Why trade FX?

If you are interested in trading currencies online, you will find the FX market offers several advantages over stock and futures trading. 

24-hour trading
FX is a true 24-hour market. Whether it's 6pm or 6am, somewhere in the world there are buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.

After-hours trading for U.S. stocks and futures brings with it several limitations. ECN's (Electronic Communication Networks), also called matching systems, exist to bring together buyers and sellers - when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread.

Superior liquidity
With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.

Because of the lower trade volume, investors in the stock market and other exchange-traded markets are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction. 

Leverage
50:1 or 100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers, and 15:1 in the futures market. At 50:1, traders post $2000 margin for a $100,000 position, or 2%.  One must also remember that while higher leverage can increase gains, it can also increase losses by the same degree.  Traders must therefore determine whether such leverage is for them.

While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the FX market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.

The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.

Lower transaction costs
It is much more cost-efficient to trade FX in terms of both commissions and transaction fees.

Commissions for stock trades range from $7.95-$29.95 per trade with online discount brokers and up to $100 or more per trade with full service brokers. An average commission on a futures trade is $15 a round turn. Forex brokers offer much lower commission structures.

Another important point to consider is the width of the bid/ask spread. In general, the width of the spread in a FX transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread. And in the futures market, spreads are typically 7 pips or wider. As a rule of thumb, one pip equals $10, which means at 7 pips, a futures trade costs approximately $20 more than a comparable trade in the spot FX market.

Profit potential in both rising and falling markets
In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells the base currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market. 

The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of t