I was talking on the phone with a beginner trader the other day and he was having trouble deciding whether he should try electronic micro trading or forex trading. To my surprise he decided to trade forex. About a year ago, I opened a small forex trading account and wanted to understand the experience of forex traders. As you will read, I was almost overwhelmed with the barriers to successful forex traders in their experiences.
No centrally regulated exchange: The only thing I can count on trading e-mini futures is market transparency, except for high-frequency trading that only publishes volume figures after a trade has been executed. Without transparency, how can you ensure that your deal is executed sequentially, as received, and that larger clients are not given preferential treatment in order execution? You can not. I’m pretty sure I’ve had consistent poor fills during my forex trading experience. You are forced to trust the bank or trading company that carries out your requests and they do so as soon as they are received; When it comes to money, it is very difficult to earn my trust from the beginning of our financial relationship; You earned it.
No data on volume: My trading style is highly dependent on volume. As we have discussed that there is no centrally regulated exchange, forex trading takes place over the counter (OTC). Over-the-counter trading is, by definition, a network of collaborating banks and trading firms that operate independently of each other, so volume cannot be easily displayed. Without a volume number, how do you make appropriate judgments regarding entering and exiting a trade? On the other hand, e-mini traders are given a continuous data stream that reflects exactly what is going on in a potential or executed trade. You know the size and volume of deals entering and exiting the market.
Claims of commission-free trading: While most forex concerns claim that there is little or no commission, this notion is a misnomer. While CME and CBOT are not free, you should be able to get a round trip in the $5.00 range. In forex, money is made in spreads, which is not the typical one-point spread (bid/ask) on a futures exchange, but changes as financial conditions require. Usually as a trade becomes more attractive, the spread widens rapidly. Why? Because the person on the other side of your contract is usually your bank. In many cases during my short forex trading career I have noticed spreads on “hot” currency pairs fluctuating by ten pips at a time and in unusual situations higher than 15 pips. Sheesh, that’s a very heavy load to carry.
Rampant structural fraud in the forex system: Because regulators do not constantly review the books and transactions of forex firms, dozens of forex trading investigations related to futures trading investigations have been conducted. Just recently, 15 of the largest trading firms entered a “no contest” order for allegedly manipulating currency trading pairs for their own profits. Of course, those profits came at the expense of their customers, the merchants. As I mentioned earlier, your forex bank or trading interest is usually on the other side of your contract and manipulates rates so that they make money, not their traders. Forex is currently leading regulators’ investigations by a wide margin. The latest scandal is still under investigation by regulators in Asia, Switzerland, the UK and the US and has to do with market manipulation by creators of forex trades, who are, I believe, a variation of our version of a market maker.
Finally, the forex market is a way to “get rich” and solve your financial problems. No trading is a proper get rich scheme, at least forex. Advertisements promoting massive returns are simply offbeat. Other companies allow clients to start forex trading accounts with just $50 in funding. This unfunded entry level leaves would-be traders thinking they’d just hit it with fifty bucks, and nothing could be further from the truth.
In short, until Forex establishes a centralized exchange (which I think they will do), adds a little transparency to their operations, and gets member firms to be regulated, Forex woes are deal-killers for me. Those forex spreads were killer! Just vent there, I suppose.