Most Forex traders come from some other trading background before they turn to trading currencies. Having a background in other markets can jump start your FX trading career but it is important to understand the differences between the Forex market, the stock market, and the futures market.
Forex Market (Spot Forex)
The Forex market, sometimes referred to as spot Forex, is the largest market in the world with over $5 trillion in volume each day. Participants buy and sell currencies "Over-the-counter" 24 hours a day, 5 days a week. Some of the more popular benefits to Forex trading are:
- Low cost of trading ( spread only)
- Flexible trade sizes in 10,000 unit increments
- No contract expiration dates
Currency Futures Market
The currency futures market is available through the Chicago Mercantile Exchange (CME) in the United States. While the currencies involved are the same as the spot market, the futures market is noticeably smaller, with around $100 billion in daily trading volume. Currency futures are traded 23 hours a day, 5 days a week and offer similar leverage to what can be found in spot FX trading. But there are a few drawbacks to trading currency futures:Moderate barrier to entry (around $5,000 account minimum)
- Moderate cost of trading (spread + broker commissions + data fees)
- Contract expiration every 3 months
- Larger minimum trade size (10,000 units and up)
Stock Market
The stock market allows participants to buy and sell ownership in companies that they believe will grow in value over time. Over half of United States' households own stock in some form or another with around $300 billion worth changing hands each day on US exchanges. Most stock exchanges are open only a few hours a day and require a higher margin requirement than the Forex market and currency futures market. A few other differences between trading stocks and spot FX:
- Low barrier to entry (around $1,000 minimum)
- Moderate cost of trading (spread + commissions + data fees)
- Flexible trade sizes (but fixed commission making smaller trades more expensive)
- Day trading rule - $25,000 minimum account required if 4 day trades are closed across a 5 day span or trading account is frozen for 90 days
When compared apples to apples, the spot Forex market allows traders more flexibility to trade how they want, when they want and at a lower cost. Are you ready to take your stock or futures trading skills and try them out in the Forex market? Open up a FREE Trading Demo account today.
Good trading!
---Written by Rob Pasche