Forex ... Hasta La Vista Baby
If you're like me and spend any time watching financial news networks, you have been subjected to thousands of forex (FX, or foreign exchange/currency market) commercials.
"Learn forex trading," "trade currencies," "make a steady income with forex," "just click and trade," "I made $18,252 profit in 20 days" ... these are just a few of the commercials you hear in a typical month, really! Literally millions of dollars have been spent introducing the public to a market that was never intended for small investors.
All I can say is ... "Hasta La Vista, Baby."
With the help of the National Futures Association (NFA), trading the forex for smaller American investors just became more difficult and probably more expensive. The rules introduced are so absurd that many forex brokerages are now encouraging their customers to move their accounts overseas where the new NFA rules do not apply. (The rules took effect on Aug. 1.)
Bye-Bye 'Little Guys'...
Many traders like to hedge their positions by opening several positions at once and deciding which one(s) to close. With the new NFA requirements, hedging is no longer an option. Instead, orders will be closed on a FIFO (First In, First Out) basis for RETAIL customers.
Retail customers, get it -- not institutional.
Let's see how this works. Trader Joe purchases 200,000 of the EUR/USD currency pair (i.e., simultaneously buying the euro and shorting the U.S. dollar) at 8 a.m. at price X. And then at 11 a.m., he purchases another 200,000 EUR/USD at price Y.
Maybe the 11 a.m. trade was at a lower price and he wants to add to his position. Combined, he has 400,000 EUR/USD. He averages the two prices to determine his profit.
Before Aug. 1, Joe could decide to close out the 11 a.m. trade and keep the 8 a.m. trade. However, now Joe must close his 8 a.m. trade before he can close the 11 a.m. trade.
Seems arbitrary, doesn't it?
Again, this rule (in fine print) applies to retail customers, not larger institutions.
Is that a misprint? A coincidence?
Here's another problem. Retail customers ordinarily trade with what is known as stop-loss and an order known as an OCO (Order Cancels Order). It is a feature built into desktop-trading platforms.
Joe buys at the current price. He then enters an offer to sell at a higher price for profit right away. And, to protect himself, he enters another sell order at a price lower than his entry price just in case the market moves against him, his "stop-loss" order.
Neither trade executes right away but are offers to sell only. Whichever order price gets hit first is what determines Joe's profit. If the profit target is reached, he gains. But if the price reaches the stop-loss before the profit target is reached, he loses.
Sayonara, Safety Net
Also effective Aug. 1, stop-loss orders are no longer allowed. Instead, brokerages are telling their clients they need to make two new "Sell Entry Orders," one that sells higher than the original buy order and one that sells lower than the original buy order. The new Sell Entry Orders have nothing to do with the original buy order.
Here's the rub. ...
Since these are both entry orders, there is a chance that both orders could be triggered if the market moves up and down quickly, resulting in the original buy order being closed but a new short order being opened. Stop-loss orders were always linked to buy orders. These new orders are not linked to any existing order because the new rule forbids that. Very weird and dangerous.
Another significant change is OCO orders. Joe buys at current price and sets up his stop-loss and profit target trades to exit. With OCO, one order cancels another order. So, if the stop-loss is executed before the profit trade, the profit trade order is automatically canceled. If the profit trade is executed before the stop-loss, the stop-loss order is automatically canceled.
The NFA says, nope, you can't do this any more ... to retail customers.
It would seem that the simple handling here, if you really want to continue trading the forex, is to move your account to a European brokerage and use stop-losses and profit targets.
I Have a Better Idea
Better yet, get out of the forex market altogether and trade the Currency Pairs Futures executing on the Chicago Mercantile Exchange (CME). Futures allow retail customers to enter stop-losses, OCO orders, etc.
One can only assume that the purpose of all these "new features" is to get rid of retail customers and just have institutions trading the forex as it was originally designed. Had it not been for the millions spent on advertising, only institutions would be trading forex today.
As a result of these new regulations, chances are that the trading volume in the futures market will pick up significantly. Many traders do not like having their accounts overseas. and they definitely want to trade with stop-losses and OCO orders.
Bottom line ... we can all hope that the number of forex commercials slows down dramatically with the NFA's new rules. But, God forbid, they start advertising futures trading. Fortunately, you rarely ever see "trade futures" commercials.
If you're ready to jump ship from the forex markets and/or get started in futures, there are plenty of profits for all of us, and without all those crazy new rules!
Barbara Cohen
Contributing Editor
The Tycoon Report
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