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With a daily trading
volume that is 50x larger than the New York Stock Exchange, there are
always broker/dealers willing to buy or sell currencies in the FX markets.
The liquidity of this market, especially that of the major currencies,
helps ensure price stability. Traders can almost always open or close a
position at a fair market price.
Because of the lower trade volume, investors in the stock market are more
vulnerable to liquidity risk, which results in a wider dealing spread or
larger price movements in response to any relatively large transaction.
For example lets say you want to sell 100 shares of Microsoft at $32.00
per share you or your broker need to find someone to buy your shares at
that price, that is liquidity. Low liquidity can wreak havoc on equities
markets. Lets say a trader were to sell 400,000 shares of Microsoft at
$30.00 that is a $1.2 million transaction or roughly 1% of the markets
volume. When that order is put through the system, the market is now
flooded with Microsoft stock which will cause its value to plummet. The FX
market is less prone to huge whipsaws from large buy/sell oreders because
of the enormous amount of buyers and sellers readily available and
waiting.
Forex
Makes Money on Interest News
Any significant news regarding interest rates directly impacts the
international financial markets. In the past, when a country has raised
its interest rate, its currency strengthens relative to other currencies
as investors shift assets to gain better returns. The influence of stock
markets has changed this equation since increasing interest rates are
typically bad news for the stock markets. Investors transfer money out of
the stock market when interest rates rise, which can cause the currency of
the country to weaken on the broader markets.
Determining which
effect will dominate can be difficult, but there is typically a consensus
in the marketplace as to what a rate change will do. Rate changes are
typically anticipated since they usually take place after regularly
scheduled meetings of central banks. Indicators that typically have the
biggest impact on interest rates are PPI, CPI, and GDP.
This allows a trader to focus
and concentrate on which currencies to trade. In the equities market,
there
are over 40,000 stocks to choose from. Which stocks do you choose?
On the stock markets, most people make money when shares are rising, but
in economic recessions and falling 'bear' markets, there is little chance
of
making serious money. In the Forex market there is a big difference.
One of the most exciting advantages of forex trading is the ability to
generate
profits whether a currency pair is 'up' or 'down'. A trader can profit by
taking a
'long' position (buying the currency pair at one price and selling it
later at a
higher price) or a 'short' position (selling the currency pair and buying
it back
at a lower price). In either case, there is always a good market trading
opportunity for a trader. The ability to sell currencies without any
limitations is
a distinct advantage over equity trading.
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