Problems with the Forex Markets

BE WARNED...

Trading the Forex Market is Not What it Seems 

Please read the information below with an open mind. I didn't write it, but my mentor, a very trusted and experienced trader did. He traded for over 50 years, and I believe every word he says.

Why Not To Trade Forex!

"...we do not advocate forex trading unless you have a particular reason as to why you need to trade during the middle of the night, or you have a specific need to trade in currency pairs that do not involve the U.S. dollar. If the U.S. dollar is involved and you are able to trade during U.S. market hours (7:20am-2:00pm U.S. Central Time) you are much better off trading currencies in the Chicago currency futures markets. Here are the reasons why:

• Brokers can deceive you about there being no commissions. Three pips = $30 minimum/round turn (called the spread) is in reality a commission that eats up your capital at an astonishing rate. Even winning traders lose money and end up with negative results because of this outlandish overhead. Trading futures, you should never have to pay a broker more than $10/round turn, and usually quite a bit less than that.
• Guaranteed fills. True but… The only way a broker can guarantee fills is for the broker to become the buyer or seller of last resort. That means the broker is running a bucket shop. All forex brokers are the buyer and seller of last resort.
• Brokers do not all tell the truth about volume. They show the volume for all forex trading, which doesn't even come close to the volume they truly have at their own brokerage, which is where you are trading. Volume in currency futures is considerably higher than the volume traded at any single forex broker, often greater by a factor of ten.
• Leaning. Brokers say they are charging you a 3 pip spread to trade the popular currency pairs. But in reality a broker may be making as much or more than 10 pips on your trades. He does this by skewing prices. Since you are not trading at an exchange, the broker can feed you any price he wants to feed you. He can buy at the bank for perhaps 7 pips less than he sells to you. He then charges you 3 pips for the privilege of being ripped off for a total of 10 pips.
• Unregulated. Forex may sound like an exchange but it isn't. It exists entirely in cyberspace with every broker and every bank having different prices for any particular currency. There is little or no regulation, even for brokers who register with the CFTC and the NFA. Forex brokers do not have to mark to market each day as do futures brokers. If your forex broker files for bankruptcy or absconds with your money you have zero recourse.
• No guarantee. If a forex broker does go out of business, you could lose all your money. There are no guarantees and no one standing behind it. Futures brokers are required to mark to market at the end of every session every day. They have to put up cash to cover every open trade on their books. Futures brokers have gone broke, but no futures customer has ever lost one cent of the money in his trading account because of a failed broker. Nor have they had to wait for their money. It is immediately available.
• You can get exactly the same action in the euro fx futures as you get in the "Euro" forex. Commissions are as low as one tenth per round turn depending on volume, through a regulated broker, trading electronically at an exchange where you know the true price of the currency.
• What is the true price? A forex broker can only give you the price of a currency as quoted to him by the bank through which he trades. Banks have differing prices for a currency. You never know what the real price is because there is no central exchange through which all prices flow. Besides not knowing the true price from the bank, you can also be deceived by "leaning" or "skewing" of the real price at the bank. Forex brokers commonly lean the prices.
• Forex brokers are not necessarily truthful. They lure people in with hype and false advertising: "No commissions!" "Guaranteed fills." "24 hour trading:" Who in their right mind is going to trade in the middle of the night unless they have a special need. While it is true that total forex volume is greater than in the futures, futures volume at the exchange is greater than the volume at your broker for the most popularly traded currencies. The only place where the liquidity differential matters is in currencies like the Mexican peso, the Brazilian real, and somebody's drachma. Those thinly traded currencies may be more liquid in forex. But if you trade anything but the few most liquid and popular currencies, you are going to be paying at least 5 pips, and often more. Unless you have a particular commercial need to deal in Polish zlotys, Indian rupees, or some other thinly traded currency, you don't need forex.
• You are told by forex brokers that there is little or no stop running. This is one of their biggest and boldest fabrications. The truth is there is far more stop running in forex than in futures, and possibly as much stop running as in the stock market. I have friends who work in forex as well as many traders who of necessity have to trade forex. One of my students is a market maker in forex. These are people who should know, but in case you don't want to believe me or them, simple observation of forex trading will reveal the vast amount of stop running that takes place there. Who is it that runs the stops? Why it is your friendly forex broker. The broker has a vested interest in seeing to it that your orders are filled. Stop running is nothing more than order filling. The broker sees to it that everybody's order gets filled.
• Probably you have heard that if you are winning regularly in forex, you may be barred from trading. Is this true? Yes it is. The fact that it is true is just another proof that when you trade forex you are trading at a bucket shop. In the book, "Reminiscences of a Stock Operator," we are told that Jesse Livermore was banned from trading at certain stock brokers because they couldn't stand him beating the house. The same thing is true with many forex brokers. Since they are the ones guaranteeing you a fill, they are in effect the buyer and seller of last resort. The truth is that most forex brokers have precious little liquidity at their firms. In order to give you the impression that there is liquidity, it is the broker who gives you your fill. It is the broker who does the stop running that supposedly doesn't exist in forex. But if you are regularly beating the socks off the broker, he will ban you from trading at his firm.

Now you know the truth about forex. I challenge any and all forex brokers to prove that I am wrong. I will change or remove anything proven to be untrue in what I stated above.

Is there hope for a trader who wants to trade forex? Yes there is. There are forex brokers and retail banks where the trading is legitimate, with no leaning and a very small spread. I am not at liberty to tell you which ones those are. You will have to do your due diligence in finding out. For the most part, these brokers and banks are not in the U.S.

There is yet another hope on the horizon for traders who want to trade forex in a regulated venue. You can trade forex on Globex at the CME, in a regulated environment and with uniformity of prices..."

Used with permission

My comments:
I can attest to what he is saying here. Once when I was testing an FX system I subscribed to, I had to get an eSignal data feed. When I compared the eSignal price action to the chart from the FX broker, it was like night and day. eSignal's feed was much more active and the prices moved in a broader range than my broker's charts.

BOTTOM LINE:         BEWARE
RECOMMENDATION: TRADE FX FUTURES, NOT FOREX

Want Some Proof?

Take a look at the chart below. It has the British Pound March07 futures (BPH07) on top and the  British Pound forex (GBP/USD) on the bottom.  It's a 60 minute candlestick chart, but it could be any timeframe - the results are the same. Do you see the similarity?  The trading volume is not shown, but check for yourself and you'll see that there's no reason to trade forex and take all the risks mentioned above, when you have virtually the same price action in the futures with fewer risks and much lower costs.