This area is for discussion of the "Spot FX" market, commonly called "Forex".

A few points are important to understand if you intend to trade in this area. As someone who occasionally dabbles in trading these markets, here are the important points as I see it.

There is no "commission" paid on trades, or so you are told. However, there is a "pip" spread, and that USUALLY is much higher than a normal stock commission when one considers ACTUAL costs!

An example will make this clear - let's say that the Yen/Dollar cross is at 110.00, and the "spread" is 3 pips; you buy at 110.00 and sell at 109.97.

This looks like 3/100ths of 1%, which appears to be incredible.

Its not quite what it looks like though, for two reasons.

First, leverage in the FX markets is typically 100:1. That is, you have a $500 margin requirement to gear $50,000 in currency. So multiply the effective cost by your gearing, and suddenly, its 3%.

Second, if you hold a position open (instead of popping in and out) you will get "rolled over" and a spread is charged on each rollover transaction!

In other words the longer you hold a position the more it costs you!

So in reality while the "paper" fee looks cheap, in reality it can be extremely expensive, and holding positions open can get ruinously expensive unless the move continues your way. For the same reason, if you trade in and out without the market moving you will find that this spread, when multiplied by your leverage, chews up your capital at an alarming rate.

Second, and potentially far more importantly, there are all sorts of accusations running around about "bucket shops" in the spot FX market. I cannot verify or refute any of these claims, but it is something to be aware of, because if you get caught in one of these bear traps your leg will be chewed off.

What's a "bucket shop"? It is a practice where instead of actually putting your order out on the market the broker instead matches your order internally and often maintains its own spread that is disadvantageous, either outright or just due to delay, than the market represents at a given point in time.

Essentially, you are trading against your broker - not against the market! And if they control your quotes as well......

The result of this is that the brokerage not only makes the spread but also a margin which is "hidden" from you, and by controlling the information flow it is trivial for them to rig the game so that they cannot lose (but you almost always will!)

One example of the sort of game that can be run on you is, for example, if you have a stop at 110.20 on a Yen/$ short, if they're "bucketing" your orders they can present a "quote" of 110.21 - tripping your stop and causing you to eat the loss. But that 110.21 execution never actually crossed on the market itself!

This is extremely difficult to detect, especially if your source of current quotes IS your brokerage, and for most people - it is! Making it worse is that the Spot FX market is an all-electronic and very thinly regulated marketplace, meaning that there is no central place where the bid/ask must be posted (such as there is on the Nasdaq, NYSE or Amex.)

For this reason choosing your brokerage is extremely important. In the option and equity markets regulation is fairly consistent and this sort of thing is rare. Regulation on the spot FX market is far more "spotty" and rumors abound of this sort of abuse, but determining whether such a charge is warranted is almost impossible as there is no centralized and controlled source of data against which you can compare.

Finally, the leverage usually offered to retail customers is 100:1. This means that being "wrong" becomes very expensive very fast.

Some FX brokerages claim to be "margin call proof"; that is, they will protect your positions internally such that you cannot receive a margin call. Of course that doesn't prevent your account from going to zero - just from going negative!

In short, read carefully and investigate carefully before trading. The FX market moves very quickly and can be quite lucurative, but it inherently is a "hit and run" market due to the rolling nature of the spread hit.

Most active traders in any market lose money, and yet the Spot FX market, due to how it is funded, basically demands that you BE an active trader to be able to participate at all.

Enjoy speculating if this is "your game", but speculate wisely.....