Difference between trading forex and stocks dubai
Access to the Market: The Forex market is famously accessible, and with 24 hours per day, 5 days per week access, there is virtually always time for a trade. The weekend markets are also technically open, although weekend trading is something that most Forex traders forego.
The options market is tied to the stock market, so trading is essentially limited to normal trading hours 9am to 4: Everything about Forex is quick. When conducting Forex trades, everything happens almost immediately. Trades are executed straight away, with none of the delays that have become commonplace among options trades, or within many other markets too.
When it comes to the speed of trading, Forex has a distinct edge. This is a key concept that can make a big difference in terms of profit potential. However, leverage must be approached in a responsible manner in order to minimise over-exposure and significant losses.
With currency trading, leverage levels can range from 50 to times the initial investment, while options-related leverage ratios are often smaller. This means that Forex investors have the ability to make significantly greater profits in a short amount of time, all with less upfront investment.
However, the leveraged investment must be carefully watched in order to minimise disastrous results. Forex trading, on the other hand, operates within a marketplace that is essentially a group of traders and computers who create a web that bypasses marketplace norms. Which investment option delivers the edge when it comes to risk management?
This really depends on the type of trader you are, and how you decide to play the game. Forex traders must enact position limits, which means that the online trading software will automatically create a margin call when the margin amount exceeds the value of the trading account in dollars. This is an automated safeguard that ensures that the trader keeps losses in check. In addition, keep in mind that with Forex you can determine the amount of time between trades, whilst options only provide a specific time period in which to trade before the options expire.
The marketplace is highly regulated, meaning that a defined system and concrete marketplace help to quell any uncertainty about the person on the other end of a trade. The market usually sees a big pick-up in activity from around 7AM London time as Europe wakes up and London is the biggest forex market and Asia comes towards the end of its working day.
Then from around 1PM onwards the market typically sees a jump in liquidity again as the US comes online. It is also during US hours that big data items the markets most watches are released. US data tends to move forex markets as the US is the world's biggest economy and the US dollar is the world's main reserve currency. For forex day traders these are the best hours to be trading as liquidity is good and trends tend to develop. But by 5PM UK time the forex markets tend to go quiet again.
Spreads, the difference between buy and sell prices, on these major pairs are the narrowest and hence the most suitable for day traders and scalpers as the transaction costs are lowest.
However, spreads will be wider on pairs involving 'exotics' as liquidity is much lower. This concentration on a few currency pairs gives traders the advantage of being able to specialise. Stock market traders can decide to specialise just in a few very liquid stocks such as Coca Cola or Vodafone. Others can simply chose to chase the momentum stocks of the moment, which means searching among 1,s of listed stocks.
There are software programmes that can locate those fast moving shares, but a lack of specialisation in those stocks can leave traders open to making losses. The other factor is that spreads on the major currency pairs tend be wafer thin and narrower than on stocks and this makes for lower transaction costs. Also, there usually aren't any commissions to pay on forex trades. No doubt this reflects that the forex market is many times bigger than the world's equity markets.
And also competition between forex platform providers is intense and in recent years spreads on the major forex pairs have narrowed considerably, which very much benefits day traders and scalpers.
Shorting shares via stock brokers can be difficult and even costly. However, shorting shares can be very dangerous and far more so than for currencies. Consider shorting the shares of a company where a takeover bid is announced after trading hours, meaning a trader can't cover their short position until the market reopens. The other major difference is leverage — on forex the leverage typically allowed is significantly higher than for stocks.
This of course comes with advantages and disadvantages. The downside of lots of leverage is that risk has to be very carefully monitored as far more can be lost than the initial deposit. Higher margins tend to favour shorter term trading styles, such as day trading or scalping. Most of the technical analysis tools, which can be used for analysing share price movements, such as moving averages, Bollinger bands, chart patterns and RSI, also work well with currencies.
However, higher levels of leverage do mean that picking entry points for trades needs to be more precise and money management needs to be tighter. But there are a number of upsides. Greater leverage and lower transaction costs means that it is possible to trade profitably with less capital than required for stocks. Also, the typically shorter time frames on trading forex means that carrying out fundamental analysis is a lot less important than technical analysis — though a basic understanding of how such factors influence exchange rates is good to know.