Many traders had beliefs that sounded something like:
Fast forward to 2014 — I still hear those kinds of statements today even though everything about the currency market has changed. What is the reality of Forex trading then today? Since the US federal government deregulated Forex trading (Foreign Exchange or FX) for retail traders in 2000 (the CFMA act), the market has more than quadrupled in size and transformed completely making it easily accessible to retail traders.
If you aren’t trading Forex in any way right now, here are the top ten reasons why you should consider it:
Have you ever been stuck in a position overnight? Has an opening gap ever majorly affected one of your positions — and maybe kicked you out of it with a loss larger than -1R?
Being a global 24h-market with around $5.3 trillion volume (USD daily), you obviously have easy and quick ways to enter or exit positions. Due to the huge depth in this market, there is virtually no risk of getting stuck in a position, experiencing price slippage or partials fills. Astonishingly, the Forex market is about 200 times larger than the NYSE.
Also, without opening or closing bells, there are no pronounced disruptions (or gaps) so price action is smooth & flowing. This fact alone opens up the market to a broad spectrum of trading styles where traders can choose to use long term systems, swing systems, day-trade or even quick scalp – at any time of the day/night.
If one economy is changing in relation to the economy of its currency pair partner, this effect shows up as a trend. With so many liquid currencies in the world you will always find a combination with a strong trend. As in any other market, Forex prices are subject to the forces of short term supply and demand, however, Forex has some unique peculiarities. The price of a currency pair reflects the conditions and activities of entire economies or even regions which very often leads to steady and smooth long term price development. It is quite common to experience nice, steady price momentum over several hours, days, weeks or even months — quite unlike equities or commodities.
You can trade Forex successfully using many different trading styles: from long-term macro, trend following, band trading to news trading or other styles. It is also possible to trade any currency pair during any period of the full 24h open market hours. Therefore, you can choose from a wide array of timeframes: really long-term (daily or weekly chart), to a swing basis (eg 1h, 4h, 8h chart) and intraday (eg 1, 5 or 15min chart). Usually, I am trading intraday or swing positions during European market hours, but if I want to do something else during the day, I can still trade — I just trade at a different time. Or if I am staying in a different time zone, I can trade Forex at times that are convenient for me there locally rather than sleeping in the day and trading at night.
Despite FX being unregulated, the market is very well coordinated through the Global FX interbank structure. The 15 biggest banks form a “transaction ring” that runs on a common platform. Similar to regulated exchanges, orders are processed efficiently by matching the best ask and bid prices. For incoming orders, this guarantees that the tightest bid/ask spread is chosen at that time — minimizing your transaction costs. No exchange commissions, broker fees or other fees apply so usually, the bid/ask spread is the only transaction cost you have to pay for a round-trip.
Another unique cost advantage of Forex trading happens due to the structure of the currency trading market. Price data vendors and brokers provide price data for free.
Note: Does this sound a little too good to be true? Forex being unregulated, your broker choice is especially important. Choose one that offers a good and stable trading platform, is known for its good customer service and does not “play tricks” with its clients – like taking the other side of your trades.
Because Forex offers stable price development without pronounced gaps, spikes or long wicks, it is excellent for trend trading based on patterns. In addition, due to the sheer size of the market, price manipulations are nearly impossible. As a result, FX charts respect important charting lines and price levels very well. Entries and exits are less prone to breakout failures, stop runs or other big-boy-games. Only important FX news has the potential to move currencies markets strongly in the short term. Luckily, you can manage the news announcements issue because these are well-publicized, pre-scheduled events during which you can choose to sit out or manage your risk accordingly.
FX charts are also unique and repetitive in one notable way: low-volatile range consolidations are quite common and they tend to develop into explosive volatility expansions. After these volatility breakouts, smooth and persistent trends often develop. My Forex systems maintain a strong trading edge in identifying these low-risk consolidation patterns that occur regularly and very often develop into good trends.
FX prices reflect the relative strength of two currencies respective economies. Obviously these dynamics are very different from country to country in the different pairs. I see each FX pair as independent and having little correlation to other pairs (with the exception of the Yen-pairs for reasons that are beyond the scope of this article). In effect, each pair has its own “life”. So I only need to pay attention to what happens to my position on one pair rather than needing to follow multiple currency pair prices. This makes trading a bit easier than equities. Remember for a stock, you have to pay attention to dynamics about the company itself, to the company’s sector, and then to the overall market movement as well. For me, simpler in trading works better.
Not considering Forex as a separate asset class that can be traded might have put you into disadvantage in comparison to others that have done in recent years. During the global financial crisis in 2008/2009, we saw very turbulent equity markets which were too volatile to trade for many styles and systems. FX just offers another opportunity to make money and as an example, there were lots of great opportunities to trade the Swiss Franc long from 2008 until mid-2011 — when it was pegged to the Euro. As Van likes to say: Crisis always implies opportunity.
If you are an American, have you ever realized that you are actually long the US Dollar when you hold US equities or even if you are “flat” and sitting in cash? That may or may not be a profitable position once you start considering what the USD is doing in relation to other strong currencies. Finally, if you invest in markets outside of the US, using the FX market to hedge currency risks is something you might want to consider.
First, you can open an FX account with a very small amount of equity, in many cases much smaller than many other account types. Second, you can day trade FX with a very small account size — unlike much larger minimum account sizes for other instrument types. Third and most important, small FX traders are not disadvantaged in their methods or their trading as they are when attempting to trade many other asset classes. With FX, you can trade small positions in the same way you would trade larger positions. This allows you to learn small with minimal risk and then scale up trading the exact same way.
Starting out by trading small with real money is a better learning experience than paper trading or trading in a demo account. FX brokers allow you to choose between very small, mid-sized and large Forex lot sizes. Even a very small account of less than $5000 USD is not dis-advantaged. Because only the spread needs to be paid, the transaction costs remain at the same proportional level. This allows you to scale-in and out of positions as often as you want without additional costs other than the spread.
Additionally, traders can choose to go long or short at any time without restrictions or even the typical psychological bias against shorting. The option of using high leverage available to FX traders allows you the opportunity to benefit from small moves in small timeframes which can increase your learning and growing from your trades.
Choosing the appropriate lot sizes (see #8 above) allows you to fully customize your position sizing™ strategies for your accounts without any cost disadvantage to small ones over large ones. The same is true for your entry or exit algorithms if you choose to scale-in or scale-out of positions — something which I do. Being able to apply all Tharp Think principles is a big edge alone!
Having traded several asset classes, I can say with confidence that there is no easier and no more cost effective way to learn to trade than with a Forex account — wherever you live, at whatever timeframe or time of the day you might want to choose.
Forex offers a level playing field for a wide variety of market participants — be it newbies or veterans, small or large accounts, full-time or part-time traders. Forex allows you to choose what fits you best: your time of the day, your preferred holding period, your trading style, your account size and your leverage.
Given this short but powerful list, why aren’t you trading Forex or at least planning to?
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