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Foreign Exchange Market

"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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