That is the million dollar question isn’t it? How do you make money trading currencies?
After all, regardless of the investment vehicle you choose, your primary goal is to make more money with the money you invest, preferably as much as possible.
While the mechanics of trading in the Forex market (FX) is quite similar to trading equities in that prices fluctuate based on supply and demand; ever-changing bid and ask prices and the types of orders used by traders are pretty much where the similarities end.
One of the major differences between the Forex and equities markets is the number of trading alternatives available: the Forex market has very few compared to the thousands found in the stock market.
The majority of Forex traders focus their efforts on seven different currency pairs. There are four “major” currency pairs, which include EUR/USD, USD/JPY, GBP/USD, USD/CHF, and the three commodity pairs, USD/CAD, AUD/USD, NZD/USD.
All other pairs, known as cross currencies, are just different combinations of the same currencies.
This makes currency trading easier to follow because rather than having to pick between 10,000 stocks to find the best value, the only thing FX traders need to do is “keep up” on the economic and political news of these eight countries.
Quite often, the stock markets can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions when you’d like to.
Furthermore, in a declining market it is only with extreme ingenuity and sometimes luck that an equities investor can make a profit. It can be difficult to short-sell in the U.S. stock market because of strict rules and regulations.
On the other hand, Forex offers the opportunity to profit in both rising and declining markets easily because with every trade you are buying and selling at the same time and short-selling is, therefore, a part of every trade.
In addition, since the Forex market is extremely liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position, as is the rule in the stock market.
Due to the high liquidity of the Forex market, margins are low and leverage is high. It just is not possible to find such low margin rates in the stock market.
Most margin traders in the stock market need at least half of the value of their investment available in their margin accounts, whereas Forex traders need as little as 1%. Furthermore, commissions in the stock market tend to be much higher than in the Forex market.
Traditional stock brokers ask for commission fees on top of their spreads, plus the fees that have to be paid to the exchange. Spot Forex brokers take only the spread as their fee for each trade.
That translate into more profit for the Forex investor.