What Are The Pros And Cons Of Online Trading?

The Digital Marketplace

The arena of online trading offers many advantages and disadvantages to individuals interested in engaging the world's financial markets. The marketplace has evolved over time from an open-outcry auction system to a predominantly digital format. Throughout the transition, technological advances have made remote, real-time trading possible from nearly anywhere in the world.

The modern incarnations of currency, equity and derivatives markets have given people from all walks of life the opportunity to participate in what was once limited to the privileged few. All that is needed to enter today's most popular financial venues is risk capital, computing power and internet connectivity. Once these assets are secured, simply choose one of the best online trading platforms or apps and start trading.

The Markets

The largest marketplaces in the world conduct a lion's share of their business operations online. The following are a few of the most prominent.

Equities

Led by established exchanges and over-the-counter (OTC) markets, the majority of stock trade is conducted online. While stock market mainstays such as the New York Stock Exchange (NYSE) maintain a physical floor, others such as the Euronext rely on an exclusively digital infrastructure.

Currency

By far the largest market in the world, the forex is responsible for upwards of US$5 trillion in traded volumes per day. Currency trading on the OTC forex is easily conducted through online brokers and software trading platforms.

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Derivatives

Over the past decade, the online trade of futures and options has flourished. From origins at the Dojima Rice Exchange through the 1990s, the trade of derivative products had been conducted via the open-outcry auction system. Today, the world's largest derivatives markets operate online. The CME Group, Eurex and Intercontinental Exchange (ICE) are the industry leaders.

Whether one is a retail trader chasing profit within the market, or an institutional player managing a vast portfolio of holdings, the benefits of online trading make each pursuit possible.

The Pros Of Online Trading

Although the online trading of financial instruments for profit is commonly viewed as a daunting task, there are several advantages afforded to the individual. It is through these advantages that value-added areas may be identified and incorporated into the trading approach. Among the greatest upsides are lower fees, a vast array of online tools, consistent liquidity and available leverage.

Of course, the degree of each advantage varies depending upon the specific situation. However, the following aspects of online trading benefit traders in the digital marketplace:

Market Access

As stated earlier, the prerequisites to begin trading securities online are limited. For beginners, all that is needed is risk capital, computing power and internet connectivity. Upon selecting an online brokerage firm and successfully opening an account, one is able to start trading. Whether you are interested in the cryptocurrency markets or online stock trading, it's possible to get up-and-running in days, not weeks.

Limited Transaction Costs

In the 1980s, the cost of making a trade on the NYSE ranged anywhere from £50 to £1,000s according to the size and type of order desired.[1] Many discount online equities brokers offer zero-commission stock trading. Under the zero-commission model, investment decisions may be made exclusive of transaction costs. Also, high volume trading strategies are more attractive due to the lack of per trade fees.

Conversely, the currency and futures markets remain commission-based. However, most online brokers have greatly reduced the trade-related commissions and fees of the past.

Liquidity

Online trading has increased market participation exponentially, with an abundance of traders willing to buy or sell at any given price. In turn, bid/ask spreads have tightened, slippage is more readily quantified and the process of entering and exiting an open position within the market has been streamlined.

The issue of market liquidity is a big one for practitioners of day trading methodologies. No matter if one aims to capitalise on trending or rotational price action, being able to get in and out of the market efficiently is a key driver of profitability.

Availability Of Leverage

The use of financial leverage has always been an integral part of trading securities. Online trading has increased its availability. For instance, forex brokerage firms commonly enable clients to implement upwards of 100:1 leverage on the account balance, making larger returns possible.

For full-time traders, being able to apply leverage is vital to making the most out of their risk capital. And, although the reckless use of leverage is detrimental, individuals with the proper know-how have a chance at generating extraordinary returns.

Opportunity

Traditional trading schedules have been eliminated by the ascension of online trading. While it is true that optimal trading hours are relatively constant, most markets now function on a 24 hour, 5 day per week basis. No matter what time of day it may be, it's possible to stream real-time quotes and execute trading strategies.

For instance, the CME Globex is open from Sunday afternoon to Friday afternoon, taking a daily 45-minute break for settlement. The forex remains open 24/5 without any cease in trading. Even more involved are the cryptocurrency markets, which are open 24/7/365. These extended business hours create a plethora of trading opportunities for users of online trading platforms.

The Cons Of Online Trading

While remote market access has many advantages, there are also disadvantages of online trading. To succeed, one must be disciplined, technologically proficient and have a winning mindset. Unfortunately, these attributes are lacking in countless beginners and aspiring full-time traders.

There's very little debate that trading securities online is challenging at best and dangerous at worst. The industry accepted wash-out rate for new short-term traders hovers around 90%, with 80% giving up within the first two years. Despite the perceived high chance of failure, online investing and trading attracts legions of new participants every year.

Several unique pitfalls are related to active trade, most of which contribute to the psychological challenges assumed by market participants:

Discipline

Online trading provides access to many different markets and makes available high degrees of leverage on a 24/5 basis. A trader's emotional state is constantly being addressed, with fear and greed often driving impulsive behaviour.

Volatility

The larger volumes and market participation attributable to electronic trading have made periodic spikes in pricing volatility more common and severe. The ability for traders and investors to enter a given market at near-light speeds has created the possibility of sudden, sometimes unpredictable, swings in price.

For example, the release of unexpected news may spike volatility and cause measurable damage to vulnerable participants. To mitigate this risk, active traders may employ the stop, stop limit, or limit order. By doing so, the market may be engaged with relative precision regardless of how volatile conditions are.

Latency

Trade is conducted in the electronic marketplace through a vast technological infrastructure. A myriad of routers, servers and algorithm driven order matching systems all play their role in a trade's execution. Unfortunately, some participants experience varying degrees of unavoidable latency involved in their trade.

Misinformation

Scams and outright fraud have been a part of the financial world since the roots of exchange. From nefarious mutual funds to stock scams, there are many examples to point to throughout history.

The world of online trading is no exception. The sale of "get-rich-quick" trading systems, negligent analysis and outright market manipulation are ever-present in the online trading environment. Subsequently, many unsuccessful traders have fallen victim to at least one of these profit-killing enterprises.

Summary

Online trading has an extensive list of advantages and disadvantages, well eclipsing the topics covered by this article. While the digital markets of today provide a wealth of opportunities, they also pose many unique risks. It is up to the individual to decide if the pros outweigh the cons, and if online trading is an appropriate course of action given capital and risk considerations.

This article was last updated on 9th November 2021.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

References

1

Retrieved 23 Nov 2015 https://www.bollingerbands.com/

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