Foreign Exchange
Markets
Date Added: May 5th, 2005
By Danny "GEKKO" Miliaresis
"Modern usages has
made the term 'speculator' a synonym for gambler and plunger.
Actually the word comes from the Latin 'speculari,' which means
to spy out and observe. I have heard many men talk intelligently,
even brilliantly about something- only to see them proven powerless
when it comes to acting on what they believe. If action is
delayed until the need is apparent to everyone, it will be too late."
-Bernard Baruch
When you
hear Wall Street, the first thing that comes to mind would have
to be rich traders, in the best suits, walking on the floor of the
New York Stock Exchange (NYSE) yelling and screaming "BUY!!! SELL!!!
GET OUT NOW!!!!!" and moving their hands around as if they were
mute. Well I must say most of those things are true.
Times have changed; in the 1980s, that would be 100% accurate.
But nowadays, everyone who has internet access can trade any market
they feel comfortable with. With technology anyone in the
world can pull up a monthly chart and fundamentals on IBM and check
out his or her positions. As time goes on, one market tends
to keep on getting more and more attention, the Foreign Exchange
Markets (Forex). With the power of technical indicators and
fundamentals and with the liquidity of it, the currency market topples
over any other marketplace.
The foreign
exchange market as we know it today was originated in 1973.
Before World War I the Forex markets were stable and without much
trading activity. After World War I, the Forex markets increased
ten-fold with speculative activity. The Great Depression and
the removal of the gold standard in 1931 created a serious lull
in Forex market activity. From 1931 until 1973, the Forex
market went through many changes to what it is known as today.
It has grown to be the largest single market on the planet.
Its average $1.5 trillion traded per day is almost 100 times that
of the $25 billion of the NYSE.
For the many investors that are looking to put their
money somewhere or to even day trade (make a living making many
trades in one day) with their money, they have typically looked
to the equity markets. In the raging bull market of the 1990's,
many investors entered into day trading with little capital because
they were able to borrow freely. However, this created lots
of concerns because these investors, with little money of their
own at stake, were causing large swings in the market. As
a result, the Securities and Exchange Commission (SEC) stated that
an investor must have at least $25,000 in cash to day trade the
market at any day (making three or more trades in 5 business days).
This is where the Forex market began to become even more appealing,
with start up capital as low as $250 and with a margin or buying
power as high as 200:1. Thus, a measly $5,000 of start up
cash can give you a whopping $1,000,000 buying power everyday, whereas
you would need to have at least $250,000 cash to get a million in
buying power if you were day trading stocks. Consequently,
there are many who view Forex as being far superior to the stock
market.
In centralized exchanges, such as the NYSE, there are
middlemen on the floor that execute the order you put in.
For example if I, as an investor, were to buy 100 shares of IBM
at a limit price of $80, my broker then calls his company's trader
on the floor of the exchange, then they must get my order filled
with the market-maker on the floor, before it comes back to me.
Middlemen and high volume can cause trouble due to late fills and
poor executions. In the Forex markets there are no middlemen--investors
deal directly with the market-maker, thus making it have much quicker
for access and to fill our orders with cheaper costs. Another
advantage of the Forex market is that big brokerage firms and investment
banks are less likely to influence the market. With the stock
market, if one analyst from a major brokerage firm says a stock
is "overbought", the stock will rapidly decline when the news comes
out. With the currency market, it is much more difficult for
an investment bank's analyst to move the market. Almost
all currency brokerage firms all have commission free trades.
That means that investors don't pay anything to get into a trade
and get out of a trade, unlike stock brokerage firms that charge
an average of $10-15 per trade. The currency firms make their
money on the spread between the bid price and ask price of the currency
pairs. That is always a huge advantage when trading for a
living. I must say when I was day trading stocks on my own
I must have spent well over $3,000/month on commissions. Now
with the currency firms I pay nothing.
Another great advantage trading currencies over equities
is that there about 8,000 stocks vs. 4 major currency pairs.
This is very helpful for the traders that have families and want
to spend time doing other things, instead of sitting in front of
the computer looking at a couple hundred charts of stocks.
With all the currencies around the world, a market is always open,
which makes the Forex market open 24 hours a day 5.5 days a week
(closed all of Saturday till the Japanese and Australian markets
open). The liquidity of the market is always there for an
investor's disposal. Lastly, an investor can trade off of
his or her profits. This means if he is in a winning position
with all of his buying power on the line and the pair keeps going
up, he can keep adding because his buying power gets larger as the
account gets larger. With stocks and equities, you have to sell
out of the position before your buying power will increase for the
investors to buy more.
While currency markets have many advantages over equity
markets, they also carry many risks as well. Being leveraged
this high can often cause quick losses, potentially leading to an
investor losing more than his original investment. However,
for an educated and experienced investor, currency markets might
provide another way to diversify your portfolio and enjoy trading
gains.
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