With the advent of the internet, speculative investing has entered realms where retail traders had hitherto been, if not excluded, severely discouraged. Nowhere is this more evident than in the case of the Forex (FX) arena.

FX trading as we know it today came into being in the early 1970's when the US removed backing of the US$ from Gold abandoning the Bretton Woods agreement and "pegged" currencies completely. A broad and active FX market rapidly developed and the rest is history.

Prior to the past two years or so, spot FX trading was very much the realm of interbank, instiutional and corporate accounts. There was, and still is, of course and active futures market place at the IMM in Chicago for example , which caters in large part to small speculators.

Certainly this is a viable venue, but as is typical of futures markets, there are a number of constrictions in the form of fixed delivery months and premiums/discounts to spot prices and the like which have limited its appeal.

It may be purely coincidental but the real "explosion" in interest and popularity in retail FX trading has come in the past year following the collapse in global equity prices as evidenced by the proliferation in available trading platforms. This may simply be a function of small speculators "going where the action is" or perhaps an indication of broadening interest in alternative investments vehicles. Whatever the reason the fact remains more and more retail traders are entering the FX arena daily.

I make no pretense of offering up a definitive guide to FX trading or how to make your fortune in this fascinating vehicle. What I do hope to accomplish is to look at the many factors that make FX and attractive alternative investment vehicle and to outline some thoughts on how to survive in what is quite possibly the last bastion of free enterprise.

Newly added: The following is dialogue posted recently on the OANDA website. It addresses an issue I have been asked about several times in recent weeks and is in my opinion the definitive answer to not only the question of "Stocks vs Forex" but also very nicely the question of "Why trade Forex?".

bandsma Member posted December 28, 2001 08:37

It really depends on how you want to trade, what your investment goals are, and how much risk you are willing to take.

If you want to actively trade you need to look at transaction costs. In a trading environment such as Oanda the transaction costs are relatively small. You just have to cover the bid/ask spread, i.e. about $.30 per $1000 on the EUR/USD pair.

Trading stocks is comparatively more expensive. Not only do you have to cover a bid/ask spread but you also have to cover broker commissions in and out of the trade. Microsoft, a heavily traded stock which should have a tight spread, is trading right now at $67.85/82. That works out to about $.44 per $1000 invested. Last I checked the cheapest commission rate was around $10 a trade. This works out so that on a $1000 investment you need a 2% change in Microsoft to cover you trade verses only needing .03% change in the EUR/USD to cover your trade.

Stocks for the most part provide consistent long-term returns. I believe on average stocks have returned 6% year-over-year. If you just want to buy and hold your best bet is to buy stocks. Currencies on the other hand don't have a consistent expected return. What your doing is trying to make money by heavily leveraging your position and riding the waves of mostly small day to day fluctuations in exchange rates. There isn't any money to be made by say, buying Euros and holding on to them for 20 years.

Because you are heavily leveraged to make money on a day to day basis, when the exchange rates really begin to move you can loose most of your money in a couple days.

Ultimately it depends on what your goals are. If you want make a living as a trader I would consider the cost of doing business, i.e. the spread and commissions, and go with trading currencies. If your looking for a good investment for your IRA go with stocks and don't day trade.