This is the first of two articles looking at forex vs stocks from the standpoint of the retail stock trader. Foreign exchange has been getting a large amount of attention recently and has attracted many new traders home-working, as well as many stock traders looking to diversify into fx trading. But what precisely is the forex market? How does it work?  

World Market

Currency trading is a global affair. You aren’t restricted to dealing in the currency of your own country. Currency exchange is an OTC market and there is no central exchange or clearing house. This gives the foreign exchange market a few advantages over the stock market for a retail trader.

Transparent Market

The value of a stock is influenced by the performance of a company whose figures could be manipulated or known to insiders for some considerable time before it is revealed publicly. Currency prices, on the other hand, are driven by the business performance of a complete nation. This is nearly impossible to manipulate and masses more clear. This indicates that a trader working at home, out of the loop of personal monetary info, is on a much more level playing field in the forex market than in stocks.

Liquidity

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

As you can imagine, such high liquidity also implies 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 big advantage, especially if you’re trading large positions.

Signals

Currency market has a wide selection of signals software available for the traders. Signals like Forex Mercenary provide exact orders to be placed on the charts. While such convenience is also available in markets, it isn’t as commonly used.  

Development

So if forex trading has so many benefits, why is it that it isn’t been popular till 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 allowed to vary.

Even then, it was only the banks, hedge funds etc who were involved in trading on the foreign exchange market initially. There had been no history of private backers getting on the telephone to a broker to trade in currency because there was in stocks. This suggests that it was not until the development of the internet that the forex market opened up and currency exchange vs stocks changed into a real choice for retail traders.