Day Trading and Swing Trading the Currency Market. Kathy Lien

forex and equity markets.

      Characteristics of FX Markets

      1. It is the largest market in the world with growing liquidity.

      2. The market is open 24 hours, 5.5 days a week for trading.

      3. Profits can be made in both bull and bear markets.

      4. There are no trading curbs, and short selling is permitted without an uptick.

      5. Instant executable trading platform minimizes slippage and errors.

      6. Leverage can be extremely high, which can magnify profits as well as losses.

      Characteristics of Equities Market

      1. There is decent market liquidity, but that can depend on a stock's daily volume.

      2. The market is only available for trading 9:30am to 5pm NY Time, with limited after-hours trading.

      3. The existence of exchange fees results in higher costs and commissions.

      4. There is an uptick rule to short stocks, which many day traders find frustrating.

      5. The number of steps involved in completing a trade can increase slippage and error.

      As one of the most liquid markets in the world, the volume and liquidity present in the FX markets has allowed traders to access a 24-hour market with low transaction costs, high leverage, the ability to profit in both bull and bear markets, minimized error rates, limited slippage, and no trading curbs or uptick rules. Oftentimes, traders can use the same strategies for analyzing the equity markets in the FX market. Fundamental traders will find that countries can be analyzed like stocks. Technical traders will find that the FX market is perfect for their style of analysis because of the abundance of tick data and because it is already one of the most commonly used analysis tools by professional traders. Now let's take a closer look at the individual attributes of the FX market to really understand why this is such an attractive market to trade!

      24-Hour Market

      One of the primary reasons why the FX market is popular is because for active traders, it is the ideal market to trade. It's 24-hour nature offers traders instant access to the markets at all hours of the day for immediate response to global developments. This characteristic also gives traders the added flexibility of determining their own trading day. Active day traders no longer have to wait for the equities market to open at 9:30am NY Time to begin trading. If there is a significant announcement or development either domestically or overseas between 4pm NY Time and 9:30am NY Time, most day traders will have to wait for the exchanges to open at 9:30am to place trades. In all likelihood, by that time, unless you have access to electronic communication networks (ECNs) such as Instinet for premarket trading, the market would have gapped up or gapped down against your favor. This is particularly frustrating when important data are released at 8:30am NY Time, such as nonfarm payrolls. Professionals would have already priced in the outcome before the average trader can even access to market.

      In addition, many people who want to trade also have a full-time job during the day. The ability to trade after hours makes the FX market a much more convenient market for all traders. Different times of the day will offer different trading opportunities, as the global financial centers around the world are all actively involved in foreign exchange. With the FX market, trading after hours with a large online FX broker provides the same liquidity and spread as any other time of day.

      As a guideline, at 5pm Sunday NY Time, trading begins as the markets open in Sydney, Australia. Then, the Tokyo markets open at 7 pm NY Time. Next, Singapore and Hong Kong open at 9 pm NY Time followed by the European markets in Frankfurt (2am) and then London (3am). By 4am the European markets are in full swing, and Asia has concluded their trading day. The U.S. markets open first in New York around 8am Monday as Europe winds down. By 5pm, Sydney is set to reopen once again.

      The majority of trading activity happens when the markets overlap; for example, Asia and Europe trading overlaps between 12am to approximately 2am, Europe and the United States overlaps between 8am to approximately 12pm NY Time, while the United States and Asia overlap between 5pm and 9pm. During New York and London hours, all currency pairs trade actively. During the Asian hours, however, the trading activity for pairs such as the GBPJPY and AUDJPY tend to peak.

      Lower Transaction Costs

      Lower transaction costs also makes forex an attractive asset class to trade. In the equity market, traders must pay a spread and/or a commission and with online equity brokers, commissions can run upwards of $20 per trade. This means that for positions of $100,000, average roundtrip commissions could be as high as $120. The over the counter (OTC) structure of the FX market eliminates exchange and clearing fees, which, in turn, lowers transaction costs. Costs are further reduced by the efficiencies created by a purely electronic market place that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen. Because the currency market offers round-the-clock liquidity, traders receive tight competitive spreads day and night. Equity traders are more vulnerable to liquidity risk and typically receive wider dealing spreads, especially during after-hours trading.

      Low transaction costs make online FX trading the best market to trade for short-term traders. For an active equity trader who typically places 30 trades a day, at $20 commission per trade, you would have to up to pay $600 in daily transaction costs. This is a significant amount of money that could take a large cut out of profits or deepen losses. The reason why costs are so high is because there are a lot of people involved in an equity transaction. More specifically, for each trade, there is a broker, the exchange, and the specialist. All of these parties need to be paid, and their payment comes in the form of commission and clearing fees. In the FX market, because it is decentralized with no exchange or clearinghouse (everything is taken care of by the market maker), these fees are not applicable.

      Customizable Leverage

      Even though many people realize that higher leverage comes with risks, traders are humans, and few of them find it easy to turn away the opportunity to trade on someone else's money. The FX market caters perfectly to these traders by offering the highest leverage available for any market. Most online currency firms offer 50 times leverage on regular-sized accounts and up to 200 times leverage on miniature accounts (abroad leverage can be as high as 400 times). Compare that to the 2 times leverage offered to the average equity investor and the 10 times capital that is typically offered to the professional trader, and you can see why many traders have turned to the foreign exchange market. The margin deposit for leverage in the FX market is not seen as a down payment on a purchase of equity, as many perceive margins to be in the stock markets. Rather, the margin is a performance bond, or good-faith deposit, to ensure against trading losses. This is very useful to short-term day traders who need the enhancement in capital to generate quick returns. For the more risk-averse investor, leverage is completely customizable, which means that if they only feel comfortable with 10 or 20 times leverage or no leverage at all, they can elect to do so. It is extremely important to understand that leverage is a double-edged sword – it can magnify profits but also losses.

      Profit in Both Bull and Bear Markets

      In the FX market, profit potentials exist in both bull and bear markets. Since currency trading always involves buying one currency and selling another, there is no structural bias to the market. Therefore, if you are long one currency, you are at the same time short another. As a result, equal profit potential exists in both upward-trending and downward-trending markets. This is different from the equities market, where most traders go long instead of short stocks, so the general equity investment community tends to suffer in a bear market.

      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 into 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 trades in the equity market is the fact