FX Still a Great Market

03/11/2013 1:00 pm EST

Focus: FOREX

Rob Booker

Host, The Trader's Podcast

FX trader and author Rob Booker discusses the new global regulations in the FX markets and whether this makes these markets less attractive for new traders.

My guest today is Rob Booker.  We are talking about the regulations in the forex industry these days and has it harmed US trading in forex.  Rob, a lot of different rules have come out now, a lot of forex brokers have gone overseas because they don't want to have to have $20 million in the bank or these sort of things.  How is this going to affect forex trading in the US long term?

The regulatory environment is more restrictive than ever before all around the world; it is not just in the United States.  The regulatory environment in Australia is not that far behind. The regulatory environment in Britain as it relates to forex trading is right in line with the United States.  The regulatory environment in Japan is actually ahead of the US; they are more restrictive now than ever before.  So the question is have the regulators really cracked down on currency trading so strongly that it really doesn't make sense to trade it anymore?  The regulations are affecting leverage and they may even affect account size necessary to trade or day trade forex.  So the question is really are they going to make it impossible for traders to engage in this market activity? 

The dirty little secret is the leverage available in forex is still significantly better than the leverage available in equities, even better than the leverage available in options, and it is similar to the leverage available in the world of futures trading, but you can do it with a smaller account size.  So I tell people all the time you can hear all kinds of stuff about forex trading; it is too volatile or it is unregulated, or it is the Wild West of trading, and meanwhile, continually we see forex traders getting a ton of experience with small account sizes, a ton of experience in quick moving markets, equally tradable technical patterns, a wonderful universe of economic reports and fundamentals to focus on.  I still think it is the richest, most volatile, most interesting market that anyone can trade. 

Now there was a lot of uproar about not having 400 to 1 leverage and people that could open an account with $25, but have you ever seen anybody make money with a $25 account and 400 to 1 leverage?  That just seems crazy to me. 

Yeah, and the real great thing about 400 to 1 leverage was that it provided the same stimulating experience that gambling provides. So, why did people love it?  They loved it for the thrill.  I loved it for the thrill, Tim.  I mean, I had my accounts that I used that were highly leveraged and it was enjoyable and you could apply all these wonderful techniques in the world of trading, but you could really try to make a lot of money in a short period of time.  For those of us that have been in the business for 10, 12, 15 years, we are still trading our bread and butter systems with lower leverage; 10 to 1, 5 to 1, 20 to 1, and if you want to be in the business for a long time, you can still make a whole lot of money with those kinds of numbers. 

Alright, now with the MF Global and the PFG thing, the trouble is, though, that even on an exchange traded product you have fraud in the market and those are much more highly regulated, yet those are where we had problems. 

For years, I heard about how dangerous forex trading was related to futures trading, but we have seen now twice in a row, MF Global and PFG, we have seen two firms go under that were guided by very strong individuals, or in the case of PFG, wholly owned by a single individual and we found out that it didn't really matter what product you traded; it mattered where you traded that product.  I have been recommending to traders for quite some time now, especially in the wake of MF Global, and with no doubt about it, after PFG, never trade with a firm that is wholly owned by one single individual. 

I'm not speaking about any firm with specifics, but listen, never trade with a firm that is owned by one individual, never trade with a firm that doesn't have the financial backing of the public markets; trade with a firm that is either publicly traded or has access to the capital of a larger parent company.  So you will see firms in the futures business and in the world of forex that are wholly owned subsidiaries now of either publicly traded companies in the US or large financial conglomerates.  These are the places that you want to trade; they are a little bit safer.  There is no surer thing in the world of trading, but you never want to trade with a firm that is run by one guy who either has the strongest personality in the world like, Jon Corzine, or who owns the whole shop, in the case of Russell Wasendorf at PFG.

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