I spoke to a novice trader the other day and he was having a hard time deciding whether he should do electronic micro trading or forex trading. To his surprise, he decided to try forex trading. About a year ago, I opened a small forex trading account and wanted to understand the experiences of forex traders. As you will read, I am almost overwhelmed by the barriers that stand in the way of being a successful Forex trader.
No centrally regulated exchanges: The only thing you can count on in e-mini futures trading is market transparency, with the exception of high-frequency trading, which only publishes volume figures after trades are executed. Without transparency, how can we ensure that transactions are executed sequentially as received and that large customers do not receive preferential treatment when executing orders? You can't. I'm sure I've experienced low fills consistently throughout my forex trading experience. You have to trust the bank or trading company to carry out your request, and they do so as soon as they receive it. When it comes to money, it is very difficult to gain trust from the beginning of our financial relationship. You got it.
No data on volume: My trading style relies heavily on volume. As we discussed there is no centrally regulated exchange, forex trading is done over the counter (OTC). OTC trading is by definition a network of cooperative banks and trading companies that operate independently of each other, so trading volume cannot be easily displayed. Without volume numbers, how can you make appropriate decisions about entering and exiting trades? On the other hand, e-mini traders are provided with a continuous stream of data that accurately reflects what is going on in potential or executed trades. We know the size and volume of transactions entering and exiting the market.
Claims of commission-free trading: Most forex concerns claim that there are little or no commissions, but this notion is incorrect. CME and CBOT are not free, but a round trip can be done in the $5.00 range. In Forex, money is made in spreads, which change depending on financial conditions, rather than the typical 1-point spread (bid/ask) on a futures exchange. Typically, spreads widen quickly as a trade becomes more attractive. why? Because the other party to the contract is usually your bank. On many occasions during my short forex trading career, I have seen spreads on “popular” currency pairs fluctuate by 10 pips at a time, and in unusual circumstances go higher than 15 pips. Sheesh, that's too heavy a load to carry.
Rampant systemic fraud in the foreign exchange system: Dozens of forex trading investigations have been conducted related to futures trading investigations because regulators do not consistently review the books and transactions of forex companies. Recently, 15 of the largest trading firms entered “non-compete” orders, accusing them of manipulating currency trading pairs for their own benefit. Of course, those profits came at the expense of the merchants who were customers. As previously mentioned, forex banks or trading interest are usually on the other side of the contract and manipulate the interest rates to ensure that they make money rather than the trader. Forex is currently attracting significant scrutiny from regulators. The latest scandal, which is still being investigated by regulators in Asia, Switzerland, the UK and the US, concerns market manipulation by forex trading originators. I think this is a variation of our version of a market maker.
Lastly, the foreign exchange market is a way to “get rich” and solve your financial problems. At least forex trading is not a proper get rich scheme. Advertisements touting huge profits are downright absurd. Other companies allow customers to start a forex trading account with as little as $50 in funds. This unfunded introductory level makes would-be traders think that they can be successful with just $50 and nothing could be further from the truth.
In short, until Forex establishes a centralized exchange (which I think they will), adds some transparency to their operations, and regulates their member companies, the Forex issue is a trading killer for me. Those forex spreads were killer! Just vent there.
