Advantages and Disadvantages
There are some significant differences between Forex and other markets like the equity markets or futures. While a good trader may be able to handle any market, structural differences in Forex can force a different approach. Moreover many of the so called "advantages" bring some inherent risks with them.
Not Regulated
The global nature of the interbank market, without an unified or centrally cleared market for the majority of FX trades, make difficult to apply a cross-border regulation.
Central banks such as the Federal Reserve Bank of the US or the European Central Bank provide to some degree oversight. But in general, the currency markets are much more lightly regulated than equity or bond markets.
There are, nevertheless, several associations and institutions which supervise and regulate key players at a national level. We will cover these subject in the next chapter.
No Exchanges
While it is true that there is exchange-based Forex trading in the form of futures, the opposite condition occurs in the OTC market via the spot market.
Trading in a decentralized environment may be seen as having advantages or not:
In a decentralized market, trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no structured clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based upon credit agreements. Essentially, business in the largest and most liquid market in the world depends on the so called "margin" accounts, a concept similar to good faith deposits. This fact can be considered as a disadvantage, while the lack of clearing fees or other exchange fees can be seen as an advantage. Most brokers don't make you pay fees to maintain an account regardless of your account balance or trading volume.
Besides, the lack of an exchange means a difference in how the exchange is actually done. In spot Forex much of the trading done by individuals is actually directly executed with their broker/dealer. That means the broker takes the other side of the trade. This is not always the case but it is the most common approach.
This doesn't mean the broker is deliberately trading against you - he still has to offset his risk in the overall market. We will talk extensively on false and true myths about brokers in the next chapter.
In a centralized market, you have the benefit of seeing real volume information, for example, and you might find comfort in knowing that there is a regulated mechanism backing your market participation.
Besides, the lack of a centralized exchange can lead to a discrepancy among price information from one market maker to the next, leading to the possibility of unfair trading activities.
At first glance, this ad-hoc arrangement can look like the wild west to investors who are used to organized exchanges. But be reassured, this arrangement works exceedingly well in practice: because participants in Forex must both compete and cooperate with each others, self regulation provides very effective control over the market.
Furthermore, reputable retail Forex broker/dealers in many countries are supervised by their national financial authorities, and agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through a regulated firm.
We will extensively talk about broker/dealers in the next chapter and how to inform and protect yourself.
Instantaneous Order Execution and Market Transparency
In the Forex world, fast order execution and instant fill confirmation is usually routine because you'll be trading via an Internet-based platform. Market transparency is highly desired in any trading environment. With no exchanges, there are no traditional open-outcry pits, no floor brokers and, consequently, no delays. Obviously, you might have to absorb some slippage if you trade during news announcements or if you trade a high volume, but normally all the prices on your broker platform are executable and your profit potential is not compromised.
Given the multi million-Dollar exchange that takes place every day in the currency markets, manipulation of the price is rather inexistent compared to other less liquid markets. However combined actions may occur in which several of the major participants - like central banks - force the market in a certain direction. That being said, this is not a rule but rather an exception.
In this regard, you should be informed of the market hours that tend to be more or less liquid as well as of the dates and times of the year in which the major trading places are less active. During low liquidity times the market is more vulnerable to erratic volatility or manipulation, like during the Asian session, or during longer periods such as holiday seasons.
In the stock market there are restrictions imposed on selling short that you don't have in the Forex. It is just as easy to take a short position as it is to take a long one. In chapter 3 you will learn the mechanics to trading.
24-Hour Trading
The Forex is the only market which can truly be viewed as a 24-hour market, which is one of the notorious differences you will notice if you came from another market. There is trading activity in all time zones during the week, and sometimes even on the weekends as well. In other markets traders must wait until the market opens the following day in order to open a new position.
However each hour of the day has a certain level of liquidity and each currency is associated with the trading session normally corresponding to its time zone and business hours. The Yen, for example, may show a greater liquidity during the Asian session. In contrast, a currency outside of its normal business hours can display more erratic movements in a chart.
A market operating 24 hours is surely attractive but you can easily fall into overtrading, taking far too many trades. Exercising some discipline will help you avoid falling into this trap. This 24 hour nature is an attribute you want to transform into an edge in your favor. As a trader, you can put on or take off positions literally any time of the day or night. That opens the game up to you if you don't have otherwise available time to trade. next, forex history, time session
There are some significant differences between Forex and other markets like the equity markets or futures. While a good trader may be able to handle any market, structural differences in Forex can force a different approach. Moreover many of the so called "advantages" bring some inherent risks with them.Not Regulated
The global nature of the interbank market, without an unified or centrally cleared market for the majority of FX trades, make difficult to apply a cross-border regulation.
Central banks such as the Federal Reserve Bank of the US or the European Central Bank provide to some degree oversight. But in general, the currency markets are much more lightly regulated than equity or bond markets.
There are, nevertheless, several associations and institutions which supervise and regulate key players at a national level. We will cover these subject in the next chapter.
No Exchanges
While it is true that there is exchange-based Forex trading in the form of futures, the opposite condition occurs in the OTC market via the spot market.
Trading in a decentralized environment may be seen as having advantages or not:
In a decentralized market, trading does not take place on a regulated exchange. It is not controlled by any central governing body, there are no structured clearing houses to guarantee the trades and there is no arbitration panel to adjudicate disputes. All members trade with each other based upon credit agreements. Essentially, business in the largest and most liquid market in the world depends on the so called "margin" accounts, a concept similar to good faith deposits. This fact can be considered as a disadvantage, while the lack of clearing fees or other exchange fees can be seen as an advantage. Most brokers don't make you pay fees to maintain an account regardless of your account balance or trading volume.
Besides, the lack of an exchange means a difference in how the exchange is actually done. In spot Forex much of the trading done by individuals is actually directly executed with their broker/dealer. That means the broker takes the other side of the trade. This is not always the case but it is the most common approach.
This doesn't mean the broker is deliberately trading against you - he still has to offset his risk in the overall market. We will talk extensively on false and true myths about brokers in the next chapter.
In a centralized market, you have the benefit of seeing real volume information, for example, and you might find comfort in knowing that there is a regulated mechanism backing your market participation.
Besides, the lack of a centralized exchange can lead to a discrepancy among price information from one market maker to the next, leading to the possibility of unfair trading activities.
At first glance, this ad-hoc arrangement can look like the wild west to investors who are used to organized exchanges. But be reassured, this arrangement works exceedingly well in practice: because participants in Forex must both compete and cooperate with each others, self regulation provides very effective control over the market.
Furthermore, reputable retail Forex broker/dealers in many countries are supervised by their national financial authorities, and agree to binding arbitration in the event of any dispute. Therefore, it is critical that any retail customer who contemplates trading currencies do so only through a regulated firm.
We will extensively talk about broker/dealers in the next chapter and how to inform and protect yourself.
Instantaneous Order Execution and Market Transparency
In the Forex world, fast order execution and instant fill confirmation is usually routine because you'll be trading via an Internet-based platform. Market transparency is highly desired in any trading environment. With no exchanges, there are no traditional open-outcry pits, no floor brokers and, consequently, no delays. Obviously, you might have to absorb some slippage if you trade during news announcements or if you trade a high volume, but normally all the prices on your broker platform are executable and your profit potential is not compromised.
Given the multi million-Dollar exchange that takes place every day in the currency markets, manipulation of the price is rather inexistent compared to other less liquid markets. However combined actions may occur in which several of the major participants - like central banks - force the market in a certain direction. That being said, this is not a rule but rather an exception.
In this regard, you should be informed of the market hours that tend to be more or less liquid as well as of the dates and times of the year in which the major trading places are less active. During low liquidity times the market is more vulnerable to erratic volatility or manipulation, like during the Asian session, or during longer periods such as holiday seasons.
In the stock market there are restrictions imposed on selling short that you don't have in the Forex. It is just as easy to take a short position as it is to take a long one. In chapter 3 you will learn the mechanics to trading.
24-Hour Trading
The Forex is the only market which can truly be viewed as a 24-hour market, which is one of the notorious differences you will notice if you came from another market. There is trading activity in all time zones during the week, and sometimes even on the weekends as well. In other markets traders must wait until the market opens the following day in order to open a new position.
However each hour of the day has a certain level of liquidity and each currency is associated with the trading session normally corresponding to its time zone and business hours. The Yen, for example, may show a greater liquidity during the Asian session. In contrast, a currency outside of its normal business hours can display more erratic movements in a chart.
A market operating 24 hours is surely attractive but you can easily fall into overtrading, taking far too many trades. Exercising some discipline will help you avoid falling into this trap. This 24 hour nature is an attribute you want to transform into an edge in your favor. As a trader, you can put on or take off positions literally any time of the day or night. That opens the game up to you if you don't have otherwise available time to trade. next, forex history, time session