THE ADVANTAGES OF THE FOREX MARKET

THE ADVANTAGES OF THE FOREX MARKET
The Forex market enjoys unparalleled advantages. You will find
that some markets share similar advantages, but no one market on
Profiting with Forex 3
earth comes close to rivaling the protection, profit potential, and
ease of use available in the Forex market. Take a look at the advantages
you can find within the Forex market.
Market Size
The Forex market is the largest financial market in the world. (See
Figure 1.1.) Nearly $2 trillion change hands every day. To give you
an idea of what an awesome number that is, the New York Stock
Exchange experienced record volume during the third quarter of
1998 and cleared only $1.9 trillion in volume—60 times less than the
Forex market clears in a quarter. Being the largest financial market
in the world is advantageous; it makes buying and selling currencies
extremely easy because there are so many buyers and sellers out
there. Imagine that you are trying to sell your home, and you had
thousands of people standing at your front door—cash in hand—
ready to buy the house. It wouldn’t be too tough to sell the house.
The second advantage of the size of the Forex market is that
investors are unable to manipulate it. Since potential manipulation
is virtually nonexistent, you can be confident that the prices you
are getting in the Forex market are fair prices.
4 CHAPTER 1
F I G U R E 1.1
Market size comparison (in millions of US$)
Source: Ouroboros Capital Management, LLC
2,000,000
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Daily Forex Volume
Canadian GDP 2004
Total US$ Reserves
Daily U.S. Futures
Daily NYSE
960,000
760,000
41,304 31,667
1,900,000
Ease of Entry
You do not have to be rich to trade in the Forex market. Everybody
deserves to be able to protect his or her financial future, and the
Forex market makes this possible by offering an extremely low
barrier to entry. In fact, you can open a Forex account with as little
as $300.
Profit Potential
It doesn’t matter if the value of the U.S. dollar is going up or down.
You can make money in the Forex market. If you think its value is
going up, you simply buy the U.S. dollar and make money all the
way up. If you think its value is going down, you simply sell the U.S.
dollar and make money all the way down.
Tax Advantages
When you invest in most financial markets, you must pay short-term
capital gains tax if you take your profits within one year of purchasing
a security. If you hold the security for more than one year
before taking your profits, you must pay long-term capital gains tax.
Currently, short-term capital gains are taxed at your current tax rate,
and long-term capital gains are taxed at only 15 percent. Obviously,
it is much better to pay less in taxes. In the Forex market—much to
investors’ delight—it doesn’t matter if you take your profits one
minute after you enter a trade or one month after you enter a trade.
Sixty percent of your profits are taxed at long-term capital gains
rates, while only 40 percent of your profits are taxed at short-term
capital gains rates. That means you keep more of your profits in
your pockets.
For example, imagine you made $10,000 on a six-month trade
in the stock market and that you also made $10,000 on a six-month
trade in the Forex market. Both trades occurred in taxable accounts,
so you owe taxes on both. Assume you are in the 33 percent tax
bracket.
Tax Treatment of the Stock Market Since you entered and
exited your trade in the stock market within six months, you will
have to pay short-term capital gains tax. If you are in the 33 percent
tax bracket, you will have to pay 33 percent tax on of the profits. So
for a profit of $10,000, you will end up paying $3,300 in taxes.
Profiting with Forex 5
$10,000
33% = $3,300
While you did get to keep $6,700 of the original $10,000 profit,
it is never fun to pay taxes.
Tax Advantages of the Forex Market We all want to keep
as much of our profit as we possibly can, and the Forex market allows
us to do that. Even though you entered and exited your trade in the
Forex market within six months—just as you did for your stock
trade—only a portion (40 percent) of your profits is taxed as shortterm
capital gains. The remaining 60 percent of your profits get the
benefit of being taxed as long-term capital gains. This means that
you will have to pay 33 percent on only $4,000 and—according to
current long-term capital gains rates—15 percent on $6,000.
Portion Taxed as Short-Term Capital Gains
$10,000
40% = $4,000
$4,000
33% = $1,320
Portion Taxed as Long-Term Capital Gains
$10,000
60% = $6,000
$6,000
15% = $900
Total Taxes Paid
$1,320 + $900 = $2,220
You would have to pay only $2,220 with your Forex trade compared
to the $3,300 you would have to pay with your stock trade.
That is a savings of slightly more than 35 percent. Tax savings like
that can add up quickly.
You can also accumulate profits quickly by investing in the
Forex market within your IRA or other tax-deferred retirement
account. Many investors are unaware they can trade anything but
stocks and mutual funds within their retirement accounts because
their brokers have conditioned them to focus only on these asset
categories. Some brokers don’t want to deal with the extra work
that would come from allowing you to invest more freely. It isn’t
advantageous for them. On the other hand, other brokers believe
that you should be able to choose where you put your money.
Check with your brokerage firm and see if it offers self-directed
options in its retirement accounts.
6 CHAPTER 1
Trading Hours
The Forex market is open 24 hours a day nearly 51⁄2 days a week.
It doesn’t matter if you’re working or retired, a homemaker or a
student, you can find a time that works for you to get involved in
the Forex market. In fact, the Forex market is usually most active
early in the morning and late and night. There are many part-time
traders who are able to use these varied hours of market activity to
their advantage by trading when they are not at work. The varied
trading hours of the Forex market also benefit long-term investors
because these investors are able to enter and exit their positions
whenever the market dictates.
No Commissions
Every time you buy a stock, a bond, a mutual fund, or a home, you
are paying someone somewhere a commission. In the Forex market,
however, you never have to pay a commission. The price you see is
the price you get. You don’t have to factor in a little extra for the
broker. You simply pay the listed price. No more, no less.
Increased Leverage
The Forex market allows you to control $100,000 with as little as
$1,000. This means that you can make your money work harder for
you in the Forex market than it can anywhere else. Imagine. You
can keep all the profits from a $100,000 trade, and all you have to
do is provide 1 percent of the money.
To put this in perspective, imagine that you are a real estate
investor, and you see a $300,000 home that you believe is going to
increase in value. If you could use the same amount of leverage in
the real estate market as you can in the Forex market, you could
buy that house with only $3,000 down and a potentially interestfree
loan. That would be incredible. Any real estate investor in the
country would do anything to get that kind of a deal, and that is
exactly the opportunity you have in the Forex market.
Increased leverage is also the point that well-intentioned, but
misinformed people point to when they say that investing in the
Forex market is risky. Granted, this amount of leverage may seem
aggressive, but the Forex market gives you the perfect antidote for
the risks associated with increased leverage: guaranteed stops.
Profiting with Forex 7
Guaranteed Stops
You have the ability in the Forex market to determine at exactly
which price you would like to enter a trade and at exactly which price
you would like to exit a trade—and these prices are guaranteed. A
stop, or stop-loss order, is an order you place that instructs your
broker to exit your trade if the price ever drops to a certain level.
Think of a stop-loss order as a stop sign for your trade. If your trade
ever reaches the stop sign—the price at which you would like to
exit your trade—it immediately stops and exits so you can protect
your money.
Guaranteed stops allow you to specify exactly how much you
are willing to risk. Even though you are using great leverage, you still
have the power to get out of a trade at any price you wish. You
can’t say that about the stock market. Sure, you can enter a stop order
to take you out of a trade if the stock starts to move down, but you
have no guarantee that you will get out at a certain price. It is really
the luck of the draw for stocks. Not so in the Forex market. You have
guaranteed stops under normal market conditions. There are some
extreme events—like the outbreak of a war or extremely unexpected
economic announcements—that may cause some slippage, but we
have never personally experienced this.
MIND THE GAPS
If you’ve ever been to London and ridden the London underground,
you are familiar with the charming reminder to “mind the gap.” Every
time the doors of the trains open, a soothing voice comes over the
loud speaker and tells you to “mind the gap.” This statement reminds
you to watch your step as you step into and out of the trains because
there is a gap between the train and the platform. Of course, this is
just common sense. Nobody wants to plunge a leg down a ravine
between a concrete platform and a steel train. Unfortunately, the
ravines that exist in the investment landscape are not as apparent
and aren’t usually accompanied by courteous warnings of potential
danger.
The key to developing and maintaining a well-balanced portfolio
is learning how to mind and fill the gaps that are inherent in
any market. Every market has gaps—the Forex included. But let’s
say you’re investing in mutual funds in the stock market; you’ve
made some great profits, but you’d like to fill some of the gaps. You
will have to look outside the stock market to find the solution.
8 CHAPTER 1
One gap that exists with mutual funds is that you can’t buy or
sell them until the market closes for the day. This can pose a problem
on days when the market is rising quickly because you end up missing
out on all of the positive movement. If you are investing in the
Forex market, however, you can fill that gap because you can profit
from your Forex trades while you are waiting to get into your mutual
fund trades. You can fill the same gap when the stock market drops
quickly. You can make money in your Forex trades to offset the
losses you would incur in your mutual fund trades.
The Forex market offers unparalleled advantages. Many other
financial markets offer some of the same advantages, but the Forex
market offers them all. The Forex is the solution for the gaps in three
widely used financial markets: the stock market, the bond market,
and the futures market. Each of these markets offers the potential for
making money, but once you see how they stack up against the Forex
market, you’ll be wondering why you haven’t added the Forex market
to your investing arsenal already.
The gaps you will see in all three markets are:
Commissions
Market hours
Liquidity
Taxes
Bear (downtrending) markets
Analysis overload