Advantages of Currency Trading
When day trading currencies, the term “day trading” changes slightly. Since currencies can be traded 24-hours-a-day, there is no such thing as “overnight” trading. Thus, you can have open positions for longer than a day with active stop losses that can be activated at any time.
Day trading suffered in 2001 when a new day trading law was passed restricting the day trading styles of many day traders. The law basically required stock day traders to have at least $25,000 in their accounts if they wanted to participate in day trading on an ongoing basis. In essence, this eliminated most day traders from the market, since most people that were day trading had less than $25,000.
Some people might argue that even though they have less than $25,000, they are still trading stocks, but the reality is that these people are holding stocks for more than a day or, in other words, short-term trading (not day trading)
So what can a trader with less than $25,000 do? The answer – trade currencies! You could day trade currencies with a lot less than $25,000. In fact, you can day trade with as little as a few hundred dollars by opening a forex mini account. Furthermore, the currency (or forex) market is opened 24 hours a day, so traders can day trade or short-term trade with an active stop loss all the time. All this is relatively new. In the not too distant past, only banks and wealthy individuals and institutions could trade currencies, but now every small investor could participate in currency trading (or forex trading). Some of the mayor advantages of currency trading over stock trading are:
Day trading 24 hours a day –
Currency trading goes on from Sunday afternoon to Friday afternoon, so for 5 days of the week you could day trade currencies all day long! The currency market does not close every day like the stock market. This basically allows the day trader to choose the hours that he is going to day trade.
Greater leverage –
Day traders (with more than $25K in their accounts) have an intraday margin of 4 to 1. This basically means that they could day trade $100,000 worth of stock with only $25,000. Short-term stock traders (those who hold stocks overnight) only have 2 to 1 margin. As a currency trader (whether day trading or short-term trading), I have 50 to 1 margin. That means that you could day trade $1,250,000 worth of currencies with $25,000. A mini forex trading account requires only few hundred dollars to start.
Easier to follow –
There are only a handful of mayor currencies to trade. This is a lot easier to do than with stocks. There are tens of thousands of stocks out there. How do you choose which stock you are going to trade? It is much easier to follow a few currencies.
More liquidity –
Whatever we are day trading has to have enough volume to make it worth our while. Greater volume means that there are more people willing to buy and sell something at any given time. The currency market is more liquid than all the world stock markets put together. Currencies are always in action.
Better for shorting –
There are artificial controls built into the market to prevent it from going down too fast. The reason is that we live in a biased world that likes to see things go up instead of down. One of these artificial contraptions is the “uptick rule,” which comes into play when shorting stocks, making it more difficult to sell a stock short than to buy it. This is unheard of in the currency market. Selling currencies short while day trading is just as easy as buying them.
Great for short-term traders –
For those that like to hold stocks for a few days when trading, currency trading is perfect. Since the currency market is opened 24 hours a day for 5 days a week, a currency day trader that wants to hold a currency position from one day to the other (or for a few days), can do it with a stop loss order in place.
No commission or transaction fees –
It is much more cost-efficient to trade FX in terms of both commissions and transaction fees. Offers foreign exchange trading commission free. This is in sharp contrast to (once again) what stock and futures brokers offer. A stock trade can cost anywhere between USD 5 and 30 per trade with online brokers and typically up to USD 150 with full service brokers. Futures brokers can charge commissions anywhere between USD 10 and 30 on a round turn basis.