​ What is Forex Trading?

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Both the options market and currency markets provide serious potential for significant gains — but which one is right for you? When trading options, you invest in the contracts that can move stocks, ETFs, or index products. Currency trades are always made in pairs, with a trader comparing the value differentials between two base currencies, like the US Dollar and the Euro for instance. Both markets offer the potential for serious profits, but which one is best suited to your investment goals and appetite for risk?

Read on to discover some of the key characteristics of each investment opportunity. Access to the Market: The Forex market is famously accessible, and with 24 hours per day, 5 days per week access, there is virtually always time for a trade. The weekend markets are also technically open, although weekend trading is difference between trading forex and stocks dubai that most Forex difference between trading forex and stocks dubai forego.

The options market is tied to the stock market, so trading is essentially limited to normal trading hours 9am to 4: Everything about Forex is quick. When conducting Forex trades, everything happens almost immediately. Trades are executed straight away, with none of the delays that have become commonplace among options trades, or within many difference between trading forex and stocks dubai markets too.

When it comes to the speed of trading, Forex has a distinct edge. This is a difference between trading forex and stocks dubai concept that can make a big difference in terms of profit potential. However, leverage must be approached in a responsible manner in order to minimise over-exposure and significant losses.

With currency trading, leverage levels can range from 50 to times the initial investment, while options-related leverage ratios are often smaller. This means that Forex investors difference between trading forex and stocks dubai the ability to make significantly greater profits in a short amount of time, all with less upfront investment.

However, the leveraged investment must be carefully watched in order to minimise disastrous results. Forex trading, on the difference between trading forex and stocks dubai hand, operates within a marketplace that is essentially a group of traders and computers who create a web that bypasses marketplace norms.

Which investment option delivers the edge when it comes to risk management? This really depends on the type of trader you are, and how you decide to play the game. Forex traders must enact position limits, which means that the online trading software will automatically create a margin call when the margin amount exceeds the value of the trading account in dollars. This is an automated safeguard that ensures that the trader keeps losses in check.

In addition, keep in mind that with Forex you can determine the amount of time between trades, whilst options only provide a specific time period in which to trade before the options expire. The marketplace is highly regulated, meaning that a defined system and concrete marketplace help to quell any uncertainty about the person on the other end of a trade. Profits can also be made in most market conditions — up, down, and sideways.

A centralised price also helps to keep things consistent. This means that the savvy investor sits around and watches his or her investment do nothing. Forex tradingon the other hand, enables a trader to start an account and begin making financial moves with very little upfront money. Easy diversification is also possible when traders utilise micro or mini lots of currency, and keep leverage ratios within reason.

When deciding which option is best for you, keep in mind that the ability to conduct trades 24 hours a day might be viewed as a benefit to many, but it can also lead to problems. Those who have a difficult time separating emotions from good trading logic might find themselves over-trading due to the easily accessible market. Many investors like to make a trade and then walk away, not having to worry about the position of their investment during all hours of the day.

In the end, there is no one right answer. However, Forex trading has proven to be lucrative, exciting, and risk averse for those who want to make serious profits in a short amount of time.

The choice, as always, is yours. Contracts for Difference CFDs and margined FX are leveraged products which carry a high degree of risk to your capital. Prices may move rapidly against you and may result in you losing more than your initial deposit. CFDs and FX may not be suitable for all investors and you should fully understand the risks involved before opening an account. Open a live account Fund your account.

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Or to put it another way can someone who profitably trades shares also make money with spot forex. The answer is yes, but with some caveats on trading style and with an acknowledgement of the differences between the two types of market. By its nature spot forex tends to favour short-term trades for reasons that will be explained later. But the first major difference between spot forex and shares is where they're traded. Stocks trade on exchanges such as the London Stock Exchange, whilst the spot forex markets trade Over The Counter, that is transactions take place directly between big banks, brokerages and other large institutions.

The other major difference is trading hours. However, in practice forex is usually active only during certain times of the day. The market usually sees a big pick-up in activity from around 7AM London time as Europe wakes up and London is the biggest forex market and Asia comes towards the end of its working day.

Then from around 1PM onwards the market typically sees a jump in liquidity again as the US comes online. It is also during US hours that big data items the markets most watches are released. US data tends to move forex markets as the US is the world's biggest economy and the US dollar is the world's main reserve currency. For forex day traders these are the best hours to be trading as liquidity is good and trends tend to develop. But by 5PM UK time the forex markets tend to go quiet again.

Spreads, the difference between buy and sell prices, on these major pairs are the narrowest and hence the most suitable for day traders and scalpers as the transaction costs are lowest.

However, spreads will be wider on pairs involving 'exotics' as liquidity is much lower. This concentration on a few currency pairs gives traders the advantage of being able to specialise. Stock market traders can decide to specialise just in a few very liquid stocks such as Coca Cola or Vodafone.

Others can simply chose to chase the momentum stocks of the moment, which means searching among 1,s of listed stocks. There are software programmes that can locate those fast moving shares, but a lack of specialisation in those stocks can leave traders open to making losses.

The other factor is that spreads on the major currency pairs tend be wafer thin and narrower than on stocks and this makes for lower transaction costs. Also, there usually aren't any commissions to pay on forex trades. No doubt this reflects that the forex market is many times bigger than the world's equity markets.

And also competition between forex platform providers is intense and in recent years spreads on the major forex pairs have narrowed considerably, which very much benefits day traders and scalpers. Shorting shares via stock brokers can be difficult and even costly. However, shorting shares can be very dangerous and far more so than for currencies. Consider shorting the shares of a company where a takeover bid is announced after trading hours, meaning a trader can't cover their short position until the market reopens.

The other major difference is leverage — on forex the leverage typically allowed is significantly higher than for stocks. This of course comes with advantages and disadvantages. The downside of lots of leverage is that risk has to be very carefully monitored as far more can be lost than the initial deposit.

Higher margins tend to favour shorter term trading styles, such as day trading or scalping. Most of the technical analysis tools, which can be used for analysing share price movements, such as moving averages, Bollinger bands, chart patterns and RSI, also work well with currencies. However, higher levels of leverage do mean that picking entry points for trades needs to be more precise and money management needs to be tighter.

But there are a number of upsides. Greater leverage and lower transaction costs means that it is possible to trade profitably with less capital than required for stocks.

Also, the typically shorter time frames on trading forex means that carrying out fundamental analysis is a lot less important than technical analysis — though a basic understanding of how such factors influence exchange rates is good to know. That in a way makes trading currencies simpler.

Successful traders or investors in shares looking for long-term positions usually do look at fundamentals such as a company's prospects and financial strength and combine that with some form of technical analysis. Another major difference is central banks.

Yes their actions certainly do influence the stock market, but they're often felt first and sometimes disproportionately in forex markets. Often, as the Bank of Japan does regularly, they'll intervene to drive down the value of the national currency and they do that by intervening directly in the forex markets. These days central banks are very active as a result of trying to manage the fall-out from the financial crisis. So the US Federal Reserve, which tends not to focus as much on the value of the US dollar, can nonetheless greatly influence its value by engaging in quantitative easing programmes to help boost jobs.

However, that also has the effect of driving USD lower. So which is better? It would be unfair to make a categoric judgement in favour of either one. It really is down to the individual, their character and their preferences. Some traders naturally feel more comfortable with stocks whilst others with spot forex.

For the long-term trader stocks may well be a better choice, they can make spectacular price moves and the lower levels of leverage means entries don't need to be quite so precise — there's more forgiveness in getting in a bit too early for example. But for traders looking to do scalping and day trading then forex, with higher levels of leverage available, should be a serious consideration. It also requires less capital, it offers an opportunity to specialise and in some respects, as discussed earlier, forex is simpler than shares.

If you have never traded forex, then a good way to get a feel for it is to simply open a demo account and experiment. Don't have an account? Justin Pugsley Justin has over 20 years experience writing about markets, economics and finance. MahiFX does not provide investment advice or recommendations, and no material on this site should be construed as such.

Opinions are those of the authors and not necessarily those of MahiFX, its officers or directors. Leveraged trading is high risk and not suitable for all. You could lose some or all of your deposited funds.