In today’s marketplace, the dollar constantly fluctuates against the other currencies of the world. Several factors, such as the decline of global equity markets and declining world interest rates, have forced investors to pursue new opportunities. The global increase in trade and foreign investments has led to many national economies becoming interconnected with one another. This interconnection, and the resulting fluctuations in exchange rates, has created a huge international market: FOREX. For many investors, this has created exciting opportunities and new profit potentials. The FOREX market offers unmatched potential for profitable trading in any market condition or any stage of the business cycle. These factors equate to the following advantages:
- No commissions. No clearing fees, no exchange fees, no government fees, no brokerage fees if you trade with a market maker.
- No middlemen. Spot currency trading does away with the middlemen and allows clients to interact directly with the market maker responsible for the pricing on a particular currency pair, if you trade with an Electronic Communications Network (ECN).
- No fixed lot size. In the futures markets, lot or contract sizes are determined by the exchanges. A standard-sized contract for silver futures is 5,000 ounces. Even a “mini-contract” of silver, 1,000 ounces, represents a value of approximately $17,000. In spot FOREX, you determine the lot size appropriate for your grubstake. This allows traders to effectively participate with accounts of well under $1,000. It also provides a significant money management tool for astute traders.
- Low transaction cost. The retail transaction cost (the bid/ask spread) is typically less than 0.1 percent under normal market conditions. At larger dealers, the spread could be as low as 0.07 percent. Prices are quoted in pips for currencies. Today pip spreads can be zero at some periods for the most actively traded pairs, but typically range from two to five pips.
- High liquidity.With an average trading volume of more than $4 trillion
per day, FOREX is the most liquid market in the world. It means that
a trader can enter or exit the market at will in almost any market condition.
I must note that at the time of the first edition of Getting Started in Currency Trading in 2005, the daily volume was slightly less than $2 trillion. - Almost instantaneous transactions. This is an advantageous byproduct of
high liquidity. - Low margin, high leverage. These factors increase the potential for
higher profits (and losses) and are discussed later. Traders have access to
leverage of up to 400 percent although 50 percent to 100 percent is
most common. 400:1 leverage means $1 controls $400 of currency. - A 24-hour market. A trader can take advantage of all profitable market conditions at any time. There is no waiting for the opening bell. Markets are closed from Friday afternoon to Sunday afternoon. As the markets transition to the Asian Session, they usually go quiet from 5 P.M. to 7 P.M. Eastern Standard Time.
- Not related to the stock market. Trading in the FOREX market involves selling or buying one currency against another. Thus, there is no hard correlation between the foreign currency market and the stock market although both are measures of economic activity in some way and may be correlated in specific respects for a limited period of time. A bull market or a bear market for a currency is defined in terms of the outlook for its relative value against other currencies. If the outlook is positive, we have a bull market in which a trader profits by buying the currency against other currencies. Conversely, if the outlook is pessimistic, we have a bull market for other currencies and traders take profits by selling the currency against other currencies. In either case, there is always a good market trading opportunity for a trader. Although big price moves occur frequently, a crash is less likely to happen in currencies than stocks because a pair measures relative value. The U.S. Dollar (USD) can be in deep trouble, but so can the European Euro (EUR). The game is the ratio between the two. The top four traded currencies are: the U.S. Dollar (USD), the Euro Dollar (EUR), the Japanese Yen (JPY), and the British Pound (GBP). Fund managers are beginning to show interest in FOREX because of this non-correlation with other investments.
- Interbank market. The backbone of the FOREX market consists of a global network of dealers. They are mainly major commercial banks that communicate and trade with one another and with their clients through electronic networks and by telephone. There are no organized exchanges to serve as a central location to facilitate transactions the way the New York Stock Exchange serves the equity markets. The FOREX market operates in a manner similar to that of the NASDAQ market in the United States; thus it is also referred to as an over-the-counter (OTC) market. The lack of a centralized exchange permeates all aspects of currency trading.
- No one can corner the market. The FOREX market is so vast and has so many participants that no single entity, not even a central bank, can control the market price for an extended period of time. Even interventions by mighty central banks are becoming increasingly ineffectual and short-lived. Thus central banks are becoming less and less inclined to intervene to manipulate market prices. (You may remember the attempt to corner the silver futures market in the late 1970s. Such disruptive excess is not likely in the FOREX markets.)
- No insider trading. Because of the FOREX market’s size and noncentralized nature, there is virtually no chance for ill effects caused by insider trading. Fraud possibilities, at least against the system as a whole, are significantly less than in any other financial instruments.
- Limited regulation. There is but limited governmental influence via regulation
in the FOREX markets, primarily because there is no centralized location or exchange. Of course, this is a sword that can cut both ways, but the author believes—with a hearty caveat emptor—less regulation is, on balance, an advantage.Nevertheless, most countries do have some regulatory say and more seems on the way. Regardless, fraud is always fraud wherever it is found and subject to criminal penalties in all countries. Regulatory bodies such as the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) are just now beginning to get a handle on some limited control of the retail FOREX business. - Online trading. The capability of trading online was the impetus for retail FOREX. Today you can select from more than 100 online FOREX broker-dealers. Although none is perfect, the trader has a wide variety of options at his or her disposal.
- Third-party products and services. The immense popularity of retail
FOREX has fostered a burgeoning industry of third-party products and
services.
