Forex Walkthrough

AAA

Level 2 Markets - Forex Vs. Stocks

Differences Between Forex and Equities
A major difference 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. Don't worry, we will discuss these pairs in detail in the next portion of our forex walkthrough. All other pairs are just different combinations of the same currencies, better known as cross 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 is 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 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 so 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, 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. (For a more, see Getting Started in Forex and A Primer On The Forex Market.)

By now you should have a basic understanding of what the forex market is, how it works and the benefits and dangers all new forex traders should be aware of. Next we'll take a closer look at the currency pairs that are most widely used by traders in the forex market.


The Pairs


Related Articles
  1. Forex Education

    Forex Tutorial: Foreign Exchange Risk and Benefits

    In this section, we'll take a look at some of the benefits and risks associated with the forex market. We'll also discuss how it differs from the equity market in order to get a greater understanding ...
  2. Forex Education

    The Pros & Cons Of A Forex Trading Career

    Trading foreign currencies can be lucrative, but there are many risks. Investopedia explores the pros and cons of forex trading as a career choice.
  3. Forex Education

    Forex Broker Guide: Introduction

    As of January 2012, foreign exchange market accounts for more than $4 trillion in average traded daily value, making it the largest financial market in the world. No central marketplace exists ...
  4. Forex Traders

    A foreign exchange or Forex trader, also referred to as a retail Forex trader, is a person that seeks to obtain profit through buying and selling various currencies on the foreign exchange market. ...
  5. Forex Education

    Working In Finance: 5 Forex Careers

    The forex markets can be both exciting and lucrative. Find out what jobs exist in this space and how to get them.
  6. Forex Strategies

    Can Forex Trading Make You Rich?

    Forex trading may be profitable for hedge funds or unusually skilled currency traders, but for average retail traders, forex trading can lead to huge losses.
  7. Forex Education

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  8. Forex Education

    Forex Tutorial: How To Trade & Open A Forex Account

    So, you think you are ready to trade? Make sure you read this section to learn how you can go about setting up a forex account so that you can start trading currencies. We'll also mention other ...
  9. Trading Systems & Software

    Guide To Smartphone Forex Apps: Forex Education, Signaling And Other Apps

    From discussion forums to how-to articles, educational forex apps can provide traders with an easy-to-access way to learn more when on-the-go. Forex traders can use these resources to learn everything ...
  10. Trading Systems & Software

    Guide To Smartphone Forex Apps: Forex Trading And Analysis Apps

    Forex trading apps make it easy for forex traders to place trades on the go. From proprietary forex broker solutions to broker agnostic apps, forex traders have a wide variety of options available ...
RELATED TERMS
  1. Forex Spot Rate

    The current exchange rate at which a currency pair can be bought ...
  2. Major Pairs

    The four forex pairs which are considered to be the most heavily ...
  3. Forex Scalping

    A trading strategy used by forex traders to buy a currency pair ...
  4. Liquidation Level

    In forex trading, the specific value of a trader's account below ...
  5. Forex Hedge

    A transaction implemented by a forex trader to protect an existing ...
  6. Forex Forecasting Software

    An analytical tool used to help currency traders with forex trading ...
RELATED FAQS
  1. In the forex market, how is the closing price of a currency pair determined?

    The foreign exchange market, or forex, is the market in which the currencies of the world are traded by governments, banks, ... Read Answer >>
  2. How is the value of a pip determined?

    Learn how the pip is used in the pricing of a currency pair in forex trading, and see how the foreign exchange market is ... Read Answer >>
  3. How is spread calculated when trading in the forex market?

    First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms ... Read Answer >>
  4. How does the foreign-exchange market trade 24 hours a day?

    The forex market is the largest financial market in the world, trading around $1.5 trillion each day. Trading in the forex ... Read Answer >>
  5. Is it possible to trade forex options?

    Yes. Options are available for trading in almost every type of investment that trades in a market. Most investors are familiar ... Read Answer >>
  6. Where is the central location of the forex market?

    There is no central location of the foreign exchange market, often referred to as the forex (FX) market. Transactions in ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center