Forex Investment and Currency Trading

What Does It Cost to Trade Currencies?
An online currency trading account (a “micro-account”) may be opened for as little as $100. Mini-accounts start at $300. Do not laugh—micro- and mini-accounts 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 $3,000,000 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 feeds from the same currency “pool.”

FOREX Versus Stocks
Historically, the securities markets have been considered, at least by the major¬ity of the public, as an investment vehicle. In the last ten 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 day trader that desires to leverage his or her cur¬rent 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 marker.

There are approximately 4,000 stocks listed on the New York Stock Ex¬change. 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.

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 “roll over” open trades after two days. There exist 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 exe¬cuted at the time and price asked by the speculator. There are numerous horror stones about futures traders being locked into an open position even after plac¬ing 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”.

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’s always a comparison of one currency to another currency—someone’s apples to someone else’s apples.

Things need to reiterate: There is always some risk in speculation regardless of which financial instruments are traded and where they are traded, regulated or unregulated.