Global Forex Trading Questions – Part 1
Global Forex Trading Questions – Part 1 of 4…
Forex is recognized as the world’s largest financial market, though it is relatively new terrain for retail traders. Prior to the opportunity the Internet provided for traders, FX had primarily been the domain of multinational corporations, secretive hedge funds and large financial institutions. Times have changed, however and individual investors hunger for information from this fascinating market. As a Forex novice or simply needing a refresher course about currency trading basics, it’s worth reading on for some answers to the forex market’s frequently asked questions.
How does the Forex market differ from the other types of markets?
Currency trading, unlike trading of options, futures or stocks, doesn’t take place within a regulated exchange. Forex is neither controlled by a central governing body, nor are there any clearing houses for guaranteeing the trades and no arbitration panel for adjudication of disputes. Members all trade together based solely upon credit agreements with each other. In essence, business in the world’s largest and most liquid market is conducted and dependent only on a metaphorical handshake.
It might seem extremely risky and such an ad-hoc arrangement, at first glance must seem bewildering for those investors more familiar with structured exchanges like the CME or NYSE. (To learn more, see Getting To Know Stock Exchanges.) In practice, this arrangement works effectively and exceedingly well: because traders in FX have to not only mutually compete but also cooperate together, their self regulation provides an extremely effective control for the market. Reputable retail Forex dealers in the USA join the NFA (National Futures Association) and in doing so agree to the binding arbitration of any resulting disputes. Therefore, any retail customer contemplating trading currencies should, critically, only do so through member firms of the NFA.
The FX market differs from other markets so much in other key ways sure to raise an eyebrow or two. Are the market indicators telling you the EUR/USD might very well spiral downward? No problem, short the pair as you see it. No uptick rule has to be observed in FX like there has to be in stocks. Unlike futures, there are no limits to position size either so you could sell, theoretically, $100 billion of currency if of course; you possessed the capital to make the trade. Let’s say your most respected Japanese client, happening to golf a round with Toshihiko Fukui, currently Bank of Japan’s Governor, decided to tell you – not hint, intimate, tip a wink, give a nod or any other euphemism – but said out loud as might be general conversation on the course that the BOJ was intending a rates raise at the next meeting, there would be nothing to stop you going right ahead and buying yen like there was no tomorrow. No one would ever consider prosecution for insider trading if your bet paid off. Insider trading does not exist in FX. European economic data, like German employment figures, very often are leaked days before their official release.
Don’t think that FX is some financial cowboy operation of the Wild West; it is the world’s most fluid and liquid market, trading all the 24 hours of a day between Sunday 5pm EST to Friday 4pm EST with rarely any price gaps, trading nearly US$2 trillion daily worldwide and yet is probably the most accessible of any market anywhere in the world.
Read Part 2 of Global Forex Trading >>
