"…Always
try to rub up against money, for if you rub up against money long
enough, some of it may rub off on you."
Damon Runyon: A Very Honourable Guy (1929)
1. Introduction
The foreign exchange market owes its existence to the 1971 abandonment
of the Bretton Woods accord and the subsequent unwinding of the regime
of universal fixed exchange rates.
According to the 2001 triennial survey by the Bank of International
Settlements (BIS), global foreign exchange turnover amounts to more
than $1,200bn per day, over 50% of which is transacted on the London
market alone. Global turnover, however, is markedly down on the 1978
BIS survey figure of $1,490bn. The BIS attributes this to the launch
of the euro, banking mergers, the growth of electronic broking at the
expense of voice and telephone dealing (leading to fewer transactions)
and non-banking consolidations that have reduced the need for foreign
exchange.
2. The players
Although currency trading is inherently governmental (central banks)
and institutional (commercial and investment banks), the foreign
exchange market is also the province of non-banking international
corporations, hedge funds and individual private investors and
speculators. However, technological innovations like the internet have
made it feasible for private investors to monitor currency markets and
to trade via intermediaries.
3. The attraction
for private investors
The main attractions of currency dealing to private investors are:-
24-hour trading, 5 days a week with continuous access to global
dealers
An enormous liquid market making it easy to exchange most currencies
Volatile markets offering profit opportunities
Recognised instruments for controlling risk exposure
The ability to profit in rising or falling markets
Leveraged trading with low margin requirements
Zero dealing commission
4. Five ways to
trade forex
Private investors can trade directly or indirectly in foreign exchange
through: -
the spot market
forwards and futures
options
contracts for difference
spread betting
We shall examine each of these instruments in turn, but first a risk
warning.
5. Margin trading:
risk and reward
All the aforementioned forex instruments are margin products, which
means that your investment exposure can be a multiple of the cash that
you lay down (i.e. the margin).
The main advantages of margin are that:
Margin enables private investors to trade in markets with high
minimum units of trading (e.g. the spot market where the minimum size
trade is 100,000 units of the base currency).
Margin trading enhances the rate of profit.
The principal disadvantage of margin trading is that it has the habit
of inflating rates of loss, on top of systemic risk. For example,
currency options are inherently riskier than spot market trades,
because a small change in the underlying spot rate can generate a
disproportionately large change in options prices. Sell naked call
options and there is no limit to potential losses. Add leverage to the
cocktail and you have the potential for large profits and large
losses.
6. Learning to
trade forex
Forex is still relatively fresh territory for private investors,
having really only been rendered feasible by the advent of the
internet. Like any financial discipline, the best investment is a
sound and practical education. To this end, TraderHouse Network (UK)
Limited has set up a training campus at the Cottesmore Golf and
Country Club near Gatwick which was featured on BBC Breakfast News.
“We believe that hands-on training conducted by experienced
professional dealers in a live dealing environment can help newcomers
to avoid the basic but expensive errors habitually made by the
self-taught,” says TraderHouse director Andy Shearman. “We have a
fully equipped dealing room, tutors and desks for hire where you can
practise until you become proficient enough to trade independently.
There has never been a “University of Forex Trading” until now.
TraderHouse fills this learning gap”
Margin broker Easy2Trade has teamed up with TraderHouse to provide
2-day basic training programmes in forex for new accountholders at the
Cottesmore campus, where they can practise on demo accounts and
benefit from expert one-to-one supervision.
TraderHouse has also joined forces with E*Trade- www.etrade.com to
offer intensive training in all Forexand Financial markets trading and
spread-betting. As of late January 2003, TraderHouse will be holding
3-day residential training courses at the Cottesmore campus. Day two
training is conducted in a “live dealing environment” and day three in
the TraderHouse dealing room itself.
For further details, contact Andy Shearman on 01293-512211 or
07957-421769
7. Regulation and
caveats
Forex trading is regulated by the Financial Services Authority. In
order to open an account with a margin broker, applicants must
demonstrate that they are intermediately experienced investors, albeit
not necessarily in forex. This may entail disclosure of one’s
investment history supported by trading statements and other evidence.
Additionally, the applicant must demonstrate an understanding of the
advantages and risks of margin trading.
WARNING: FOREIGN EXCHANGE TRADING AND INVESTMENT IN DERIVATIVES
CAN BE VERY SPECULATIVE AND MAY RESULT IN LOSSES AS WELL AS PROFITS. FOREIGN
EXCHANGE AND DERIVATIVES TRADING IS NOT SUITABLE FOR MANY MEMBERS OF THE
PUBLIC AND ONLY RISK CAPITAL SHOULD BE APPLIED. THE WEBSITE DOES NOT TAKE
INTO ACCOUNT SPECIAL INVESTMENT GOALS, THE FINANCIAL SITUATION OR SPECIFIC
REQUIREMENTS OF INDIVIDUAL USERS. YOU SHOULD CAREFULLY CONSIDER YOUR FINANCIAL
SITUATION AND CONSULT YOUR FINANCIAL ADVISORS AS TO THE SUITABILITY TO YOUR
SITUATION PRIOR TO MAKING ANY INVESTMENT OR ENTERING INTO ANY TRANSACTIONS.
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