Forex Investment and Currency Trading

No Trading Curbs or Uptick Rule

The FX market is the largest market in the world, forcing market makers to offer very competitive prices. Unlike the equities market, there is never a time in the FX markets when trading curbs would take effect and trading would be halted, only to gap when reopened. This eliminates missed profits due to archaic exchange regulations. In the FX market, traders would be able to place trades 24 hours a day with virtually no disruptions.

One of the biggest annoyances for day traders in the equity market is the fact that traders are prohibited from shorting a stock in a downtrend unless there is an uptick. This can be very frustrating as traders wait to join short sellers but are only left with continually watching the stock trend down before an uptick occurs. In the FX market, there is no such rule. If you want to short a currency pair, you can do so immediately; this allows for instant and efficient execution.

Online Trading Reduces Error Rates

In general, a shorter trade process minimizes errors. Online currency trading is typically a three-step process. A trader would place an order on the platform, the FX dealing desk would automatically execute it electronically, and the order confirmation would be posted or logged on the trader’s trading station. Typically, these three steps would be completed in a matter of seconds. For an equities trade, on the other hand, there is generally a five-step process. The client would call his or her broker to place an order, the broker sends the order to the exchange floor, the specialist on the floor tries to match up orders (the broker competes with other brokers to get the best fill for the client), the specialist executes the trade, and the client receives a confirmation from the broker. As a result, in currency trades the elimination of a middleman minimizes the error rates and increases the efficiency of each transaction.

Limited Slippage

Unlike the equity markets, many online FX market makers provide instantaneous execution from real-time, two-way quotes. These quotes are the prices at which the firms are willing to buy or sell the quoted currency, rather than vague indications of where the market is trading, which aren’t honored. Orders are executed and confirmed within seconds. Robust systems would never request the size of a trader’s potential order, or which side of the market he’s trading, before giving a bid/offer quote. Inefficient dealers determine whether the investor is a buyer or a seller, and shade the price to increase their own profit on the transaction.

The equity market typically operates under a “next best order” system, under which you may not get executed at the price you wish, but rather at the next best price available. For example, let’s say Microsoft is trading at $22.50. If you enter a buy order at this price, by the time it reaches the specialist on the exchange floor the price may have risen to $23.25. In this case, you will not get executed at $22.50; you will get executed at $23.25, which is essentially a loss of three-quarters of a point. The price transparency provided by some of the better market makers ensures that traders always receive a fair price.

Perfect Market for Technical Analysis

For technical analysts, currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends. Over 80 percent of volume is speculative in nature, and as a result the market frequently overshoots and then corrects itself. Technical analysis works well for the FX market and a technically trained trader can easily identify new trends and breakouts, which provide multiple opportunities to enter and exit positions. Charts and indicators are used by all professional FX traders, and candlestick charts are available in most charting packages. In addition, the most commonly used indicators—such as Fibonacci retracements, stochastics, moving average convergence/divergence (MACD), moving averages, (RSI), and support/resistance levels—have proven valid in many instances.

Equity traders who focus on technical analysis have the easiest transition since they can implement in the FX market the same technical strategies that they use in the equities market.