The forex (FOReign EXchange) markets are very popular day trading markets. The forex markets are cash markets where one currency is traded against another currency, such as the EURUSD (Euro to US Dollar) market or the EURGBP (Euro to British Pound) market.
The forex markets are based upon the exchange rates of the different currencies, and are available for all of the major currencies. Some of the most actively traded forex markets are the EURUSD, the GBPUSD (also known as cable), and the USDJPY (US Dollar to Japanese Yen). The forex markets are traded 24 hours per day from Monday morning in New Zealand until Friday night in the US.
Forex Market Pitfalls
In theory, the forex markets are traded just like any other market, but there are some significant differences that need to be considered. Some of these differences are negligible, but some will make a big difference to your profit and loss, and need to be understood before the forex markets are traded.
The forex markets are not offered by any exchange (such as the CME in the US, or the DTB is Europe). They are decentralized markets, where each transaction is conducted directly between the traders involved. This would normally be fine, but without an exchange to regulate the markets, the forex markets are more vulnerable to manipulation by market makers.
Market makers are usually retail forex brokers, but in reality they are traders that set their own prices for a particular market. Market makers make their profit from the difference between the prices that they receive and the prices that they offer. This means that traders that trade with the market makers are not receiving the best available price for their trades.
Retail Forex Brokers
Retail forex brokers are brokerages that cater specifically to individual traders. Retail forex brokers often advertise their services as commission free, and will sometimes try and explain why their being a market maker is an advantage for you. This is completely incorrect, and these types of brokerages (which they really are not) should be avoided.
Retail forex brokers make their profit by making their own market (hence the name market maker). For example, if the actual bid and ask prices of the EURUSD market are 1.2567 and 1.2568, a retail forex broker might offer 1.2566 and 1.2569 to their customers. This allows them to keep the two pips difference as profit for themselves.
In addition to fixing the prices, retail forex brokers also trade against their customers. For example, if a trader is long the GBPUSD market at 1.5674, and the market has moved against their trade to 1.5628, a retail forex broker might offer a lower price of 1.5624 to the trader. If the trader then exits their trade, there is a four pip difference between the actual price and the trader's price, which the retail forex broker keeps as their profit.
Another problem with retail forex brokers is that they have access to all of their customers orders, including entries, targets, and stop losses. This means that they can make their own trades specifically to take advantage of the trader's orders. For example, if a trader is long the EURGBP market at 0.6712, and has a target order at 0.6812, a retail forex broker might keep the prices artifically low, so that when the market reaches the trader's target order, there is a five pip difference between the actual price and the trader's price. The retail forex broker would then go short at the real price of 0.6815, while filling the trader's target order at 0.6812, and keep the five pips difference as their own profit.
These are just some of the ways that retail forex brokers manipulate the forex markets to take profit away from individual traders.
Conclusion
The forex markets can be traded by individual traders, just not through retail forex brokers. Day traders that are interested in trading the forex markets need to make sure that they are using a reputable brokerage that makes their profit from commissions rather than unscrupulous trades. All of the brokerages that are listed in the day trading site's brokerage profiles are decent brokerages, and can be used to trade the forex markets without the additional risks associated with retail forex brokers.
