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Your Money > Investing Ideas Articles > So, You Want To Be A Forex Trader?
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By Selwyn Gishen
The ongoing global economic crisis that became widely apparent in 2008 has forced people to take a closer look at their investment portfolios. As more investors find that long-term buy-and-hold strategies in the stock market may not produce the desired returns, more investors and traders are discovering that currencies are an alternative asset class that is worth pursuing for both short-term and long-term capital appreciation. Trading currencies - like any other venture - requires due diligence, careful study and a practical know-how if you are to be successful. Related Links
Trading Currencies: The Interbank Market The primary method of trading currencies is in the over-the-counter market. This interbank market is where banks and financial institutions around the world trade with each other. It is not regulated in the same way that the stock and commodity markets are. Stock, bond and futures markets are all exchange-driven markets. Within these markets is a central exchange where prices are determined by market makers and made accessible to all those trading through the exchanges. These markets are tightly controlled by a host of regulatory agencies, such as the Financial Services Authority (FSA) in the UK. In the USA, the exchanges are regulated by the Commodity Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC). The spot forex market depends on the relationships and credit agreements between trading banks. Hence trading currencies depends on the willingness of one bank to buy or sell currency to another bank. However, the amount of currency traded each day is so large (around £2.5 trillion) that the interbank currency market dwarfs all the stock markets and commodity markets combined. It is truly a huge and liquid market. Opening A Trading Account It is important for a trader to understand that opening an account with a forex market maker does not allow access to the huge interbank market at the same rate that the banks get. All forex market makers (whether they are banks themselves or not), have relationships with dealing banks. They will usually receive an electronic feed from these banks in order to obtain the current and prevailing market rates. These are the rates at which they will transact with each other. Since you are not a bank, but a retail trader, they will adjust (mark up) these rates slightly and offer them to you, their customer, at a slightly wider spread than the one they are paying for each currency pair. This is how your market maker makes a profit. Choosing A Market Maker: Buyer Beware! In the interbank market, market makers vary from large to small. What is important are the integrity and financial soundness of the company with which you choose to do business. Market makers are your trading partners - you need them to provide sufficient liquidity and professional execution so that you have a fair chance of being profitable. Some unscrupulous market makers will requote the price they show on the screen once you place a trade, or will let the price slip a little before they execute for you in order to take advantage of a few extra pips of profit at your expense. (A pip is the smallest increment of trade in FX, and is equal to 1 basis point, or 0.0001.) This type of activity is called "slippage." In very volatile markets, some slippage can be expected; however, a trader should be aware that slippage can sometimes be the practice of an unethical broker. A reputable market maker will ensure you get the best executions and best possible spreads. If you are successful, then in the long term, they will benefit more because you will still be trading with them. So buyer beware! Before you open a forex trading account, be sure you are comfortable with your market maker. If you intend to be in the game for a long time, it is well worth your time to investigate where you should open your account. Delving Deeper There are very big advantages to trading forex, among which are the size of the market and its liquidity, which usually ensures instant execution. This means that you can get into a position instantly and out just as fast. The market trades for five and a half days every week throughout the year, so you can even trade at night or in the wee hours of the morning. Another big benefit, if carried out with skill and care, is the availability to take advantage of a significant amount leverage. This provides you with the ability to control large positions with very small deposits. In forex, leverage is usually available up to 100:1. In the selection of articles to follow, we will cover different topics of interest to whet your appetite and equip you with some basic tools to begin trading forex. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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