by Wyatt Atkins

Created on: October 22, 2008   Last Updated: April 29, 2010

The beauty of forex trading is that it is uncharted territory: anything can and indeed does happen, all the time. In stock trading, liquidity poses a real problem; you may have the right idea, but in order to buy, you need to have a seller at the right price. Or you may want to sell short, but you need to have a buyer. If that buyer stands his ground, the spreads plus the commissions alone deliver a first sizable haircut on your future earnings. Not just in trading; in any kind of business, if you leave potential profit on the table, before you even enter a position or trade, then you are in serious trouble. You lower your profit margin. A good idea remains low profit or even turns to a loss. The odds were against you right from the start.

Not so in forex trading. Most of the time, most reputable platforms offer an unprecedented liquidity: you can just enter your limit price (and/or stop limit) and if the ticker passes through your quote, the trade is executed. In fact, as the markets are open 24 hours a day, you could be soundly sleeping while someone in Asia at 02:30 am works up the courage to hit your price. Your confirmation will be waiting for you when you wake up!

Commissions? In most cases, there are none! The operator of the platform gets paid by taking a cut of the bid/ask spread and you do not pay any additional fees whatsoever. And the real surprise is that spreads are usually tight, especially in the more liquid pairs, such as EUR/USD, or EUR/JPY, for instance. It is not unusual to see spreads as small as 2 pips, depending on the trading platform. Liquidity plus tight spreads: a trader's dream!

Depending on the type of your account, if you own a pair, you might even be paid interest for doing so. On the other hand, as most of the time you trade at a considerable leverage, you will be paying interest yourself - but if and only if you roll over your positions at the end of the trading day. Which means that you basically get a 1-day, interest-free loan to trade. Close your positions 1 minute before the end of trading, and you pay nothing whatsoever.

And while stock brokers make you pay for extra goodies such as technical analysis charts and streaming real time quotes, most forex trading firms offer these services and more for free to all account holders. The tickers of the pairs tick endlessly before you and all you need to do is click to buy or sell. How much? Most platforms execute all trades automatically up to a level (1 mil. Is not unusual) and then give you the possibility to chat with their back office and request a quote for, say, 20 mil, which, as is understandable, tends to be better than current prices.

But there is a catch, as always: in the stock markets, you can trade without much knowledge of what is going on. You can count on someone buying out the failing company you bought and saving you. Not so in forex trading. While luck can certainly prove certainly useful, there is no substitute for knowledge and hard work. And while game theory is considered useful, forex trading is not something you should play with. True, you can't lose more money than what is deposited in your account, but you can't really win any unless you actually know what you are doing.

Many systems have been proposed and followed in an attempt to "beat the market". In stocks, some extraordinarily gifted traders, can actually do it, even if only for a short period of time. In forex trading, such illusions of grandeur can prove very dangerous, and costly. With each tick of the clock, the pips go for or against you. You need to act quickly and decisively. And time is your best friend if you respect it, or the worst, if you don't.

Learn more about this author, Wyatt Atkins.
Click here to send this author comments or questions.