When we think about day trading and portfolio management, we tend to think of the stock market first. A majority of people who either seek to make a living as day traders or invest in long-term portfolios do so in the traditional markets, buying shares of companies and hoping for those companies to perform well. But there are plenty of alternative modes of trading as well, and one that’s more popular than it gets credit for is forex.
Essentially defined as the trading of world currencies against one another’s value, forex works like most any other kind of investment, but in a different and unique environment. To some, the forex market looks dense and complicated, and lacks the diversity or quick earnings potential of the stock market. To others, it can seem convenient, accessible, and conducive to regular trading efforts as opposed to simply long-term plays.
There are certainly pros and cons to delving into this market, but here we want to take a look at a few of the reasons that many people do consider forex trading.
In a previous article about undeniable reasons to love online trading, we mentioned that online trading, in one form or another, is available 24/7. However, traditional day traders actually don’t enjoy this perk. It’s thanks in large part to the forex market that that online trading can make the claim that it’s available 24/7. Because forex trading involves currencies from all over the world and some financial market somewhere in the world is open at all times, currencies’ relationships to one another are always changing. This doesn’t mean that forex pairings need to be monitored 24/7, but it does mean that to some extent forex traders can choose the hours they want to focus on in trading their favorite pairings.
Another reason that some traders are drawn to forex is that the market is, on the surface, a great deal simpler than any mainstream stock index. As shown through one infographic explaining the difference between forex and stocks, this is because there are only eight major currency pairs that make up the majority of the forex market. More specifically, those eight pairs account for 72% of the volume of the forex market. By contrast, if you were to pick out eight major S&P stocks they’d make up about 20 percent of the market at most. This doesn’t mean that it’s any easier to make effective trades, but it does mean that forex traders have fewer potential assets to keep an eye on.
Traders are always looking for favorable leverage, and it just so happens that this is another thing that draws people toward forex. As explained in another article delving into the pros and cons of forex, this particular market tends to have very high leverage. In some cases, that means 50-to-1 leverage. That means that for each $1 you actually put into your account you’re able to trade $50 worth of currency, allowing for significant trading activity with a relatively small investment. That doesn’t mean that you’re always necessarily making 50 times your actual gains, but it does allow for more meaningful transactions in a market defined by small movements over short periods of time. It’s also worth noting that most brokers will also close your position for you before you’re able to lose more than you invested in the first place.
The forex market is not for everybody. But for those curious about various types of day trading who might be looking for something new, it’s worth thinking about. Some even find the trading environment to be more appealing than traditional stocks.