Forget Forex, Try Currency Trading with Emini Futures
For whatever reason, Forex(FX) has great marketing. Novice investors are led to believe that FX is the market to trade. Well, forget FX. The fees are high and the opportunities hurt by the FX brokers. Currency trading for smaller investors should be about trading currency futures not FX.
How does currency trading work? The primary use of FX is for international trade and investment, enabling businesses to convert from one currency to another as they buy and sell merchandise. One party buys a currency and pays for it with another currency. The volume of trading is very high in Forex because it operates 24/7, making it very inticing to smaller investors who want to trade off hours.
But there are some severe draw backs for individual investors in this market. First and foremost, there is no exchange. That means oversight is done at the brokerages level. It's like the self police. Then, who stops the brokerage from front running? Unfamiliar with front running? Wikipedia defines Front Running as "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." Front running applies to Forex brokers as well. Without an exchange to oversee trades, front running happens.
As bad as that is, here is the biggest problem with trading Forex for smaller investors. The spread difference between the bid (what you can buy FX contracts for) and the ask (what you can sell FX contracts for) is 3 pips. 1 pip = 1 price movement. To compare, trading stocks, 1 price movement = 1 penny. The problem with FX is that the broker takes the first 3 price movements as the cost of entering the trade, getting into the game so to speak. That means there has to be a price movement of at least 4 pips just to break even. In this way, FX traders start every trade in the red, in the whole.
So can smaller investors get involved in currency trading if they don't trade the Forex market? In a nutshell, yes. They can be trading futures of the Forex...currency futures. Currency futures trading is all done through an exchange, such as the Chicago Mercantile Exchange (CME) or the New York Mercantile Exchange (NYMEX). They have intense oversight of brokerages, so front running is much more difficult to get away with. Also exchanges require tighter spreads between the bid and the ask, just 1 tick (1 tick = 1 pip = 1 price fluctuation). instead of the 3-4 pips like the Forex Market.
As far as commissions, trading futures is a much fairer arrangement. The broker gets roughly 1/3 of the first tick, that's it. You don't start every trade in the red. Why is this hot? Price movements between currency pairs may only move 1-3 ticks, especially when there is a flat market. If the broker gets 3 price movements upfront, then you must remain in the trade much longer and scalping a couple of ticks is out of the question. This causes a lot of traders to lose their shirts, because just to break even, price must go 3 fluctuations...again, just to break even. But with futures trading, since the broker only gets a piece of the first tick, you'll be able to scalp for 2-3 ticks. That's just not possible trading FX.
Here's the best part...you'll be trading the same currency pairs that you will with Forex, the EURO/USD, the Swiss Franc/USD, the Japanese Yes/USD, the British Pound/USD, the Australian Dollar/USD, the Canadian Dollar/USD. These are the hot currency pairs to trade anyway.
So currency trading the futures market is a much better way to go for smaller investors. Commissions are less, front running is watched, and you can scalp. Forget Forex...it was all marketing in the first place.