traders.