Forex trading has increased in popularity in recent years with new traders learning and stock market traders retraining. There are several reasons why traders prefer to trade forex over stocks:
Forex is leveraged. This means that with a comparably small deposit you are able to gain access to a much larger trade size. This is like just putting forward a deposit for the trade but having the profits or losses that come from the full trade size. So, with a small trading capital you can have exposure to trades which are significantly larger. The amount of leverage depends on the forex company and the currency pair that you are trading but, in some circumstances, you can trade a pair with leverage of 200:1.
With stocks you are buying shares in the company. You may find that the number of shares that you want to buy at a particular price are simply not available. There are often problems of liquidity when a trader wants to purchase large volumes. Some stocks are notoriously illiquid and can be difficult to trade as a result.
Forex is a completely different ball game. Yes, the supply of a country’s currency can fluctuate but there is also a huge supply of the currency to trade. As a result, all major world currencies are extremely illiquid. The US dollar and the Euro are the most liquid currencies, making the EUR/USD the most liquid currency pair in the world.
Currency markets are far more accessible than stock markets. Most stock markets are open for the day, closing at the end of each session. For example, the London Stock Exchange opens at 08:00 am and closes at 16:30. It is only possible to buy or sell shares on the LSE between these hours.
Forex markets are 24 hours. They start trading at the open in Sydney on Monday morning and run until the close in New York on Friday evening. They do not close at the end of each trading day. Therefore, it is much easier to find a trading time that is suitable. There are many trading centres across the world, so currencies are always trading either more actively or less actively in one-time zone or another.
Going short in the stock market in not so simply. This is selling a share to open when you wish to make money when the stocks decrease in value. Some stocks you just can’t short. Brokers just won’t allow their clients to sell to open on some stocks.
It is possible to go short a currency. This means that you think that the value of the currency will decrease versus the value of another. In this example, you sell the currency. This is as simple as going long or buying the currency. You can go long or go short any of the currencies that a broker has to trade.