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Let's begin by talking about the
advantageous of Forex.
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Ease of entry- In my opinion, this is
the number one reason for the explosion of interest in Forex. The
barriers to entry are much lower than the traditional financial
markets. Futures
brokers require traders to post margins
and maintain minimum account sizes generally in the 1000's of
dollars to gain access into their arena. Forex is much different.
There are several FX dealers that will allow you to trade
micro
lots with as little as $1.00 in your
account! The more traditional FX dealers offer mini
lots with sometimes as much as 400/1
leverage allowing a $10,000.00 lot
size to be controlled by as little as $40.00 in the account.
Accounts can often be funded by credit cards and opened/traded the
same day. Truly, anyone with the desire to trade can get a start
in the Forex market.
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True 24-hour
trading- The active Forex market basically
follows the sun around the world. At anytime of the day or night,
you can find an active pair to trade. The market is open 24-hours
a days 5 1/2 days a week. Those with full time jobs are able to
trade Forex after work, before work and on Sunday evening. This is
a real advantage for many traders.
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Free trading software/analysis
tools/quotes- Stock and futures traders are use to paying for
their Technical Analysis software and quotes. In fact, some futures
traders even pay for their order entry platform on a monthly
basis. All of the major Forex dealers offer fantastic market
analysis/order entry/news platforms at no cost to the trader.
These tools generally cost $100.00 plus per month on the equity
trading e with full access are also available at no
cost.
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No Commissions- Traders merely pay
the bid/ask spread to enter the market. This spread can be wide
and is a significant cost of trading. However, it is the only
"mark up" from the dealer, generally.
You will hear others talk about
liquidity, the interbank market, and the shear size
of the FX market as advantageous. These factors are relevant for the
institutional side of the business but have little meaning for the
retail trader. It's important to keep in mind that retail traders
are trading via retail dealers in the FX market. Your trades are
kept on the books of the dealer, who is the counterparty, and never
actually go into the true interbank marketplace.
Now let's talk about several
disadvantageous of the Forex market.
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Unregulated with no central marketplace The retail FX
market is truly the wild west of finance. There is very little
regulation and no central marketplace or clearing
firm. Dealers have been accused of all kinds of nefarious
activities against their traders. Things like stop running, moving
prices just to cause losses, and placing successful traders on
manual execution in this wild and crazy market. I don't have
direct experience with any of these claims, but do know that your
losses directly enrich the dealer. A reputable, well capitalized
retail dealer would likely be your best bet to avoid much of the
shenanigans. In addition there is talk of a centralized FX
marketplace being built within the next 2 years which should end
any dealer trickery.
-
Wide bid/ask spreads- Most retail dealers have
spreads around 3 pips for the major
pairs. This means to trade the standard
retail lot size of $100,000.00 one needs to pay $30.00. Therefore,
the trader is already 3 pips in the hole upon entering the trade. The trade needs to
move 4 pips in the right direction just
for you to make dollar one on the trade. This is a huge
disadvantage for the day trader. The swing trader can absorb the
spread due to greater gains but it is still a major stumbling
block for successful FX trading
. Several brokers have begun to offer tight spreads with commissions, but they are the
minority.
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Interest rate differentials or
negative rolls- Although this can be an advantage, depending on
the pair you are trading, it is often an disadvantage as your
forced to pay interest daily to maintain your position. Some pairs
pay interest to you, however, not all dealers allows you to
collect particularly in the mini/micro accounts. Negative rolls
cause major friction while swing trading, it is crucial to know
your dealers roll
policy.
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