Forex for a trader
Trade forex vs stocks

Trade forex vs stocksWhy Trade Forex: Forex vs. Stocks. There are approximately 2,800 stocks listed on the New York Stock exchange. Another 3,100 are listed on the NASDAQ. Which one will you trade? Got the time to stay on top of so many companies? Aren’t four pairs much easier to keep an eye on than thousands of stocks? Look at Mr. Forex. He’s so confident and sexy. Mr. Stocks has no chance! That’s just one of the many advantages of the forex market over the stock markets. Here are a few more: The forex market is a seamless 24-hour market. Most brokers are open from Sunday at 4:00 pm EST until Friday at 4:00 pm EST, with customer service usually available 247. With the ability to trade during the U. S., Asian, and European market hours, you can customize your own trading schedule. Minimal or No Commissions. Most forex brokers charge no commission or additional transactions fees to trade currencies online or over the phone.

Most brokers are compensated for their services through the bidask spread. Instant Execution of Market Orders. Your trades are instantly executed under normal market conditions. Under these conditions, usually the price shown when you execute your market order is the price you get. You’re able to execute directly off real-time streaming prices (Oh yeeeaah! Big time!). Fills are instantaneous most of the time, but under extraordinarily volatile market conditions, like during Martian attacks, order execution may experience delays. Short-Selling without an Uptick. Unlike the equity market, there is no restriction on short selling in the currency market. Trading opportunities exist in the currency market regardless of whether a trader is long or short, or whichever way the market is moving. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. So you always have equal access to trade in a rising or falling market. Centralized exchanges provide many advantages to the trader.

However, one of the problems with any centralized exchange is the involvement of middlemen. Spot currency trading, on the other hand, is decentralized, which means quotes can vary from different currency dealers. Competition between them is so fierce that you are almost always assured that you get the best deals. Forex traders get quicker access and cheaper costs. BuySell programs do not control the market. How many times have you heard that “Fund A” was selling “X” or buying “Z”? The stock market is very susceptible to large fund buying and selling. In spot trading, the massive size of the forex market makes the likelihood of any one fund or bank controlling a particular currency very small. Banks, hedge funds, governments, retail currency conversion houses, and large net worth individuals are just some of the participants in the spot currency markets where the liquidity is unprecedented. Analysts and brokerage firms are less likely to influence the market. Have you watched TV lately? Heard about a certain Internet stock and an analyst of a prestigious brokerage firm accused of keeping its recommendations, such as “buy,” when the stock was rapidly declining? IPOs are big business for both the companies going public and the brokerage houses.

Relationships are mutually beneficial and analysts work for the brokerage houses that need the companies as clients. That catch-22 will never disappear. Foreign exchange, as the prime market, generates billions in revenue for the world’s banks and is a necessity of the global markets. Analysts in foreign exchange have very little effect on exchange rates; they just analyze the forex market. Trading in Forex vs Trading in Stocks. With only a stable Internet connection, retail traders have access to financial markets. But with global markets at their fingertips, what is best: trading in Forex or trading in stocks? Or both? Before anything, trading financial markets isn’t for everyone. The recent rise and fall in the cryptocurrency universe is the best example. People depleted their savings to pile on the long side as the FOMO (Fear of Missing Out) sentiment prevailed. Some sold their house and put everything in the “new gold.” However, the same people have a problem now. Most likely, they face bankruptcy. The market retraced over sixty percent from the highs.

What is the lesson to learn here? There’s only one answer: diversification. When diversifying a portfolio, traders manage risk. What risk, you might ask? The risk of something like above won’t happen to the trading account. Because of greed, retail traders still look at financial markets as the place where they’ll get rich. However, can you get rich trading Forex? Do you know what it takes for successful trading in Forex? Or, what is stock market trading? And, is it similar to FX trading? The same questions apply to any market. Why would anyone trade a market if heshe doesn’t know the ins and outs of it? This article aims to: Explain what trading in Forex is Show how to trade on the stock market Pros and cons of trading in stocks Compare trading in Forex vs. trading in stocks. But, above all, it aims to answer questions like: Is Forex trading profitable? How to profit from trading in stocks?

And, how to avoid taking unnecessary risks. After all, that’s what trading is, right? Currency trading is so popular today that everyone heard of the Forex market. But do people understand the foreign exchange trade? The financial system as we know it depends on the USD. Because it is the world’s reserve currency, the entire Forex market depends on its valuation. Therefore, trading in Forex implies trading the USD. You might disagree with this statement, but: Sovereign states build currency reserves in USD Oil and significant commodities have the price in USD IMF (International Monetary Fund) and other big financial institutions mainly lend in USD. Hence, what happens with the USD matters for the world. And, it matters when trading in Forex too. As the largest financial market in the world, the foreign exchange market has an impressive turnover. Over five trillion (with a T!) dollars change hands every single day! Because of the enormous volume, it makes it difficult for any single entity to manipulate prices. Hence, trading in Forex is the purest manifestation of technical and fundamental skills. The Forex market is the place where the world’s currencies fluctuate against each other.

In economic terms, they free-float. The so-called fiat money in the free world has different valuations around the globe. Because every currency represents an economy’s strength or weakness, trading in Forex implies making economic comparisons. That is, comparing two economies and selling or buying a currency based on the outlook. A growing economy triggers higher interest rates. Hence, the fiat currency becomes attractive. As such, traders have a bullish bias. They want to own the currency. So, they buy. Or, go long. A slowdown in economic activity leads to lower interest rate levels. Inflation falls, the currency weakens. Traders sell the currency. They go short. But, the problem is, against what currency to buy or sell?

Is Forex Trading Profitable? Sometimes, a currency appreciates only against some currencies. And, depreciates or losses value against others. The first quarter of 2018 illustrates it perfectly. The Euro, the Eurozone’s common currency, rose against the commodity currencies (CAD and AUD). Here’s the EURAUD 2018 price action. It shows a huge bullish trend. It rose almost a thousand pips. How about EURCAD? The other commodity currency (CAD) fell like a rock against the Euro. Over a thousand pips in a robust and bullish trend! However, against the USD, the Euro consolidate.

For the entire first quarter of 2018, it stood in a narrow range. Therefore, is Forex trading profitable? Yes and no. Yes, if you trade the right instrument. Or, the one that moves, if you’re a swing trader or investor. Yes, if you trade the right instrument. Or, the one that sits in a range, if you’re a scalper. Hence, a swing trading or investing strategy made money on the long side on EURAUD and EURCAD. But, lost on EURUSD. Moreover, a scalping strategy proved disastrous on EURAUD and EURCAD.

But, it made money on the EURUSD pair. As such, trading in Forex is not about a single currency. Instead, it is about a currency pair and its valuation against other currencies. The Forex dashboard revolves around the USD. As its pillar, the USD volatility affects a trader’s profitability. When the USD doesn’t move, nothing moves. Hence, to make a profit when trading in Forex, traders need to understand what moves the USD. Here are some things to consider: Inflation – CPI – consumer price index PPI – producer price index Jobs data ADP – private payrolls NFP – non-farm payrolls jobless claims unemployment rate AHE – average hourly earnings GDP – gross domestic product. Technical Analysis in Forex Trading. Besides the above, general economic data on: Consumer’s health Construction sector’s performance Manufacturing and services sectors data will help to build the big picture. However, an analysis like this helps to interpret ALL economies. Hence, traders use the same criteria to compare different economies. Next, they look at how the currencies appear grouped on the Forex dashboard. Finally, they buy or sell a currency pair (not a currency) based on economic differences. But, that sounds a bit complicated, right? Not everyone is an economist. Moreover, some people don’t have time to monitor economic data.

So, what’s the solution? Is it one? Fortunately, trading in Forex works from a technical perspective too. Technical traders use charts to interpret markets. They check the information on the left side of a chart to project future levels. Any Forex broker offers access to a trading platform with an entire range of trading tools to use. Here’s a list, to name a few: Trend indicators Bollinger Bands Ichimoku Kinko Hyo Moving Averages Parabolic SAR Oscillators RSI – relative strength index DeMarker MACD – moving average convergence divergence Stochastics Fibonacci tools Retracement Expansion Fan Time zones Andrew’s Pitchfork Gann tools Trendlines and channels Trading theories Elliott Waves Drummond Point and Figure Dow Theory. Depending on the trading style, each tool has a purpose. For example, the Elliott Waves Theory doesn’t work without Fibonacci tools. Moreover, scalping fails and swing trading or investing works when counting waves. On the scalping side, oscillators do a great job. Either buying oversold or selling overbought; scalpers observe them. In the end, trading in Forex is about: Understanding the market Picking the right strategy Using risk management. Trading stocks differs. In fact, the two markets vary so much, that the procedure to approach them varies too. Equities or stocks move for a different reason.

On the one hand, there’s company related information. On the other hand, there are general monetary policy decisions that affect trading on the stock market. If you want, the monetary policy is the common ground for trading in Forex and trading in stocks. Fundamental and technical analysis work too, but: Economic data to interpret differs Technical analysis tools differ. A general trading in stocks approach implies the now famous “buy and hold”strategy. Warren Buffett, the renowned investor, is an avid pursuer of it. And, it proved him right. He continuously bet against the doomsday, buying stocks on any cyclical dip. When deciding to trade stocks, first decide on what to trade: individual stocks or an index. Next, find out what matters for the two categories. Finally, make the right decision based on the trading plan and style (scalping, swing trading, investing). Trading in stocks implies buying or selling a piece of a public company. Companies decide to list part or all their shares on a stock exchange, to raise capital for expanding the business. Therefore, anyone can own a piece of a company. Or, a share of it. Ever seen something you like, like a T-shirt, a personal computer, or a boat?

Chances are you can find shares of the companies owning them. And, just like that, you’re involved in the stock market. Trading in stocks has different “frictional expenses”. In plain English, the fees and commissions differ than trading in Forex. Trading in Forex has the same rules for both long and short positions. However, when trading in stocks, one exposes to unlimited liabilities if on the short side. Individual Stocks to Trade. Unlike trading in Forex, trading in stocks offers the possibility to earn a dividend. As such, the dividend yield or the dividend size plays an essential role when picking a stock to trade. When trading an individual stock, traders check a company’s: Types of shares offered (g., preferred, common) Financial statements Income statement Shows info related to Revenues Expenses Profit and loss Balance sheet Shows info related to Assets Liabilities Cash flow Shows info about Cash inflows Cash outflows Retained earnings Shows changes in equity, like Sale of stock Repurchases Dividend payment. The first to are the most important ones in valuing a company. Other things like earnings per share and various ratios help too. Because any company listed on a stock exchange is public, the info is public information. Hence, anyone can find it and use it for hisher own purposes.

Internal news influences the price of individual stocks too. Not one, insider trading held the headlines on Wall Street. All these, and much more, are pieces of information to know about trading in stocks. And, they don’t exist when trading in Forex. Traders must be aware of the earnings calendar too. Every quarter, public companies release financial statements. They provide a great deal of volatility in the price of a stock. Moreover, some companies release the earnings statements after hours, when the market is closed. Low liquidity levels make the price swinging hard. As a result, short-term oriented strategies have little chances to survive in such an environment. Changes in management influence the price of an individual stock. CEO’s (Chief Executive Officer) and CFO’s (Chief Financial Officer) come and go, and the market interprets the moves as positive or negative for an individual stock. How to avoid following all the things listed above? Luckily, indices exist.

An index is a weighted basket of various individual stocks. Most known indices around the world are: Dow Jones – United States S&P500 – United States Russel – United States Nasdaq – United States Xetra Dax – Germany Cac40 – France Ibex – Spain Nikkei – Japan. In this case, trading in stocks means buying or selling an index. The Dow Jones in the United States, for example, has thirty companies in its componence. The companies listed belong to various economic sectors, like: Manufacturing Services IT Construction Financial services. Hence, trading in stocks via an index gives exposure to different industries. Therefore, traders reduce the risk of being exposed to one single company and industry. However, trading an index bears many similarities with trading in Forex. The monetary policy in that jurisdiction affects the value of a stock and stock index. For example, assume the central bank starts a tightening cycle.

More precisely, it starts raising the interest rates. Typically, there is an inversed relationship between tightening and the stock market. Namely, stocks don’t like higher interest rates. However, some stocks do. For example, financial stocks would benefit from higher interest rate levels. Here’s Goldman Sachs one-year evolution, in the midst of the Fed tightening. Trading an index might not give the same opportunities like trading an individual stock. But it provides protection against being too much exposure on one single company. Diversification is key. Remember? How to Start Trading Stocks.

Trading in stocks starts with picking the right broker. Nowadays, trading in stocks can be done via a Forex broker too. Stiff competition led to Forex brokers adding more products to a trading account. Therefore, besides the classic currency pairs, a Forex broker’s account also gives access to: Commodities trading (gold, oil, silver, and so on) Stocks trading (via CFD’s – contracts for difference, trading in stocks is available from a Forex broker’s account) Indices trading Bonds and options. Trading in Forex and trading in stocks from the same account has multiple benefits. One would be that traders use the two to diversify the portfolio. For example, the trader can split the trading account into two parts: one for Forex trading and another one for speculating on the stock market. This way, traders diversify the market exposure and better manage the risk of losing the trading account. Either from a Forex broker’s account or a stockbroker, you need a brokerage house to intermediate the transaction. Typically, fees for trading in stocks exceed the ones for trading in Forex, so that’s something to keep in mind. Trading in Forex and trading in stocks have different particularities. In the end, both Forex and stock traders aim for the same thing: to make a profit.

However, the time horizon of their trades leads to different strategies. Some people look to accumulate wealth via a buy and hold strategy. They save money from the regular day job and invest them in the stock market. By choosing an individual company’s stocks or one or multiple stock indices, retail traders actively participate in the financial market. A Forex vs stocks comparison indicates that the Forex market is: More liquid More volatile Hence, offers more trading opportunities. However, the stock market is: Transparent Better regulated Gives access to a suite of trading tools and instruments that don’t exist in currency trading. To sum up, the best way to trade stocks depends on each trader’s trading plan. Some traders buy stocks only for the dividend paid. As such, they keep the stock until the dividend date, then promptly dump it. Other traders follow closely market analysts and reports regarding various companies. For example, if a company announces a buyback plan (the company buys its own shares), that’s a bullish statement. Traders jump in and buy the stock for a buy and hold opportunity. One thing traders keep forget: taxes. When trading in stocks and trading in Forex, any potential profit is taxed. Uncle Sam never sleeps, nor other financial authorities around the world. Therefore, make sure you understand the real costs of trading in Forex and trading in stocks, before committing capital to a live trading account.

GET STARTED WITH THE FOREX TRADING ACADEMY. Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university. 2.1 Level 1 Forex Intro 2.2 Level 2 Markets 2.3 Level 3 Trading. 5.1 Short Term 5.2 Medium Term 5.3 Long Term. Differences Between Forex and Equities. While the mechanics of trading in the forex market is quite similar to equities in that prices fluctuate based on supply and demand, ever-changing bid and ask prices and the types of orders used by traders are pretty much where the similarities end. One of the major differences 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 EURUSD, USDJPY, GBPUSD, USDCHF, and the three commodity pairs, USDCAD, AUDUSD, NZDUSD. 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 can be 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 easily 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. (For more, see: The Uptick Rule Debate) 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 2%. 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. Forex vs Stocks – What is the Better Market? Updated: February 19, 2018. The two major markets are the Foreign exchange market and the well known stock markets. Forex vs stocks? well In this chapter, we’re going to look at the advantages of trading the Forex market over stocks. Why we trade Forex and why many other traders and investors are making the switch. If you mention trading to family or friends, they are most likely going to assume you’re talking about the stock market, not many people are actually aware of the Forex market. So if the stock market is so popular, why would someone choose to trade on the Foreign Exchange market? Here are the reasons why we, and many others favor the Forex market over the stock market. The number one argument for Forex vs Stocks is the whole open 24 hours deal. When trading stocks you are limited to their relative exchange’s trading hours.

For example, the New York Stock exchange only operates Mon-Fri during New York business hours, and the London FTSE is only open for trade during the London business hours. The foreign exchange market however opens around 8 am Sydney time on a Monday in Australia, and closes around 5 pm New York time in the United States on a America Friday. This basically means that Forex is a 24 hour market open during the 5 day business week. This flexibility is great for traders; you don’t have to be available for any specific time frame. The freedom to trade when you want allows you to integrate trading into your busy life easily. Especially when you use end of day trading strategies. Forex brokers usually don’t charge commissions or transaction fees. They make their money through spreads (by selling currency to you at a slightly higher price than what they can buy it for), which are dirt cheap when compared to the stock market. Brokers are able to offer cheap spreads and make good returns due to the sheer volume of Forex transactions that they experience on a daily basis. The truth is that Forex is the cheapest market to trade in the world. To begin trading stocks you need to have a lot of initial capital to be able to make reasonable returns. This is because the stock market offers very low leverage. Leverage is the ability to use your money to control a larger sum of “borrowed” money in the market. The stock market only offers about 1:2 leverage, which means with $1000 you could control $2000 in an open position. Forex brokers generally have a larger range of leverage options available.

A leverage ratio of 1:100 will allow you to control $100,000 in the market with only $1000 of your capital. It’s not uncommon for brokers to offer leverages up to 1:500 which means you can control $100,000 worth of currency with only $200. The New York stock exchange currently has about 2800 different stocks listed, that’s 2800 different markets to choose to trade from. There are another 2679 stocks listed on the NASDAQ exchange, so you can see how picking a stock to trade can be overwhelming. The Forex market’s focus is around the major global currencies. The United States Dollar (USD) The EURO (EUR) The Great British Pound (GBP) The Japanese Yen (JPY) The Swiss Franc (CHF) The Australian Dollar (AUD) The Canadian Dollar (CAD) It’s much easier to follow these 7 major currencies than to try keep up to date with thousands of stocks. Less Susceptible to Manipulation. The stock market is vulnerable to price manipulation. Large companies can force certain stocks to move by buying or selling them in large amounts, driving the smaller traders out of their positions. The stock market is also more susceptible to analyst’s ‘recommendations’ and news events that may affect that company’s perceived performance or reputation. News, or rumours, can in turn cause a particular company’s stocks to unexpectedly move rapidly in one direction. Because of the epic scale of the Forex market, no one company or bank can forcefully move the Forex market like they can in the stock exchange.

The amount of money required to force a currency to move is just beyond the capabilities of large companies, even single banks cannot force currency prices to move in their favor. In the debate of Forex vs stocks, the Forex market really shines here. Only a country’s central bank has the power to manipulate currency prices, and that’s using the full power of the country’s economy. Sometimes central banks forcefully depreciate their home currency to increase their importexport sector, which in turn will boost the economy. No Restrictions on Short Selling. During stock market crashes it is possible for short selling bans to be put in place by the stock exchange. This means you cannot open any new short trades. During market crashes it is very hard to find buyers for your crashing stock. Imagine you are currently holding stocks, and you see the market collapsing. The first thing you want to do is sell off your stocks before they lose too much value. No one wants to buy stocks in the middle of market crashes. Unless you can find a willing buyer for your stock you may be forced to sit by and watch your money disappear. If you can find a buyer, it is most likely going to be at a very cheap price.

In the Forex market, there is no shame in shorting during market crashes. In fact, Forex traders can make fast money when the markets are plummeting in chaos. Currencies are traded in pairs. You’re always buying one currency to sell the other. One could go as far to say that you’re always a bull and a bear at the same time. So in the overall argument of Forex vs stocks, I find myself being a passionate Forex trader due to the advantages it offers. If you would like to learn more about becoming a professional part time, or even full time Forex trader using price action strategies, then feel free to check out our War Room membership. It includes our Price Action Protocol course that teaches you in detail how to trade with price action. Also included in the course are our powerful money management models and them membership also provides a nice social network for traders.

Should you trade forex or stocks? Today's investors and active traders have access to a growing number of trading instruments, from tried-and-true blue chip stocks and industrials, to the fast-paced futures and foreign exchange (or forex) markets. Deciding which of these markets to trade can be complicated, and many factors need to be considered in order to make the best choice. The most important element may be the trader's or investor's risk tolerance and trading style. For example, buy-and-hold investors are often more suited to participating in the stock market, while short-term traders – including swing, day and scalp traders – may prefer markets wherein price volatility is more pronounced. In this article, we'll compare investing in the forex market to buying into blue chips, indexes and industrials. Forex Versus Blue Chips. The foreign exchange market is the world's largest financial market, accounting for more than $5 trillion in average traded value each day as of 2016 (date of the most recent BIS Triennial Central Bank Survey). Many traders are attracted to the forex market because of its high liquidity, around-the-clock trading and the amount of leverage that is afforded to participants. Blue chips, on the other hand, are stocks from well-established and financially sound companies. These stocks are generally able to operate profitably during challenging economic conditions and have a history of paying dividends.

Blue chips are generally considered to be less volatile than many other investments and are often used to provide steady growth potential to investors' portfolios. Volatility. This is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. As such, many short-term traders are attracted to the forex markets, while buy-and-hold investors may prefer the stability offered by blue chips. Leverage. A second consideration is leverage. In the United States, investors generally have access to 2:1 leverage for stocks. The forex market offers a substantially higher leverage of up to 50:1, and in parts of the world even higher leverage is available. Is all this leverage a good thing? Not necessarily.

While it certainly provides the springboard to build equity with a very small investment – forex accounts can be opened with as little as $100 – leverage can just as easily destroy a trading account. Trading Hours. Yet another consideration in choosing a trading instrument is the time period that each is traded. Trading sessions for stocks are limited to exchange hours, generally 9:30 A. M. to 4pm Eastern Standard Time (EST), Monday through Friday with the exception of market holidays. The forex market, on the other hand, remains active round-the-clock from 5 P. M. EST Sunday, through 5 P. M. EST Friday, opening in Sydney, then traveling around the world to Tokyo, London and New York. The flexibility to trade during U. S., Asian and European markets – with good liquidity virtually any time of day – is an added bonus to traders whose schedules would otherwise limit their trading activity. Forex Versus Indexes. Stock market indexes are a combination of similar stocks, which can be used as a benchmark for a particular portfolio or the broad market. In the U. S. financial markets, major indexes include the Dow Jones Industrial Average (DJIA), the Nasdaq Composite Index, the Standard & Poor's 500 Index (S&P 500) and the Russell 2000. The indexes provide traders and investors with an important method of gauging the movement of the overall market. A range of products provide traders and investors broad market exposure through stock market indexes. Exchange-traded funds (ETFs) based on stock market indexes, such as S&P Depository Receipts (SPY) and the Nasdaq-100 (QQQQ), are widely traded.

Stock index futures and e-mini index futures are other popular instruments based on the underlying indexes. The e-minis boast strong liquidity and have become favorites among short-term traders because of favorable average daily price ranges. In addition, the contract size is much more affordable than the full-sized stock index futures contracts. The e-minis, including the e-mini S&P 500, the e-mini Nasdaq 100, the e-mini Russell 2000 and the mini-sized Dow Futures are traded around the clock on all-electronic, transparent networks. Volatility. The volatility and liquidity of the e-mini contracts are enjoyed by the many short-term traders who participate in stock market indexes. Let's say that the major equity index futures trade at an average daily notional value (the total value of a leveraged position’s assets) of $145 billion, exceeding the combined traded dollar volume of the underlying 500 stocks. The average daily range in price movement of the e-mini contracts affords great opportunity for profiting from short-term market moves. While the average daily traded value pales in comparison to that of the forex markets, the e-minis provide many of the same perks that are available to forex traders, including reliable liquidity, daily average price movement quotes that are conducive to short-term profits, and trading outside of regular U. S. market hours. Leverage. Futures traders can use large amounts of leverage similar to that available to forex traders. With futures, the leverage is referred to as margin, a mandatory deposit that can be used by a broker to cover account losses. Minimum margin requirements are set by the exchanges where the contracts are traded, and can be as little as 5% of the contract's value. Brokers may choose to require higher margin amounts.

Like forex, then, futures traders have the ability to trade in large position sizes with a small investment, creating the opportunity to enjoy huge gains – or suffer devastating losses. Trading hours. While trading does exist nearly around the clock for the electronically traded e-minis (trading ceases for about an hour a day to enable institutional investors to value their positions), the volume may be lower than the forex market, and liquidity during off-market hours could be a concern depending on the particular contract and time of day. While outside the scope of this article, it should be noted that various trading instruments are treated differently at tax time. Short-term gains on futures contracts, for example, may be eligible for lower tax rates than short-term gains on stocks. In addition, active traders may be eligible to choose the mark-to-market (MTM) status for IRS purposes, which allows deductions for trading-related expenses, such as platform fees or education. In order to claim MTM status, the IRS expects trading to be the individual's primary business. IRS Publication 550 and Revenue Procedure 99-17 cover the basic guidelines on how to properly qualify as a trader for tax purposes. It is strongly recommended that traders and investors seek the advice and expertise of a qualified accountant or other tax specialist to most favorably manage investment activities and related tax liabilities, especially since trading forex can make for a confusing time organizing your taxes. See Investopedia's forex broker reviews and stock broker reviews to help you start trading. The internet and electronic trading have opened the doors to active traders and investors around the world to participate in a growing variety of markets. The decision to trade stocks, forex or futures contracts is often based on risk tolerance, account size and convenience. If an active trader is not available during regular market hours to enter, exit or properly manage trades, stocks are not the best option.

However, if an investor's market strategy is to buy and hold for the long term, generating steady growth and earning dividends, stocks are a practical choice. The instrument(s) a trader or investor selects should be based on which is the best fit of strategies, goals and risk tolerance. Why do the Pros Daytrade Futures? The Powerful Advantages of Trading the E-Mini S&P 500 Futures over Stocks, ETFs and Forex. Have you ever wondered why many traders prefer futures over equities andor Forex? If your answer is "yes" and you are interested in daytrading this is definitely an article you should take a minute to read. Make no mistake, there are substantial risks involved with futures daytrading and it is not suitable for all investors, but I feel the following 20 points demonstrate the particular advantages of daytrading the E-mini S&P 500 over trading stocks, Forex and ETFs like the SPDRs and QQQs. During normal market hours the Emini S&P 500 (ES) futures have a tight bid-ask spread of typically 1 tick or $12.50 per contract. With a current approximate contract value of about $50,000, that comes out to .025% of the contract value, which is one of the best spreads in the trading world. This spread should be considered your cost of entry (not unlike commissions) to enter and exit the market. The wider the spread, the more the trade has to move in your favor just for you to get to break-even. Depending on the stock or currency pair you are trading the bid-ask spread may be much wider. Also, since Forex firms "create" the market and therefore, the bid-ask spread, they can widen it to whatever they see fit. Even when Forex firms advertise a fixed spread, they typically reserve the right to widen when they see fit. Typically, this spread is anywhere from $15 to $50+ depending on the currency pair and market conditions. 2. Central Regulated Exchange.

All ES trades are done through the Chicago Mercantile Exchange and its member firms where all trades are recorded in an official time and sales. All trades are made available to the public on a first come, first served basis and trades must follow the CME Clearing rules, along with the strict CFTC and NFA rules. Forex trades occur "over the counter," (off any exchange floor or computer) where there is no centralized exchange with a time and sales report to compare your fill. Traders with different firms can experience different fills even when trades are executed simultaneously. Even more alarming is that in some cases the Forex brokerage firm you have an account with takes the other side of your trade and is therefore "betting" against you. Even for equity trades many stock brokerage firms direct your trades to brokers that give them a "haircut," rebate or kickback for your order or they go to dark pools or are shown to flash traders before made available to the public. Again, this can become a conflict of interest since your order may not be getting the best possible execution. ES commissions are only $1.99 (not including exchange, NFA or data fees) per side and larger traders can even lease a membership to further reduce their fees. This low transaction cost allows daytraders to get in and out of the market without commissions significantly cutting into their profits, but of course the more trading you do the more this will impact your bottom line. While most Forex firms do not charge a "disclosed" commission, they make their money by creating their own bidask spread and taking the other side of your trade, typically costing much more than the transaction costs of the ES. The average discount stock brokerage firm charges $5-10 per trade, which can really eat into your potential daytrading profits. You can see the 10 best bids and 10 best asks along with the associated volume in real time and you are allow the placement of your order at any price you wish when trading the ES. This transparency of the market’s orders allows ES traders to see where and how many orders have been placed ahead of them. For short term daytraders this information may be very valuable and may be used as an indication of future market movements. Most Forex platforms do not offer Level II type pricing and for the few that do, since there is no centralized market, it is only the orders that that firm has access to and not the entire market. Also, most Forex firms do not allow you to place an order within a few ticks of the last price or between their posted bidask spreads, further limiting your trading abilities. 5. Virtually 24 Hour Trading. The ES futures market is open from Sunday night at 5p CST until Friday afternoon at 3:15p (it closes from 3:15p-3:30p and also closes daily from 4:30-5p for maintenance).

This allows you to enter, exit or have orders working to protect your positions almost 24 hours a day, even while you sleep. Even with pre and post market trading, the stock market is open less than 12 hours per day, and the liquidity during these sessions are not always good. 6. All Electronic Trading. There is no trading pit for the ES which means there are no market makers, no locals and no floor brokers and all orders are matched by a computer on a first come-first served basis no matter how large or small they are. This means that all traders see the same level II market and bidask spreads with an equal chance to hit them. While most Forex firms offer electronic trading, some manually approve each order at a trading desk because they are market makers against your orders. Many times larger traders are given preferential treatment and better bidask spreads. Of course more leverage is a double edged sword since higher leverage equates to higher risk, but one Emini S&P contract currently has an approximate value of $65,000 and can be daytraded for as little as $500 which is 1% of its total value (about 100:1 leverage). Even if you hold a position overnight, the current overnight margin is only $5,625 which is still less than 10%. Not all stocks and ETFs are available to be traded on margin, and the ones that can, require at least 50% margin to do so. US regulated Forex firms are not allowed to offer more than 50:1 leverage on the major currency pairs and 20:1 on the other currencies. This high margin requirement may be very limiting to daytraders who are only looking for small market movements. 8. No Interest Charges. For futures trading the daytrade and position margins do not require you to pay any interest on the remainder of the funds. The $500 posted for daytraders is a performance bond and traders do not pay interest on the remaining value of the ES futures contract.

No special type of futures trading account is required to be able to take advantage of the daytrade margins. Stock traders typically must apply for a special account in order to be able to daytrade andor trade on margin and for those who can use the 50% margin, they need to pay interest on the other 50% they are borrowing. Forex has a cost of carry associated with its trading which means interest may be charged or paid on positions taken, but in the end this interest is seen as a revenue stream for Forex brokers and works to their advantage. 9. No Pattern Day Trader Rule. Futures daytrade accounts can be opened with as little as $3,000 and do not have any Pattern Daytrader Rules associated with them. Of course only risk capital should be used no matter what the amount is that you choose to start with. The SEC describes a stock trader who executes 4 or more daytrades in 5 business days, provided the number of daytrades are more than six percent of the customer's total trading activity for that same five-day period, as a Pattern Daytrader. As a Pattern Daytrader you are required to have a minimum of $25,000 starting capital and cannot fall below this amount. The Emini S&P futures trade about an average of 2 million times a day which allows for great price action, volatility and speedy execution. At a current approximate value of $50,000, that is over $100 billion changing hands every trading day. Not all stocks and Forex markets are as liquid which means movements can be shaky and erratic, making daytrading more difficult. Forex firms like to make the claim that the over the counter foreign exchange market trades more than one trillion Dollars in volume per day, but most people don't realize is that in most cases you just traded against your broker's dealing desk rather than the true interbank market. US Futures traders have favorable tax consequences for short term traders since futures profits are taxed 6040, which means that 60% of the gain is taxed at the maximum rate of 15% (similar to long-term gains) and the other 40% is taxed at a maximum rate of 35% as ordinary income. Securities positions held for less than 12 months are considered short term gains and taxed at 35%. Of course everyone’s tax situation is different and should consult a licensed accountant for their specific situation.

When trading a stock index like the Emini S&P futures your "news risk" is spread out over the entire market. Should a report or rumor come out on an individual stock it should have very little impact on the whole index you are trading. When you take a position in an individual stock you are susceptible to stock specific risk which can occur without warning and with violent consequences. When you trade the ES you are trading with a Commodity Futures Trading Commission (CFTC) regulated and National Futures Association (NFA) member firm which is subject to the customer segregated funds rules laid out by the US government. Even with regulated US Forex firms, funds are not considered segregated, so if a regulated firm goes bankrupt clients funds are not offered the same protections as they are in the futures market. Many ES futures traders only track the ES market and find it is the only chart they need to follow. There are always opportunities and great volume throughout the trading day. When large institutions or traders want to take a position in the market or hedge a portfolio they usually turn to the futures markets to get this done quickly and efficiently. Therefore, why not trade the market the "Big Boys" trade? Most traders agree that individual stocks and therefore, the market as a whole follow the futures indices, and not the opposite. In fact, many stock traders will have an Emini futures chart up next to the stock they are following.

As a stock or Forex trader you may need to scan dozens of stocks or currency pairs for opportunities. Many times specific stocks fall out of favor so volume and, therefore opportunities dry up and traders are forced to find a new stock to trade. There are no rules against going short the ES, traders simply sell short the ES contract in hopes of buying it back later at a lower price. There are no special requirements or privileges you need to ask your futures broker for. Most stockbrokers require a special account with higher requirements for you to be able to go short. Some stocks are not shortable, or have limited shares that can be shorted. Also, up-tick rules could be re-enforced and in the past the government has put temporary bans on stocks that can be shorted. 16. Direct Correlation. On average the ES futures are directly correlated to the underlying S&P 500 index in the short and long term. If you pull up an Emini S&P 500 futures chart and compare it to the S&P 500 index chart they should almost look identical.

Double or triple weighted ETFs do not track the S&P accurately over longer periods, and some currency ETFs have credit risks associated with them which could hinder their ability to correlate. The S&P 500 index is comprised of very actively traded stocks with some of the largest market capitalizations and with hundreds of billions of dollars invested in some fashion in them. With such large dollar values and high trading volume it would be very hard to manipulate its movements. On the other hand sometimes it is easy to move or even manipulate a particular stock and even a foreign currency market. George Soros has been accused of intentional driving down the price of the British Pound and the currencies of Thailand and Malaysia and many stock "promoters," insiders and markets makers have been convicted of manipulating stocks. The old adages follow the "big boys" and "smart money" are usually true when it comes to trading, and large money managers, pension funds, institutional traders, etc. tend to be very active traders in the futures markets. The S&P 500 futures contract is generally recognized as the leading benchmark for the underlying stock market movements. Most active equity traders admit they first look to the index futures for an indication of what the stock they are trading might be doing, so why not just trade the leader of the market, the Emini futures? Volume can be one of the most useful indicators a trader can use, those little lines at the bottom of the chart are not just there to look pretty they should be used as another indication of the validity or lack thereof, of a particular move.

In other words combined with other indicators andor chart patterns volume can be used to confirm a move in the market. Most market technicians would agree that a move made on relatively light volume is not as significant as a move made on heavy volume and should be treated accordingly. Since the Forex market is over the counter (OTC), there is no centralized exchange, no one place where trades take place therefore, there is no accurate record of volume and most, if not all, Forex charts will not show any indication of volume. So what might appear to be a significant move on a Forex chart, may just be a false move on low volume and could not be filtered out if you were looking at a Forex chart. 20. Clearing Reliability. During the May 6, 2010 "Flash Crash" the Emini S&P futures continued to trade within a reasonable price range reflecting what the cash S&P 500 index was indicating. No trades on the Emini S&P futures were cancelled and all trades cleared. According to the joint study by the SEC and CFTC, ETFs made up 70% of the securities with trades that were later canceled. Furthermore, there were about 160 ETFs that temporarily lost almost all of their value and 27% of fund companies had securities with trades broken. Had you bought or sold during this event you may had been notified after the market closed that your trade was no longer good and left with potentially dangerous consequences. As you probably already know trading is hard enough, so why choose a market where the odds are stacked more against you before you even place your first order. The above mentioned 20 points clearly make the E-Mini S&P 500 futures the best choice for daytraders and will give you the most bang for your buck. Before you trade futures, though, please make sure they are appropriate for you and that you only use risk capital.


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