Don’t Blame Forex!

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Any time you have a situation where people end up disappointed with their performance in the market, there are going to be claims of fraud and malfeasance.   This is certainly the case with Forex trading. Recently, a small group of reporters and bloggers have taken aim at the retail Forex industry.  Some have even gone to the extreme of comparing Forex trading to casino gambling.

As we have seen in recent years, investors in any of the financial markets need to be wary of scam artists.  There are plenty of ponzi schemes and other scams involving stocks, commodities, real estate, and a host of other markets. However, that shouldn’t be a reason to avoid an entire market.  Most stock, commodities and real-estate brokers are completely fair and transparent in their practices, but unfortunately the opportunity to be unfair and deceptive is there for those who want take advantage of people. The Forex market is no different, but it is important not to let a few bad apples spoil the entire bunch. 

So, is Forex trading a scam that all people should avoid?  Absolutely not.  Is Forex trading suitable for everyone? No it isn’t.  A common mistake among personal finance writers out there today is using the labels trading and investing interchangeably.  These two approaches to the markets are not the same.    

Most of us would agree that trading is not something most individual investors should do if they are looking for predictable returns.  It is irrelevant whether you are talking about stocks, bonds, futures and commodities or currencies.  Many individual investors are simply not good candidates for trading, because they lack the time, patience and resources for the appropriate level of investor education and risk tolerance necessary to succeed in these markets.     

However, for more sophisticated investors with the proper risk profile, Forex trading can be a suitable way to add higher returns to your overall portfolio.  Let’s examine some of the benefits of Forex and how Forex trading compares favorably with futures or stock trading.  

Forex is the largest financial market in the world.  The average daily trading volume in the global Forex and related markets currently is over US$ 3 trillion, which dwarfs the combined world equity markets.    

The Forex market is unique compared to other financial markets due in large part to: its large trading volumes; extreme liquidity; large number and variety of traders; its geographical dispersion – for some people analyzing countries might be easier than analyzing companies – and its long trading hours: 24 hours a day except on weekends (from 5pm EST on Sunday until 4pm EST Friday). 

Like any financial market, Forex currency trading requires proper regulation.  Every country has its own governmental financial institution and independent regulators that supervise and control the Forex industry and work to protect its investors.  In the United States, a Forex broker must be registered as a Futures Commission Merchant (FCM) with the government regulators – the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).  These regulators serve to protect the public against fraud, and manipulative trade practices.

These agencies impose strict regulation requirements and large capital requirements on all Forex brokers.  More specifically, beginning in 2008 the NFA required Forex dealers to increase their capital reserves in stages, ending with $20 million in net capital reserves for each Forex broker by 2009.    

On weekly and monthly bases, Forex brokers are required to submit financial reports to regulators, who in turn have the right to fine Forex firms and/or terminate their regulatory status for violations.    

In the Forex market traders usually enjoy lower overall transactions costs and pay only a very small spread.  In the stock market, individuals generally place their orders with a broker who charges a commission, and the firm who executes the order on the exchange charges a spread.  This is a cost that is usually hidden in the equity markets, but is more transparent in the Forex market. 

Further, many Forex brokers charge no commission or exchange fees to trade Forex online or on the phone.  Costs are further reduced by the efficiencies created by a purely electronic marketplace that allows clients to deal directly with the market maker, eliminating both ticket costs and middlemen.

 Another difference between Forex and other markets is that you will not incur a deficit balance in your trading account.  This is not the case with futures and equities markets where it is far more likely to incur losses that exceed the present balance of your account.  This point is rarely brought up by critics of Forex trading.  

Another protection for traders is that in the Forex market, spot rates cannot be manipulated.  This is due in large part to the sheer size of the Forex market.  There is no single institutional investor, central bank or even government that alone can completely influence price for more than a few moments.  The same cannot be said for other markets that are more thinly traded.

Moreover, Forex traders can benefit from a wealth of free information and investor education that is available online (www.Forexlive.com).  Here you will find some of the greatest resources for Forex education that can speed up your learning curve and help you build up your confidence.    Before starting to trade your own money, it is highly recommended to start by opening a demo account to practice trading with “make believe” money.  This way you can learn from your mistakes without risking capital.    

Another reason why Forex trading requires a measured approach is leverage.   The impact of Forex trading leverage can be enormous.  It is important for traders to choose the amount of leverage they are comfortable with, if any. The use of leverage is a personal decision that requires an individual to evaluate their appetite for risk and assess their own financial situation. 

The importance of understanding leverage only confirms the point discussed earlier that trading and investing are not the same.  Again, these two approaches to the markets should not be intermixed as they require varying levels of investment education, understanding of the markets and different degrees of risk tolerance.   However, both approaches have one fact in common; prudent risk management is the key to success.   

In conclusion, anytime you engage in financial transactions that involve the risk of capital loss, you should be careful and diligent.  Do you homework and spend the necessary time and resources to educate yourself about the market.

Anna Timone (195 Posts)


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