A computer with reliable high-speed connection to the Internet, a small grubstake, and the information in this book are all that are needed to begin trading currencies. You do not even need the grubstake to practice on; a free demo account is offered by all retail FOREX brokers.
What Does It Cost to Trade Currencies?
An online currency trading account (a micro-account) may be opened for as little as $1! Mini-accounts start at $400. Do not laugh—micro- and miniaccounts are a good way to get your feet wet without taking a bath. Unlike futures, where the size of a contract is set by the exchanges, in FOREX you select how much of any particular currency you wish to buy or sell. Thus, a $3,000 grubstake is not unreasonable as long as the trader engages in appropriately sized trades. FOREX mini-accounts also do not suffer the illiquidity of many futures mini-contracts, as everyone essentially feeds from the same interbank currency “pool.”
Market maker brokers take their expenses and profit by marking up the bid-ask spread. ECN brokers charge a flat lot fee to trade. As an example, if you buy and then later sell 100,000 EURUSD and the spread is two pips, you pay a total of four pips or approximately $40. ECN lot fees vary from $15 to $40 for a 100,000 lot. If you trade a larger lot size and/or frequently you will be able to negotiate these costs.
FOREX versus Stocks
Historically, the securities markets have been considered, at least by the majority of the public, as an investment vehicle. In the past 10 years, securities have taken on a more speculative nature. This was perhaps due to the downfall of the overall stock market as many security issues experienced extreme volatility because of the “irrational exuberance” displayed in the marketplace. The implied return associated with an investment was no longer true. Many traders engaged in the day trader rush of the late 1990s only to discover that from a leverage standpoint it took quite a bit of capital to day trade, and the return—while potentially higher than long-term investing—was not exponential, to say the least.
After the onset of the day trader rush, many traders moved into the futures stock index markets where they found they could better leverage their capital and not have their capital tied up when it could be earning interest or making money somewhere else. Like the futures markets, spot currency trading is an excellent vehicle for the pattern day trader that desires to leverage his or her current capital to trade. Spot currency trading provides more options and greater volatility while at the same time stronger trends than are currently available in stock futures indexes. Former securities day traders have an excellent home in the FOREX market.
There are approximately 4,000 stocks listed on the New York Stock Exchange. Another 2,800 are listed on the NASDAQ. Which one will you trade? Trading just the seven major USD currency pairs instead of 6,800 stocks simplifies matters significantly for the FOREX trader. Fewer decisions, fewer headaches. The trader can specialize in one, two, or three currency pairs and have a full plate offering all the opportunity he or she can seize.
FOREX versus Futures
The futures contract is precisely that—a legally binding agreement to deliver or accept delivery of a specified grade and quantity of a given commodity in a distant month. FOREX, however, is a spot (cash) market in which trades rarely exceed two days. Many FOREX brokers allow their investors to rollover open trades after two days. There are FOREX futures or forward contracts, but almost all activity is in the spot market facilitated by rollovers.
In addition to the advantages listed, FOREX trades are almost always executed at the time and price asked by the speculator. There are numerous horror stories about futures traders being locked into an open position even after placing the liquidation order. The high liquidity of the foreign exchange market (roughly three times the trading volume of all the futures markets combined) ensures the prompt execution of all orders (entry, exit, limit, etc.) at the desired price and time.
The caveat here is something called a requote or dealer intervention, which I discuss in a later chapter.
The Commodity Futures Trading Commission (CFTC) authorizes futures exchanges to place daily limits on contracts that significantly hamper the ability to enter and exit the market at a selected price and time. No such limits exist in the FOREX market.
Stock and futures traders are used to thinking in terms of the U.S. Dollar versus something else, such as the price of a stock or the price of wheat. This is like comparing apples to oranges. In currency trading, however, it is always a comparison of one currency to another currency—someone’s apples to someone else’s apples. This paradigm shift can take a little getting used to, but I will give you plenty of examples to help smooth the transition.
The author was a commodity futures trader and registered trading advisor for many years but has found currency trading much more to his liking for many of the reasons listed above.
I must reiterate: There is always some risk in speculation regardless of which financial instruments are traded and where they are traded, regulated or unregulated. Leverage is a door that swings both ways.
Both stock and futures traders must make a similar adjustment to currency trading: In stocks and futures the specific investment vehicle is denominated in dollars or local currency. In FOREX the underlying vehicle is a pair—the relative value of one currency to another.
Summary
FOREX means FOReign EXchange. The FOREX (FX) market is more than a $4 trillion-a-day financial market, dwarfing everything else, including stocks and futures. Because there is no centralized exchange or clearinghouse for currency trading the FOREX market is currently less regulated than other financial markets.
There are a wide variety of reasons to consider FOREX trading, including high leverage and low costs. Access to the FOREX markets via the Internet has resulted in a great deal of interest by small traders previously locked out of this enormous marketplace. Getting started requires only this book, a review of the FX landscape, a computer and Internet connection, and a small grubstake.
What Does It Cost to Trade Currencies?
An online currency trading account (a micro-account) may be opened for as little as $1! Mini-accounts start at $400. Do not laugh—micro- and miniaccounts are a good way to get your feet wet without taking a bath. Unlike futures, where the size of a contract is set by the exchanges, in FOREX you select how much of any particular currency you wish to buy or sell. Thus, a $3,000 grubstake is not unreasonable as long as the trader engages in appropriately sized trades. FOREX mini-accounts also do not suffer the illiquidity of many futures mini-contracts, as everyone essentially feeds from the same interbank currency “pool.”
Market maker brokers take their expenses and profit by marking up the bid-ask spread. ECN brokers charge a flat lot fee to trade. As an example, if you buy and then later sell 100,000 EURUSD and the spread is two pips, you pay a total of four pips or approximately $40. ECN lot fees vary from $15 to $40 for a 100,000 lot. If you trade a larger lot size and/or frequently you will be able to negotiate these costs.
FOREX versus Stocks
Historically, the securities markets have been considered, at least by the majority of the public, as an investment vehicle. In the past 10 years, securities have taken on a more speculative nature. This was perhaps due to the downfall of the overall stock market as many security issues experienced extreme volatility because of the “irrational exuberance” displayed in the marketplace. The implied return associated with an investment was no longer true. Many traders engaged in the day trader rush of the late 1990s only to discover that from a leverage standpoint it took quite a bit of capital to day trade, and the return—while potentially higher than long-term investing—was not exponential, to say the least.
After the onset of the day trader rush, many traders moved into the futures stock index markets where they found they could better leverage their capital and not have their capital tied up when it could be earning interest or making money somewhere else. Like the futures markets, spot currency trading is an excellent vehicle for the pattern day trader that desires to leverage his or her current capital to trade. Spot currency trading provides more options and greater volatility while at the same time stronger trends than are currently available in stock futures indexes. Former securities day traders have an excellent home in the FOREX market.
There are approximately 4,000 stocks listed on the New York Stock Exchange. Another 2,800 are listed on the NASDAQ. Which one will you trade? Trading just the seven major USD currency pairs instead of 6,800 stocks simplifies matters significantly for the FOREX trader. Fewer decisions, fewer headaches. The trader can specialize in one, two, or three currency pairs and have a full plate offering all the opportunity he or she can seize.
FOREX versus Futures
The futures contract is precisely that—a legally binding agreement to deliver or accept delivery of a specified grade and quantity of a given commodity in a distant month. FOREX, however, is a spot (cash) market in which trades rarely exceed two days. Many FOREX brokers allow their investors to rollover open trades after two days. There are FOREX futures or forward contracts, but almost all activity is in the spot market facilitated by rollovers.
In addition to the advantages listed, FOREX trades are almost always executed at the time and price asked by the speculator. There are numerous horror stories about futures traders being locked into an open position even after placing the liquidation order. The high liquidity of the foreign exchange market (roughly three times the trading volume of all the futures markets combined) ensures the prompt execution of all orders (entry, exit, limit, etc.) at the desired price and time.
The caveat here is something called a requote or dealer intervention, which I discuss in a later chapter.
The Commodity Futures Trading Commission (CFTC) authorizes futures exchanges to place daily limits on contracts that significantly hamper the ability to enter and exit the market at a selected price and time. No such limits exist in the FOREX market.
Stock and futures traders are used to thinking in terms of the U.S. Dollar versus something else, such as the price of a stock or the price of wheat. This is like comparing apples to oranges. In currency trading, however, it is always a comparison of one currency to another currency—someone’s apples to someone else’s apples. This paradigm shift can take a little getting used to, but I will give you plenty of examples to help smooth the transition.
The author was a commodity futures trader and registered trading advisor for many years but has found currency trading much more to his liking for many of the reasons listed above.
I must reiterate: There is always some risk in speculation regardless of which financial instruments are traded and where they are traded, regulated or unregulated. Leverage is a door that swings both ways.
Both stock and futures traders must make a similar adjustment to currency trading: In stocks and futures the specific investment vehicle is denominated in dollars or local currency. In FOREX the underlying vehicle is a pair—the relative value of one currency to another.
Summary
FOREX means FOReign EXchange. The FOREX (FX) market is more than a $4 trillion-a-day financial market, dwarfing everything else, including stocks and futures. Because there is no centralized exchange or clearinghouse for currency trading the FOREX market is currently less regulated than other financial markets.
There are a wide variety of reasons to consider FOREX trading, including high leverage and low costs. Access to the FOREX markets via the Internet has resulted in a great deal of interest by small traders previously locked out of this enormous marketplace. Getting started requires only this book, a review of the FX landscape, a computer and Internet connection, and a small grubstake.
