Forex Trading
When to not trade forex!
Because so many people bombard us with requests about forex, we teach people how to trade it. Better to teach them the right way than to let them commit financial suicide. Nevertheless, we do not advocate forex trading unless you have a particular reason as to why you need to trade during the middle of the night, or you have a specific need to trade in currency pairs that do not involve the U.S. dollar If the U.S. dollar is involved and you are able to trade during the 22 hours the U.S. futures trade on Globex, you are much better off trading currencies in the Chicago currency futures markets. Here are the reasons why:
Brokers can deceive you about there being no commissions.
$30 minimum/round turn (called the spread) is in reality a
commission that eats up your capital at an astonishing rate.
Even winning traders lose money and end up with negative results
because of this outlandish overhead. Trading futures, you
should never have to pay a broker more than $10/round turn,
and almost always quite a bit less than that. If you need a futures
broker who will give you an very good rate, email us at: broker
referral.
Guaranteed fills. True but… The only way a broker can guarantee fills is for the broker to become the buyer or seller of last resort. That means the broker is running a bucket shop. All forex brokers are the buyer and seller of last resort. If the broker claims to not have a deal desk, then the bank is the buyer and seller of last resort. The banks are unregulated when it comes to trading forex.
Brokers do not all tell the truth about volume. They tell you about
the volume for all forex trading, which doesn't even come
close to the volume they truly have at their own brokerage,
which is where you are trading. Volume in currency futures
is higher than the volume traded at any single
forex broker, often greater by a factor of ten.
Leaning. Brokers say they are charging you a 3 pip spread to trade the popular currency pairs. But in reality a broker may be making as much or more than 10 pips on your trades. He does this by skewing prices. Since you are not trading at an exchange, the broker can feed you any price he wants to feed you. He can buy at the bank for perhaps 7 pips less than he sells to you. He then charges you 3 pips for the privilege of being ripped off for a total of 10 pips. No one knows the true price of a currency traded in forex. Forex pricing does not guarantee you true price discovery nor does it guarantee an efficient market.
Unregulated. Forex may sound like an exchange but it isn't. It exists entirely in cyberspace with every broker and every bank having different prices for any particular currency. There is little or no regulation, even for brokers who register with the NFA. Forex brokers do not have to mark to market each day as do futures brokers. If your forex broker files for bankruptcy or absconds with your money you have zero recourse.
No guarantee. If a forex broker does go out of business, you could lose all your money. There are no guarantees and no one standing behind it. Futures brokers are required to mark to market at the end of every session every day. They have to put up cash to cover every open trade on their books. Futures brokers have gone broke, but no futures customer has ever lost one cent of the money in his trading account because of a failed broker. Nor have they had to wait for their money. It is immediately available.
You can get exactly the same action in the euro fx futures as you get in the "Euro" forex. Commissions are as low as one tenth per round turn depending on volume, through a regulated broker, trading electronically at an exchange where you know the true price of the currency. Knowing the true price of anything is called "price discovery." Futures markets give you greater efficiency than do forex markets. Futures trades move more money than do forex trades. The contracts are larger and a tick is usually worth more than a pip.
What is the true price? A forex broker can only give you the price of a currency as quoted to him by the bank through which he trades. Banks have differing prices for a currency. You never know what the real price is because there is no central exchange through which all prices flow. Besides not knowing the true price from the bank, you can also be deceived by "leaning" or "skewing" of the real price at the bank. Forex brokers commonly lean the prices.
Forex brokers are not necessarily truthful. They lure people in with hype and false advertising: "No commissions!" "Guaranteed fills." "24 hour trading:" Who in their right mind is going to need to trade 24 hours unless they have a special need. While it is true that total forex volume is greater than in the futures, futures, volume at the exchange is greater than the volume at your broker for the most popularly traded currencies. What most traders don't realize is that the vast majority of forex volume is traded directly between banks and that volume is never seen at the retail broker level. The only place where the liquidity differential matters is in currencies like the Mexican peso, the Brazilian real, and somebody's drachma. Those thinly traded currencies may be more liquid in forex. But if you trade anything but the few most liquid and popular currencies, you are going to be paying at least 5 pips, and often more. Unless you have a particular commercial need to deal in Polish zlotys, Indian rupees, or some other thinly traded currency, you don't need forex.
You are told by forex brokers that there is little or no stop running. This is one of their biggest and boldest fabrications. The truth is there is far more stop running in forex than in futures. I have friends who work in forex as well as many traders who of necessity have to trade forex. More than one of my students is a market maker in forex. These are people who should know, but in case you don't want to believe me or them, simple observation of forex trading will reveal the vast amount of stop running that takes place there. Who is it that runs the stops? Why it is your friendly forex broker as well as your friendly forex banker. They both have a vested interest in seeing to it that your orders are filled. Stop running is nothing more than order filling. The brokers and bankers see to it that everybody's order gets filled...but with how much slippage??
Probably you have heard that if you are winning regularly
in forex, you may be barred from trading. Is this true? Yes
it is. The fact that it is true is just another proof that
when you trade forex you are trading at a bucket shop. In
the book, "Reminiscences of a Stock Operator," we
are told that Jesse Livermore was banned from trading at certain
stock brokers because they couldn't stand him beating the
house. The same thing is true with many forex brokers. Since
they are the ones guaranteeing you a fill, they are in effect
the buyer and seller of last resort. The truth is that most
forex brokers have precious little liquidity at their firms.
In order to give you the impression that there is liquidity,
it is the broker who gives you your fill. It is the broker
who does the stop running that supposedly doesn't exist in
forex. But if you are regularly beating the socks off the
broker, he will ban you from trading at his firm. This can happen if when the broker claims to not have a deal desk.
Now you know the truth about forex. I challenge any and all
forex brokers and bankers to prove that I am wrong. I will change or remove
anything proven to be untrue in what I stated above. This challenge has now been on this website for more than 3 years. We have yet to have a single challenge to the truth revealed here.
Is there hope for a trader who wants to trade forex? Yes there possibly is. There may be forex brokers and retail banks where the trading is more legitimate than at others, with no leaning and a very small spread. I am not at liberty to tell you which ones those are because I have never seen or heard of one. You will have to do your due diligence in finding out if they exist.
You can post further comments and questions regarding this article in our educational discussion board for Currency Trading / Forex: http://tradingeducators.com/forum
JR
