 How to Choose a Broker for the Six Different Currency Investments Part II
By Sean Hyman Yesterday, I told you how to play long-term trends in the currency market with unleveraged ETFs, ETNs, foreign bonds and CDs.
Now I want to tell you about how to earn thousands in just a few short weeks with short-term Forex spot trades and Forex options trades. These are high-leveraged plays that are made for the short-term (with trades lasting from minutes to a few weeks).
As with most leveraged investments, both options and Forex trades carry more risk - and they also carry higher rewards.
But frankly, Forex and options don’t trade exactly like your normal stocks or bonds, so setting up your brokerage account can be a bit confusing if you’re new to currency trading.
So let’s end the confusion right here. Today, I’ll tell you how to set up your account so you can jump into either the Forex or the Currency Options market right now.
Spot Forex - The Largest, Most Liquid
Market in the World, But You Need
a Special Broker to Trade
Let’s first discuss my favorite - the spot Forex market.
The Forex market is technically the world’s largest market, where currencies are traded 24 hours a day, six days a week. This market has more volume than all stock markets of the world combined, so it’s by far the most liquid market in the world.
In the Forex market, you’re always trading currency pairs - one currency against another (for example, you might trade the euro vs. the dollar, the EUR/USD).
You’re also trading with leverage, which means you invest a little to control a greater amount of currency. Most Forex brokers (i.e. “market makers”) can trade up to 15-30 currency pairs for you with leverage.
So where in the world do you trade these? First, you have to establish a relationship with a market maker who trades the Forex market. This is important: You need a special FX dealer because most regular stock brokers can NOT trade in the Forex market.
Some traders call Forex dealers “brokers,” but they’re officially known as “market makers” because they are not really “brokering” a trade but rather “making a market” for your trade.
So how do you choose a FX market maker? First, you need to choose an FX dealer firm.
Look at the dealer’s size first. Go with a bigger firm that’s well-capitalized.
Also, ideally you want to go with a “no dealing desk” market maker that has fairly tight spreads (vs. a dealing desk broker that takes the other side of your trade and wins when their clients - i.e. you - lose).
Spreads are important because that’s how you pay your market maker to execute the trades. You don’t pay ANY commissions to buy or sell - you simply pay the spread per trade.
You also want a market maker that’s regulated by some government body. In the spot Forex market, it’s important to find out where they are regulated.
The tightly regulated places are the U.S., Canada, the U.K., and Hong Kong. So if they aren’t regulated by one of these…then I’d suggest not using them. You want them to be tightly regulated and watched over.
Also, be sure your prospective market maker offers stellar 24-hour customer service. Don’t be afraid to ask questions about their size, dealing desks and customer service.
Currency Options -
Traded on Highly Regulated Exchanges with Your Normal Stock Broker
So what are Forex options (aka currency options)? Forex options are options based off of a currency pair in the spot Forex market.
The advantage of an option contract is that you put down little money and control a sizable position. This means you have the opportunity to make large double or triple-digit gains in a very short period of time - just like in the Forex spot market.
The other advantage is that currency options trade just like regular stock options on the Nasdaq OMX exchange. So if you’re already familiar with stock options, currency options are generally easier to trade because the “trading lingo” is the same.
Also, unlike Forex trades, you only ever risk your initial investment. For instance, if you paid let’s say US$500 for a specific option contract, you only risk that initial US$500, no matter what the markets do. In other words, your risk is strictly limited.
The downside of an option contract is that every option contract eventually expires, whereas trades in the spot Forex trade NEVER expire. In spot Forex, you just still have to have the margin left to continue to support the position. This is why I personally prefer Forex.
But with that said, let me discuss why some traders still choose to go this route.
To me, the advantage lies in what brokers you can use and where the instrument trades. You can trade currency options through the exact same stock brokerage account that you already have - as long as they trade options.
All you need to do (if you haven’t already) is to ask your broker to give you the form to fill out to make the account “optionable.” That means that they give you the proper disclosure about risks, etc. Then you simply fill out the form, and your normal broker can prepare your account to trade options.
Then, you can buy a call or a put on six major currencies: the euro, British pound, Japanese yen, Swiss franc, Canadian dollar and the Australian dollar.
All these options are traded against the dollar by default. So buying a euro call option is like buying the euro/dollar pair (EUR/USD) in the spot Forex market. |
