What You Need to Know About Forex!
by Marco Mayer, Trading Educators' leading Forex expert
Many people are trying to trade Forex, but are finding themselves in trouble because they do not fully understand how that market works.
At Trading Educators, we teach people how to trade Forex correctly rather than letting them commit financial suicide.
There are good reasons to trade Forex, but there are also many disadvantages, especially compared with trading currency futures. Listed below are some of the primary advantages that you should know about. If the U.S. dollar is involved, and you are able to trade during the 22-hours the U.S. futures trade on Globex, we feel you might be safer trading currencies in the currency futures markets which are traded on a regulated exchange.
Throughout this document, the word "dealer" refers to Forex brokers.
You can trade full-size currency futures ($125,000) contracts, and mini-size Forex Futures contracts at the Chicago Mercantile Exchange. (At this time we do not recommend trading mini-size Forex Futures because they are not sufficiently liquid.) Here are the advantages:
- You are trading at a regulated exchange, not with an unregulated broker or bank.
- The regulations for futures are far more extensive than you can find with a Forex dealer, even if that dealer is registered with the CFTC and the NFA.
- In futures, your account is better protected against broker or bank failure, especially when you're in a position and not in cash.
- In futures there is 100% transparency: everyone sees the same price at the same time. This is not true when trading Forex.
- There is no requirement for interest to be received or paid when a contract is held overnight.
- Futures commissions are low and are negotiable, and the spread in any liquid contract is almost always 1-tick.
- The exchange is the buyer and seller of last resort; you don't trade against your broker.
There are also some advantages trading in the spot forex markets, especially when trading using electronic communications networks (ECN), with which you trade directly with other market participants and not against your broker:
- You can trade smaller size. With many brokers you can trade 10k mini-lots, which allows you to do better position-sizing and risk-management, especially when you're trading a small account and/or position trading.
- Usually the good ECN networks provide more liquidity than the futures markets, but for most traders this will probably never be an issue in the futures.
- You can collect interest while you're in a position, which can be quite interesting if you're holding longer-term positions.
Be careful to avoid Forex scams. If you prefer to trade currency pairs in the Forex Markets, be mindful of the following cautions:
When you open a Forex account, choose a reputable firm or you could lose your trading account. That's right, you could lose every cent! Such loss has already happened when Forex brokers have "gone broke," so it's up to you to choose a good broker.
Ever since retail Forex began, we have warned that it is essential that you work with reputable Forex brokers from a country that demands high industry standards for Forex firms.
The U.S. has tight industry standards and the strictest regulation for Forex firms, as do Canada, U.K., Australia, and Hong Kong. If you have your account domiciled with any of these nations, you're already ahead of the game. But beyond that, you also need to find a reputable and well-capitalized firm within your country of choice.
Let us emphasize: place your hard-earned cash only with a firm that is highly regulated AND is well capitalized! These two points are extremely important.
In fact, there is even one firm that displays its balance sheet directly on its website. If a firm avoids strict regulations and/or exceed the minimum capital requirements of these regulators, then you don't want to do business with them.
How to Tell Which Firm Is Worth Your Business
The CFTC and NFA can point you to a list that tells you exactly the amount of assets a firm has, and the minimum requirements each firm has to meet.
Don't get involved with a small firm or an unregulated or loosely regulated firm. As said before, regulators in the U.S., U.K., Canada, Australia, and Hong Kong are tough. If your firm dodges these places, there's a reason.
If your firm welcomes regulation, and strives to exceed minimum capital requirements that the NFA and CFTC set forth, then you are probably with a firm that's worth your time.
Forex brokers can deceive you about there being no commissions. But there's a spread you have to pay, and if it's 3-pips and you trade 100k units, this means you pay $20 commissions per round turn, which will eat up your capital at an astonishing rate. Even winning traders lose money and end up with negative results because of this outlandish overhead.
- Guaranteed fills. True, but the only way a dealer can guarantee fills is for the dealer to become the buyer or seller of last resort. That means the dealer is running a bucket shop, and you're trading against the broker.
- 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, 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 even more by skewing prices. Since you are not trading at an exchange, the broker can basically feed you any price he wants to feed you. Broker pricing does not guarantee you true price discovery, nor does it guarantee an efficient market. A broker might, for example, widen the spreads from 3- to 6-ticks for a few seconds, hitting your stop-loss, while the real market never traded there.
- Maybe you have heard that if you win regularly in Forex, you may be barred from trading. Is this true? Yes it is, with some of the bad brokers. 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 his 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 dealer who gives you your fill. It is the dealer who does the stop running that supposedly doesn't exist in Forex. But if you are regularly beating the socks off the dealer, he will ban you from trading at his firm. This can happen even when the dealer claims to not have a deal desk.
Is there hope for a trader who wants to trade Forex? Yes, there is.
If you have a need to trade any of the exotics, it is not practical, and may very well be impossible, to trade them in the futures markets. Also, if you insist on trading Forex with a small amount of money, you will have to trade in the Forex markets. We refer to mini-, micro-, and nano-accounts.
Having given you the real information about Forex, we want to make sure that you understand that Trading Educators is here to help you to properly trade Forex, if that turns out to be your decision. Towards that end, we offer a highly successful Forex trading method (Ambush), an EBook on how to day trade Forex, a Forex webinar, and private tutoring in Forex trading.