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PAY THE FOREX SPREAD
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Forex prices, or quotes, include a bid and an ask, similar to other financial products. The bid is the price at which a dealer is willing to buy and traders can sell a currency. The ask is the price at which a dealer is willing to sell and traders can buy a currency. In forex trading, unlike futures or equities, one has to pay a PIP (percentage in points) spread on entering and on exiting a trade. The PIP spread is the point difference between the bid and the asking price of the spot currency price. This can vary between two and six PIPs, depending on the volume and the popularity of the cross currency.

A typical example is the euro (EUR) versus the U.S. dollar (USD). We will see a bid price on the EUR/USD of 1.2630 and an asking price of 1.2633, which means you are paying a three-PIP spread. The spread essentially works like this. You place a buy on the EUR/USD at 1.2633, but you won't see breakeven on the trade until the price moves to 1.2633 bid. If you are trading a mini-account, you will see a $3.00 deduction for your trade profit on entry. Once the price moves to 1.2633 bid, then your account comes out of the red and into the black. In an exotic cross such as the euro versus against the Japanese yen or the New Zealand dollar versus the Japanese yen, you might pay a higher bid-ask spread of 6 to 12 PIPs. You need to check with your forex dealer for the listing of PIP spreads per preset crosses and pairs trades.

WHAT ABOUT INTEREST

If you want to hold a position for several days, a rollover process is necessary. In the spot forex market, all trades must be settled within two busi ness days at the close of business at 5 P . M . (Eastern Standard Time, EST). The only fee involved here is the interest payment on the position of cur rency held. At times, depending on the position, you can receive an interest payment as well. This is where the term tomorrow/next (Tom/Next) ap plies. It refers to the simultaneous buying and selling of a currency for de livery the following day. As with futures, the forex market is now regulated to an extent and comes under the scrutiny of the self-imposed regulators, such as the National Futures Association after the Commodity Futures Trading Commission (CFTC) Modernization Act passed in 2002; but since there is no centralized marketplace, many forex dealers can and do make their own rules and policies. Because forex dealers are in the business to make money and to provide a service for traders, some firms will charge interest on your account but not make an interest payment to your account unless you meet certain financial requirements. Again, because these deal ers are in the business to make money, I have heard stories that some will even increase the interest charge by more than double the going rate; and if they do give a credit offer, the rate will be below what the market is really at.

Since most traders in forex are short term in nature, by settling up or closing out their positions by 5 P . M . (EST), they are not generally concerned with the interest rate charge aspect. Also, unless they have serious posi tions on (over $1,000,000 value), the interest charge will be minimal anyway and not something that should distract from the job at hand, which is trading. My advice is this: Do your homework when looking for the right dealer to trade through and ask questions regarding interest charge policies when holding positions for several days.

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