Retail forex
Retail Forex market (retail currency trading or retail FX) is a part of the global Foreign exchange market. According to the New York Times the retail Forex is a risky market overcrowded with cheaters trying to swindle the assets of credulous individuals. There is an opinion that almost 90 percent of retail Forex traders always lose their money.
History
The work related to exchange of the foreign currencies began with the appearance of the financial markets. However the online retail forex began its work only since mid 90s. As for big retail traders they had already worked since 1970s at the Chicago Mercantile Exchange.
Since 1996 online retail forex became a common thing. Many Internet trading platforms were created with an intention to provide the possibility for individuals to trade at the forex market.
Throughout online trades there envisaged almost no possibility of the physical delivery to the customer. All positions are closed sooner or later. The members of the market provide quite high amount of the leverage in online trading. For instance leverage in currencies may reach 100:1 level. In such situation the customer is to assume all risks related to control of the position in the amount of 100 times more than his assets.
The currencies at the retail forex are quoted in pairs, for instance, EURUSD means the Euro against the USD. However the frequent mistake is to quote the currencies divided by the “/” in a wrong way. In case there is the “/” between two currencies it means that the order of the currencies should be reversed. Let’s consider, the correct variant is to quote EURUSD or USD/EUR. For instance in case you need to pay $130 for EUR 100, 130/100=1.3, where 1.3 is the exchange rate.
Major point of the retail forex
Currency Pairs
The price of the currency can alternate only in relation to the other currency therefore the currencies are traded in pairs. For example EURUSD means the prices for the Euro paid in the United States dollars.
High Leverage
The leverage (margin) and floating loss are the key points of the trade and they are easily explained with the help of the example as follows. Usually retail forex market members use the 100:1 leverage but there is a requirement to possess an account with the certain amount of money that would prevent you from getting the critical loss point. Let’s consider the following situation. In case there is a $ 100,000 position that is held in EURUSD on the 100:1 leverage it means that the trader is to invest $1,000 to take control over this position. But in case the position value decreases the market members usually do not accept the possibility of decreasing their traders’ accounts below the zero point and making compensation later because of the frequent fluctuations of the forex prices and increasing effect of the leverage. Market makers use the services of the automatic systems to control the amount of the money at the traders account and close his positions in case this trader lose more money that he has at this account. Here is the example: in case the trader’s account is $2,000 and he purchases $100,000 position in EURUSD it means that this trader has the half of his money tied up in margin and another half ($1,000) that will compensate any value decrease of the traders position keeping it open.
Usually there are 3 main parts of the any trading platform. They are the balance, the equity and the margin. Let’s consider the example: the trader has 2 positions of $ 100,000 for each of them and $10,000 at his account. As there is 100:1 leverage the trader will need $1,000 to take control over the each position. Thus the left amount of the margin is $8,000. This money can be used to control another positions or keep the margin at the high level to provide some support for the positions held in case of certain decrease. In case trader will take another position of $100,000 he will need to pay another $1,000. In case trader will use the margin to support decreasing positions value he will lose this money in case of value decrease of these positions. So trader will have only $3,000 left at the account incase the positions will decrease by $4,000 in value.
In case trader has only one $100,000 position then he will spent $1,000 to control it and probably use the left money to support the margin.
Transaction Costs and Market Makers
Market members accept the entrance of the retail traders at the forex market. When considering EURUSD the spread is usually 3 pips. And the exchange rate is shown in bid and offer prices. The difference of these prices in 3 pips can bring a great profit. The common position is $100,000 thus 3 pips means $30 paid by the trader to money members. The pip is 1/100th of the percent and traders usually buy 100,000 of the counter currency. For example in the currency pair EURUSD the base currency is the USD and the pip is 1/100 of a percent means it will always amount in $10. However in case you base currency is the Swiss Frank then the pip amount will be $8 as trader purchases 100,000 equivalent of the Swiss Franc.
Financial Instruments
Most used financial instruments:
Forwards – means a transaction between buyer and seller that have defined a certain exchange rate somewhere in the future. Transaction will be made on that day no matter what the rates will be. The period of such deal can last for several years.
Futures – are almost the same as forwards but completed with contract and certain terms. For instance, 100,000 of British pounds for the next March at the defined rate. Futures can be traded at the Exchanges. The period of the contract term may last about 3 months. These contracts may include any interests amounts.
Swaps – also is a forward transaction when buyer and seller exchange currencies and have defined that they will return those currencies back to each other. Swaps cannot be traded at the exchanges.
Spot – short term transaction (commonly made for the 2-3 days). It means that buyer and seller simply exchange the currency. Usually such deals are made in cash and interests are not included.
The Difference Between Spot and Futures in Forex
Futures are commonly supplied with a contract lasting up to 3 months. Spots, on the contrary, last for a short period of time. The initial intention of the Futures was to hedge risks and get profit from the situation that will occur at the market in the future and the Spots’ main assignment is to get profit from current market conditions. Spot commonly requires 2 days, this time was adopted with an aim to provide the party transporting the money the time to receive it. Basically the 2 days period is still active throughout the Forex transactions but in fact it is not used anymore. There is a certain time defined for closing and reopening the spots – it is 5 pm EST daily. The reason of doing so is to provide an unlimited time for the delivery. Let’s consider following example: a spot is opened on Monday thus its delivery day according to 2 days period is Wednesday. But at 5 pm EST this position is being closed and then reopened instantly thus the delivery day now becomes the Thursday. So such scheme enables investors to prolong the position for the unlimited period of time.
When considering Futures and Spots it is also important to mention the difference of how the interest is credited. There is intrinsic interest rate for each currency involved into Forex transaction. For example, the USD interest rate is the Federal Funds Rate. The interest is usually added every day no matter is the trades held or not. So, when we consider the Futures we talk about the interest that is included into the price of the contract. However, when we consider Spot we can see there are no interests added into the offering price, as the Spot is a part of cash market not a contract one. The scheme of crediting interest is not a new one and was already proposed by different bodies. Usually there used a method involving a crediting of the day’s worth of interest simultaneously with flipping the position or prolonging it for another day. So in case the spot is opened at 5:01 pm on Monday and is closed at 4:59 on Tuesday there will be no interests credited for this spot at all. However in case the Spot was opened at 4:59 on Tuesday and closed at 5:01 of the same day the interest will be credited in the full amount. Moreover there are such exceptions like following one: those traders involved only into the intra-day deals (also called as “day traders”) commonly do not use the interest at all.
