Shadowtraders

Forex vs Currency Futures...A Case of Catch 22"

When it comes to trading the Forex Market versus trading the Futures of the Forex, unfortunately advertising gets in the way. There has been a big media push to get traders buying and selling Forex contracts. The problem is...that's all it is, media hype. So many traders lose their shirts in the Forex Market because it is a confusing Catch-22 investment environment.

First is the problem with fees and "commissions" just to get into the Forex game. With the Forex market, there is a spread difference between the bid (what you can buy Forex contracts for) and the ask (what you can sell Forex contracts for). The spread is 3 pips. 1 pip = 1 price movement. To compare, trading stocks, 1 price movement = 1 penny. The Forex broker takes the first 3 price movements as the cost of getting into the game. That means there has to be a price movement of at least 4 pips just to break even. In this way, Forex traders begin every trade in the whole. Too often there are 3 or less Pips in the move. Then the Forex trader just works for the broker.

Second, for Americans, the Commodity Futures Trading Commission (CFTC) has set rules that make it much more difficult for smaller investors to trade the Forex market. The first thing the CFTC did was to reduce the leverage that US Forex brokers can offer to the customers down to 1:50 for larger currency pairs and 1:20 for smaller ones. In May 2009, it was 1:100. CFTC chairman Gary Gensler said, "These rules of the road will help protect the American public in the largest area of retail fraud that the CFTC oversees: retail foreign exchange." Just how reduced leverage for smaller investors while larger investors (institutional houses, hedge funds, commodity pools with greater than $5 million in total assets, individuals or entities with greater than $10 million in assets, etc.) get to keep their original 1:100 leverage is unclear.

To avoid the leverage / margin issue, Americans often decide to open accounts with off-shore Forex brokerages in Europe that are not under CFTC control. But here's the Catch 22....front running.

Forex brokerages do not always have oversight and are unregulated. Remember the Forex market is not traded on an exchange whose main purpose is to guarantee fullfillment along with the quality of the contracts. Many of these brokerages front run their trades.

According to Wikipedia, "Front running is the illegal practice of a stock broker executing orders on a security for its own account while taking advantage of advance knowledge of pending orders from its customers. When orders previously submitted by its customers will predictably affect the price of the security, purchasing first for its own account gives the broker an unfair advantage."

Who would be there to stop the unregulated Forex brokerage from front running? And there are stories from unregulated brokers about what they do and do not let their clients trade. One brokerage, for example, does not allow trading before, during, or 10 minutes after a news item. Why? They can't front run news events.

That is the classic Catch 22. Use a CFTC regulated Forex broker and lose the margin due to reduced leverage, or use a non CTFC unregulated broker and watch him front run your trades.

For smaller investors who want to buy and sell currencies, it is much easier to trade the Futures of the Forex instead of the Forex itself. The commission/fees are less and the margin is better, Futures brokerages cannot front run because they are regulated, and the trades go through an exchange for settlement. Smaller investors beware of the Forex market. .

Barbara Cohen CIO, Shadowtraders, and professional day trader, specializes in teaching students how they can be trading futures with their own trading system and trading strategies. Ms. Cohen has helped hundreds of traders achieve their goals trading. Find out if trading futures is for you by attending one of Ms. Cohen’s Free Webinars. Check out my Futures Trading Articles. For more information, send an email to shadowsupport@shadowtraders.com or call 866-617-2037 today.

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Testimonials disclosure. Unique experiences and past performances do not guarantee future results! Testimonials herein are unsolicited and are non-representative of all clients; certain accounts may have worse performance than that indicated. Trading Futures involves substantial risk and there is always the potential for loss. Your trading results may vary. Because the risk factor is high in Futures trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that you can afford to lose, you should not trade Futures. No "safe" trading system has ever been devised, and no one can guarantee profits or freedom from loss.

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