I was talking on the phone with the other day with a novice trader and he was having trouble deciding whether he should try e-mini trading or forex trading. To my astonishment he decided to trade forex. Approximately a year ago I opened a small forex trading account and wanted to understand what forex traders' experience. As you will read, I was nearly overwhelmed at the barriers to success a forex trader experiences.
· Lack of a Centrally Regulated Exchange: The one thing I can count on trading e-mini futures is transparency in the market, with the exception of High Frequency Trading which doesn't post volume numbers until after execution of a trade. Without transparency, how can you be sure your trade is executed sequentially, as received, and larger clients aren't given preferential treatment in order execution? You can't. I sure seemed to get consistent lousy fills during my forex trading experiment. You are forced to trust the bank or trading firm that is executing your orders is doing so as they receive them; when it comes to money, it's pretty hard to earn my trust from the onset of our financial relationship; you have earn it.
· No Volume Data: My style of trading relies heavily on volume. Since we have discussed the lack of a centralized regulated exchange, Forex is traded Over-the-Counter (OTC). OTC trading is, by definition, a network of cooperating banks and trading firms that work independent of each other, so volume cannot easily displayed. Without volume figure how can you make proper judgments regarding trade entry and exit? On the other hand, e-mini traders are given a constant data stream reflecting exactly what is going on in a potential or executed trade. You know the volume and size of trades entering and exiting the market.
· Claims of No Commission Trading: While most forex concerns claim there is little or no commission, this notion is a misnomer. While the CME and CBOT is not free, you should be able to get a round trip in the $5.00 range. In forex, the money is made in the spreads, which is not the typical 1 tick spread (bid/ask) on the futures exchange, but changes as financial conditions warrant. Usually as a trade becomes more attractive, the spread expands rapidly. Why? Because the person on the other side of your contract is usually your bank. In several instances in my short forex trading career I observed the spread on "hot" currency pairs oscillating ten pips at a time and in unusual situations up higher than 15 pips. Sheesh, that is a pretty heavy load to haul.
· Rampant Structural Fraud in the Forex System: Since regulators are not constantly auditing the books and transactions of forex firms, there have been dozens of forex trading investigations relative to futures trading investigations. Just recently, 15 of the largest trading firms entered a "no contest" plea to the charge of manipulating currency trading pairs for their own profit. Of course, those profits came at the expense of their customers, the traders. As I mentioned earlier, your forex bank or trading concern is usually on the other side of your contract and manipulating rates so they make money, not their traders. Currently forex is leading the regulators active investigations by a wide margin. The most recent scandal is still under investigation by regulators in Asia, Switzerland, the UK, and United States and concerns market manipulation by originators of forex trades, who are a variation, I guess, to our version of a market maker.
· Finally, the forex market is hyped as a way to "get rich" and solve your financial problems. No trading is a proper get rich scheme, least of all forex. Ads touting phenomenal returns are simply aberrant. Others firms allow clients to start forex trading accounts funded at only $50. This underfunded entry level leaves potential traders thinking they are going to hit it big with just fifty bucks, nothing could be farther from the truth.
In summary, until forex establishes a centralized exchange (which I believe they will), adds a bit of transparency to their operation, and gets members firms under regulation, forex problems are a deal killer for me. Those forex spreads were murderous! Just venting there, I suppose.
· Lack of a Centrally Regulated Exchange: The one thing I can count on trading e-mini futures is transparency in the market, with the exception of High Frequency Trading which doesn't post volume numbers until after execution of a trade. Without transparency, how can you be sure your trade is executed sequentially, as received, and larger clients aren't given preferential treatment in order execution? You can't. I sure seemed to get consistent lousy fills during my forex trading experiment. You are forced to trust the bank or trading firm that is executing your orders is doing so as they receive them; when it comes to money, it's pretty hard to earn my trust from the onset of our financial relationship; you have earn it.
· No Volume Data: My style of trading relies heavily on volume. Since we have discussed the lack of a centralized regulated exchange, Forex is traded Over-the-Counter (OTC). OTC trading is, by definition, a network of cooperating banks and trading firms that work independent of each other, so volume cannot easily displayed. Without volume figure how can you make proper judgments regarding trade entry and exit? On the other hand, e-mini traders are given a constant data stream reflecting exactly what is going on in a potential or executed trade. You know the volume and size of trades entering and exiting the market.
· Claims of No Commission Trading: While most forex concerns claim there is little or no commission, this notion is a misnomer. While the CME and CBOT is not free, you should be able to get a round trip in the $5.00 range. In forex, the money is made in the spreads, which is not the typical 1 tick spread (bid/ask) on the futures exchange, but changes as financial conditions warrant. Usually as a trade becomes more attractive, the spread expands rapidly. Why? Because the person on the other side of your contract is usually your bank. In several instances in my short forex trading career I observed the spread on "hot" currency pairs oscillating ten pips at a time and in unusual situations up higher than 15 pips. Sheesh, that is a pretty heavy load to haul.
· Rampant Structural Fraud in the Forex System: Since regulators are not constantly auditing the books and transactions of forex firms, there have been dozens of forex trading investigations relative to futures trading investigations. Just recently, 15 of the largest trading firms entered a "no contest" plea to the charge of manipulating currency trading pairs for their own profit. Of course, those profits came at the expense of their customers, the traders. As I mentioned earlier, your forex bank or trading concern is usually on the other side of your contract and manipulating rates so they make money, not their traders. Currently forex is leading the regulators active investigations by a wide margin. The most recent scandal is still under investigation by regulators in Asia, Switzerland, the UK, and United States and concerns market manipulation by originators of forex trades, who are a variation, I guess, to our version of a market maker.
· Finally, the forex market is hyped as a way to "get rich" and solve your financial problems. No trading is a proper get rich scheme, least of all forex. Ads touting phenomenal returns are simply aberrant. Others firms allow clients to start forex trading accounts funded at only $50. This underfunded entry level leaves potential traders thinking they are going to hit it big with just fifty bucks, nothing could be farther from the truth.
In summary, until forex establishes a centralized exchange (which I believe they will), adds a bit of transparency to their operation, and gets members firms under regulation, forex problems are a deal killer for me. Those forex spreads were murderous! Just venting there, I suppose.
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