Forex trading today is an extremely popular and profitable venture and the term forex is used to refer to the practice of currency trading. At present the forex trading market trades into billions on a daily basis and its growth prospects are quite high.
In order to have an idea about the way of functioning of the forex trading market, it is necessary to understand the entire process of currency trading. In this case, it must be pointed out that currency trading involves the evaluation of the value of the currency of a country in comparison with another.
Forex evaluation
Here the currency which is first registered for trading is referred to as the base currency. While it is clear that in order to trade currencies in the forex trading market a certain degree of evaluation is necessary, one must note that this valuation is done on the basis of what is known as exchange rate or exchange value and it is this exchange rate which is the determining factor in case of currency trading.
The exchange value may be regarded as the relative value since it is that value which enables one currency to express itself in terms of another foreign currency. It is necessary to note here that the relative value is not a constant factor which is dictated by certain centralized authority but rather its value changes from time to time according to fluctuations recorded amidst the market forces.
Forex research
Extensive research has revealed that there are mainly two major factors which may contribute to changes in the value of the exchange rate. It is a well-known fact that all forms of monetary transactions in the different financial markets are governed by predictions and assumptions and most of the traders engage in trading by assuming whether a particular currency will record a rise or fall based on certain factors.
For example various political and economic factors of a nation may greatly alter the rise and fall of currencies in the financial markets and this in their turn may suitable affect the exchange rates. Another important factor is commonly faced by tourists.
This is because tourists in a foreign country are required to convert their domestic currencies in favor of the currency of the foreign country and therefore all future transactions in that foreign country has to be made according to the value of the foreign currency.
Spot transactions
There are certain key terms which are vital and necessary to note in case of indulging or participating in forex trading. ‘Spot transactions’ are used to refer to such contracts which are concluded on a short term basis and may involve direct transaction between two foreign currencies in future depending upon the availability of funds.
While the level of risks involved in case of forex trading is slightly lower than those involved while dealing in stock exchanges, it must be noted that there always remains a certain proportion of risk involved and ‘forward transactions’ are a means of countering the risks that may be entailed while trading in foreign exchange.
Those forward transactions which consist of short term contracts are known as ‘foreign currency futures.’
Friday, October 23, 2009
Forex Trading The Relationship between Commodities and the Foreign Exchange Market
Gold and oil in particular have an important relationship with the forex market, and can be used as leading indicators in forex trading. Four major currencies are considered to be the closest tied to commodity prices - the Australian Dollar, the Canadian Dollar, the New Zealand Dollar and the Swiss Franc.
Gold and it's relationship to the Forex Market
While the US is the world's second largest producer of gold, after South Africa, gold normally does not move in line with the US Dollar, rather they tend to have an inverse relationship. This is because during periods of geopolitical uncertainty traders tend to migrate away from the US Dollar and towards gold as a safe haven.
In the world of Forex, no major currency is considered to be as safe and stable as the Swiss Franc. The political neutrality of the Swiss and the fact that 40% of its currency reserves were previously backed by gold underpin the Swiss Franc's image as being a safe haven during periods of uncertainty. For these reasons the CHF/USD has a strong positive correlation with gold prices.
The AUD/USD, NZD/USD, USD/CHF currency pairs tend to trade in line with gold the closest, due to the other currency having close political and natural ties to gold.
Oil and it's relationship to the Forex Market
Canada's total crude oil reserves stand in second place behind Saudi Arabia. The Canadian Dollar is the currency most influenced by rising oil prices- if oil prices rise the CAD is likely to closely follow. Rising oil prices benefit the Canadian economy as it takes in more money for oil and raises profits for domestic oil companies. The US imports 85% of Canada's oil exports. Rising oil prices have in part caused the Canadian dollar to rise to a 28 year high against the US dollar.
Gold and it's relationship to the Forex Market
While the US is the world's second largest producer of gold, after South Africa, gold normally does not move in line with the US Dollar, rather they tend to have an inverse relationship. This is because during periods of geopolitical uncertainty traders tend to migrate away from the US Dollar and towards gold as a safe haven.
In the world of Forex, no major currency is considered to be as safe and stable as the Swiss Franc. The political neutrality of the Swiss and the fact that 40% of its currency reserves were previously backed by gold underpin the Swiss Franc's image as being a safe haven during periods of uncertainty. For these reasons the CHF/USD has a strong positive correlation with gold prices.
The AUD/USD, NZD/USD, USD/CHF currency pairs tend to trade in line with gold the closest, due to the other currency having close political and natural ties to gold.
Oil and it's relationship to the Forex Market
Canada's total crude oil reserves stand in second place behind Saudi Arabia. The Canadian Dollar is the currency most influenced by rising oil prices- if oil prices rise the CAD is likely to closely follow. Rising oil prices benefit the Canadian economy as it takes in more money for oil and raises profits for domestic oil companies. The US imports 85% of Canada's oil exports. Rising oil prices have in part caused the Canadian dollar to rise to a 28 year high against the US dollar.
Forex Trading Understanding Forex Quotes
Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.
When the U.S. dollar is the base unit and a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.
The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.
In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.
In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.
Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.
When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'offer'. The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency). The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).
Forex Trading Forex Trading Regulation
Other Issues to Consider
In addition to understanding how the off-exchange forex market works and some of the risks associated with this product, there are other unique features about the market that you need to understand before you decide whether to invest in this market and which dealer to use.
Who regulates off-exchange foreign currency trading?
The CFTC has some regulatory authority over retail off-exchange forex markets. The Commodity Exchange Act (CEA) allows the sale of OTC forex futures and options to retail customers if, and only if, the counterparty (the person on the other side of the transaction) is a regulated entity. These regulated entities include the following: financial institutions, such as banks and savings associations, registered broker-dealers and certain of their affiliates, registered futures commission merchants (FCMs) and certain of their affiliates, certain insurance companies and their regulated affiliatess financial holding companies, and investment bank holding companies. Under the CEA, the CFTC has the authority to shut down any unregulated entity that acts as a counterparty to forex futures oroptions transactions with retail customers. The CFTC also has the authority to take action against registered FCMs and their affiliates for violating the anti-fraud and anti-manipulation pro-visions of the CEA in connection with OTC forex transactionsinvolving retail customers, but the CFTC cannot adopt rules toregulate these transactions. NFA has rules to protect customers in the retail off-exchange forex market. As mentioned later in this article, firms that introduce customers to forex dealers do not have to be regulated enti-ties. NFA’s rules provide, among other things, that a forex dealer FCM must take responsibility for the activities of unregulated entities that solicit retail customers. Additionally, NFA’s rules require forex dealer FCMs to: observe high standards of commercial honor and just and equitable principles of trade in connection with the retail forex business; supervise their employees and agents and any affiliates that act as counterparties to retail forex transactions; maintain a minimum net capital requirement based on the value of open customer positions; and collect security deposits from those customers. NFA’s forex rules do not apply to all FCMs and their affiliates, however. Therefore, you should ask the dealer if NFA regulates its forex activities.
In addition to understanding how the off-exchange forex market works and some of the risks associated with this product, there are other unique features about the market that you need to understand before you decide whether to invest in this market and which dealer to use.
Who regulates off-exchange foreign currency trading?
The CFTC has some regulatory authority over retail off-exchange forex markets. The Commodity Exchange Act (CEA) allows the sale of OTC forex futures and options to retail customers if, and only if, the counterparty (the person on the other side of the transaction) is a regulated entity. These regulated entities include the following: financial institutions, such as banks and savings associations, registered broker-dealers and certain of their affiliates, registered futures commission merchants (FCMs) and certain of their affiliates, certain insurance companies and their regulated affiliatess financial holding companies, and investment bank holding companies. Under the CEA, the CFTC has the authority to shut down any unregulated entity that acts as a counterparty to forex futures oroptions transactions with retail customers. The CFTC also has the authority to take action against registered FCMs and their affiliates for violating the anti-fraud and anti-manipulation pro-visions of the CEA in connection with OTC forex transactionsinvolving retail customers, but the CFTC cannot adopt rules toregulate these transactions. NFA has rules to protect customers in the retail off-exchange forex market. As mentioned later in this article, firms that introduce customers to forex dealers do not have to be regulated enti-ties. NFA’s rules provide, among other things, that a forex dealer FCM must take responsibility for the activities of unregulated entities that solicit retail customers. Additionally, NFA’s rules require forex dealer FCMs to: observe high standards of commercial honor and just and equitable principles of trade in connection with the retail forex business; supervise their employees and agents and any affiliates that act as counterparties to retail forex transactions; maintain a minimum net capital requirement based on the value of open customer positions; and collect security deposits from those customers. NFA’s forex rules do not apply to all FCMs and their affiliates, however. Therefore, you should ask the dealer if NFA regulates its forex activities.
Forex Auto Trading: An Escort to Achieve Millionaire Grade
There is no place in the world like Forex trading market to accomplish success in spawning oodles of money. The Foreign Exchange trading, popularly known as Forex, deals with purchase and sell of foreign currencies and thus, holds unleashed potential equivalent to share trading.
Businessman Going up
How does it Work
Forex trading is driven by the fluctuating forces existing in the currency market. These forces are capable of playing with the prices of currencies from different countries. Thus, there is a constant revision of the worth possessed by each currency.
* Investment in Forex trading is made by converting one currency into another during its deceased value phase on the run.
* When the prices of new currency climb new heights, the investor has the options to convert it back to the original form or alter it into other another currency.
Thus, keeping in mind the fact that nothing remains constant in this universe, one can expect to earn high yields on Forex trading investments. The prospective investors in this market must learn existing trends in Forex trading before making serious investments.
Essence of Forex Auto Trading
Forex auto trading is the latest buzz in the investment market. There are a number of automated software tools, which are taking the Forex investment market by storm. One of the most accepted and appreciated Forex auto trading software is Forex Auto Pilot, popularly known as FAPS.
So, why does an investor need to look upon at these efficient software systems for Forex trading?
* First of all, these systems work beyond the capabilities of humans in exploring the high and low phases of Forex trade market. Thus, these tools are helpful in employing extensive research for your investment to flourish.
* These tools are capable of keeping the knowledge of each world currency in its database and utilizing this information to bring desired profits for the investors.
* Being a human, it is impossible for investors to keep their eyes on computer screen for 24 hours a day. However, one may hire these tools to work round-the-clock without asking for a lunch break.
* The auto Forex trading tools are dedicated to fuel the idea of home-business. Let us keep this point on hold for further discussion later on.
* These systems are risk-analyzers. Thus, the risk factors, which might be overlooked by human eyes, are analyzed by these systems.
* These automated tools are considered as connoisseurs in handling the voluminous data associated with Forex market, which may take serious turns in fractions of seconds.
* Also, one may invest in more than one trade at a given point of time with the help of these automated software systems. More than that, it allows the investor to make investments on different trading platforms.
A proficient trader can enhance his or her proficiency level by learning the benefits of Forex trading systems. However, moral of the story is that Forex automated trading software systems have proven their mettle in the world of investments and this has been made possible by thinking minds behind these systems.In the Horde of Forex Trading Systems.
Every new development in a particular field is accompanied by the dawn of service providers to prove their flair in providing maximum benefits associated with it. In case of Forex trading automated systems, a number of products have been launched in the recent times and the number is still going strong. However, it is not in the aptitude of everyone to provide underlying functionality in the form of these automated systems.
One celebrated name in this direction is that of Forex Auto Pilot System, as it comes from the bench of a successful Forex trader. The system has been endowed with all capabilities to emerge as a powerful Forex trading tool.
Man on The Phone
If you are unable to decide upon the right choice for these automated tools, it is recommended to employ extensive research and read reviews of auto Forex trading tools available on different web portals.
Automated Tools for Self-Employment
As we promised in our previous discussions on the benefits offered by Forex trading tools, it is time to unfold the potency of these systems in providing an excellent opportunity of home-based business to millions of people, who desire to do so. There are many reasons, why people want to leave their job and switch over to self-employment:
* First and most important reason is that the skills of an individual are not suitably paid by doing jobs.
* Majority of bread-earners are frustrated victims of bosses and seniors jumping over their heads.
* Most of the people in regular jobs are unhappy with a dull routine of waking up early, commuting long distances to reach offices and then, listening to commands. So, how about being your own boss and that too, at the comfort of your home?
Thus, the stage is set for tools like auto Forex trading systems to add a commendable worth to your earnings within a short period of time. Thus, there is no scope of turning down the effectiveness of these tools to reach your destination. One has to simply sit back and relax, after surrendering the load to these systems. It demands only few minutes to glance at computer screen and let these tools describe the reports generated throughout the day.
Making Efficient Usage of Forex Trading Tools
Possessing one of these automatic tools is not enough for a budding investor. It is time to introduce you to newly purchased system and learn the tracks of reaching the peak of investment market.
* First of all, you must make an effective selection amongst desktop-installed software or Internet-facilitated automated tool for Forex trading. The later one definitely shares more benefits with an investor:
1. First of all, there is no headache of maintaining the software.
2. Also, you may access this software from different corners of the world
3. Most importantly, it is a more secure system as compared to desktop based application
* After making a good selection, one must study the software to its depth. It is always good to know the system, which promises to earn significant money for your investments.* One must understand the real meaning of word ‘auto’. These tools are made self-sufficient to work for the investor. Thus, it is not a wise act to interfere in its working.* Now, that doesn’t mean that an investor should not possess the know-how of Forex trade market. Keep your knowledge updated to entertain the requirements at any point of time.
Having said all, it is time to express the gratitude towards people, who burn their night oils in coming up with these wonderful automated systems. The development of these systems requires the knowledge of two significant aspects. Firstly, there must be updated knowledge of trends existing in Forex trading market to prepare all type of figures and calculative functionality for these systems. Secondly, technical knowledge of computer programming completes the picture of ending up with a dependable tool for trading.
Believing our beliefs that it is nice to recommend good things to others, we want to help your search for Forex trading systems to attain meaning. Forex Auto Pilot System is the talk of the town for all good reasons. The system promises most effectual currency trading in the biggest market of world. Thus, there is no fun in wasting the time. Get set to attain what is called the status of a millionaire.
The Risks of Trading in the Forex Market
Although every investment involves some risk, the risk of loss in trading off-exchange forex contracts can be substantial. Therefore,if you are considering participating in this market, you should understand some of the risks associated with this product so you can make an informed decision before investing. As stated in the introduction to article, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all customers. The only funds that should ever be used to speculate in foreign currency trading, or any type of highly speculative investment, are funds that represent risk capital – i.e., funds you can afford to lose without affecting your financial situation. There are other reasons why forex trading may or may not be an appropriate investment for you, and they are highlighted below.The market could move against you. No one can predict with certainty which way exchange rates will go, and the forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and the time you close it out will affect the price of your forex contract and the potential profit and losses relating to it. You could lose your entire investment You will be required to deposit an amount of money (often referred to as a “security deposit” or “margin”) with your forex dealer inorder to buy or sell an off-exchange forex contract. As discussed earlier, a relatively small amount of money can enable you to hold a forex position worth many times the account value. This is referred to as leverage or gearing. The smaller the deposit in relation to the underlying value of the contract, the greater the leverage. If the price moves in an unfavorable direction, high leverage can produce large losses in relation to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire deposit. Depending on your agreement with your dealer, you may also be required to pay additional losses. You are relying on the dealer’s creditworthiness and reputation. Retail off-exchange forex trades are not guaranteed by a clearing organization. Furthermore, funds that you have deposited to trade forex contracts are not insured and do not receive a priority in bankruptcy. Even customer funds deposited by a dealer inan FDIC-insured bank account are not protected if the dealer goes bankrupt.There is no central marketplace Unlike regulated futures exchanges, in the retail off-exchange forex market there is no central marketplace with many buyers and sellers. The forex dealer determines the execution price, so you are relying on the dealer’s integrity for a fair price. The trading system could break down If you are using an Internet-based or other electronic system to place trades, some part of the system could fail. In the event of a system failure, it is possible that, for a certain time period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result in loss of orders or order priority. You could be a victim of fraud. As with any investment, you should protect yourself from fraud. Beware of investment schemes that promise significant returns with little risk. You should take a close and cautious look at the investment offer itself and continue to monitor any investment you do make.
skip to main | skip to sidebar new forex styles for you posts 1.0714 as 1-week high
FXstreet.com (Barcelona) – The Dollar has extended its rally against the Swissy bringing the pair to trade above the 1.0700 level and post 1.0714 as fresh 1-week high. Since the beginning of the European session, USD/CHF has risen around 130 pips from 1.0582, intra-day low, to break the MA200 level at 1.0675 and post 1-week high.
Valeria Bednarik, FXstreet.com collaborator, comments: “USD/CHF regained the upside after forming a triple floor at the 1.0550 area. Quoting around 1.0700, rally also seems overextended, and longing for a downside correction, that could reach the 1.0650 area without harming current trend. Above 1.0730, expect the pair to extend the rally despite over bought conditions.”
Valeria Bednarik, FXstreet.com collaborator, comments: “USD/CHF regained the upside after forming a triple floor at the 1.0550 area. Quoting around 1.0700, rally also seems overextended, and longing for a downside correction, that could reach the 1.0650 area without harming current trend. Above 1.0730, expect the pair to extend the rally despite over bought conditions.”
Tax Strategies for Forex Traders
Forex, the foreign currency exchange market, can be a lucrative one indeed for traders skilled in its dynamics. This worldwide network of government central banks, commercial and investment banks, hedge funds, international corporations and brokerage firms enables traders to capitalize on the rise and fall of a currency dollar volume that exceeds $1.4 trillion every day, making it the largest and most liquid of the world markets.
But when income tax time rolls around, currency traders receive special treatment from the Internal Revenue Service, the subtleties of which can sometimes trip up the unsuspecting.
Here's a look at the tax landscape for forex traders, and why it may be a good idea to have a Traders Accounting tax professional help guide you through the twists and turns.
Futures and Cash Forex
Forex is traded in two ways: as currency futures on regulated commodities exchanges, which fall under the tax rules of IRC Section 1256 contracts, or as cash forex on the unregulated interbank market, which fall under the special rules of IRC Section 988. Many forex traders are active in both markets.
Because futures and cash forex are subject to different tax and accounting rules, it is important for forex traders to know which category each of their trades fall into so that each trade can be reported correctly to receive optimum tax advantage.
Section 1256: The Advantageous Split
Forex traders receive a significant tax advantage over securities traders under Section 1256: reporting capital gains on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles) allows you to split your capital gains on Schedule D, with 60%taxed at the lower long-term capital gains rate (currently 15%) and 40% at the ordinary or short-term capital gains rate of up to 35%. That combined rate of 23% amounts to a 12% advantage over the ordinary (or short-term) rate.
If you trade exclusively in forex futures, it's smooth sailing come tax time; your trades fall under Section 1256 and automatically receive the 60/40 split.
But things get a little more complicated tax-wise if you dabble in cash forex, which is subject to Section 988 (Treatment of Certain Foreign Currency Transactions).
Section 988: To Opt Out or Not?
Section 988 was enacted as a way for the IRS to tax companies that earn income from fluctuations in foreign currency exchange rates as part of their normal course of business, such as buying foreign goods. Under this section, such gains or losses are reported and treated as interest income or expense for tax purposes, and do not receive the favorable 60/40 split.
Because forex futures do not trade in actual currencies, they do not fall under the special rules of Section 988. But as a currency trader, you are exposed daily to currency rate fluctuations, hence your trading activity would fall under the Section 988 provisions.
But because currency traders consider these fluctuations part of their capital assets in the normal course of business, the IRS enables you to opt out of Section 988, and thereby retain the favorable 60/40 split for these gains under Section 1256.
The IRS requires that you note "internally" your intention to opt out of Section 988 before making the trades; you are not required to notify the IRS. Obviously, some traders bend this rule based on their year-end outcome, and there seems little inclination onthe part of the IRS to crack down, at least so far.
As a rule of thumb, if you have currency gains, you would benefit (reduce your tax on gains by 12 percent) by opting out of Section 988. If you have losses however, you may prefer to remain under Section 988's ordinary loss treatment rather than the less favorable treatment under Section 1256.
Tax Time: Tougher for Currency Traders
Forex futures traders tend to breeze through tax time; their brokerage firm sends them an IRS Form 1099, on which their aggregate profit or loss is listed on Line 9.
But since currency traders don't receive 1099s, you are left to find your own accounting and software solutions. Don't be tempted to simply lump your currency trades in with your Section 1256 activity, a common temptation; these trades need to be separatedinto Section 988 reporting, and in cases of loss, you could wind up paying more tax than necessary.As a fast-growing market segment, forex trading is almost certain to come under greater IRS scrutiny in the future. An experienced Traders Accounting tax professional can help you file in full compliance with IRS rules and make the most of your tax advantages.
But when income tax time rolls around, currency traders receive special treatment from the Internal Revenue Service, the subtleties of which can sometimes trip up the unsuspecting.
Here's a look at the tax landscape for forex traders, and why it may be a good idea to have a Traders Accounting tax professional help guide you through the twists and turns.
Futures and Cash Forex
Forex is traded in two ways: as currency futures on regulated commodities exchanges, which fall under the tax rules of IRC Section 1256 contracts, or as cash forex on the unregulated interbank market, which fall under the special rules of IRC Section 988. Many forex traders are active in both markets.
Because futures and cash forex are subject to different tax and accounting rules, it is important for forex traders to know which category each of their trades fall into so that each trade can be reported correctly to receive optimum tax advantage.
Section 1256: The Advantageous Split
Forex traders receive a significant tax advantage over securities traders under Section 1256: reporting capital gains on IRS Form 6781 (Gains and Losses from Section 1256 Contracts and Straddles) allows you to split your capital gains on Schedule D, with 60%taxed at the lower long-term capital gains rate (currently 15%) and 40% at the ordinary or short-term capital gains rate of up to 35%. That combined rate of 23% amounts to a 12% advantage over the ordinary (or short-term) rate.
If you trade exclusively in forex futures, it's smooth sailing come tax time; your trades fall under Section 1256 and automatically receive the 60/40 split.
But things get a little more complicated tax-wise if you dabble in cash forex, which is subject to Section 988 (Treatment of Certain Foreign Currency Transactions).
Section 988: To Opt Out or Not?
Section 988 was enacted as a way for the IRS to tax companies that earn income from fluctuations in foreign currency exchange rates as part of their normal course of business, such as buying foreign goods. Under this section, such gains or losses are reported and treated as interest income or expense for tax purposes, and do not receive the favorable 60/40 split.
Because forex futures do not trade in actual currencies, they do not fall under the special rules of Section 988. But as a currency trader, you are exposed daily to currency rate fluctuations, hence your trading activity would fall under the Section 988 provisions.
But because currency traders consider these fluctuations part of their capital assets in the normal course of business, the IRS enables you to opt out of Section 988, and thereby retain the favorable 60/40 split for these gains under Section 1256.
The IRS requires that you note "internally" your intention to opt out of Section 988 before making the trades; you are not required to notify the IRS. Obviously, some traders bend this rule based on their year-end outcome, and there seems little inclination onthe part of the IRS to crack down, at least so far.
As a rule of thumb, if you have currency gains, you would benefit (reduce your tax on gains by 12 percent) by opting out of Section 988. If you have losses however, you may prefer to remain under Section 988's ordinary loss treatment rather than the less favorable treatment under Section 1256.
Tax Time: Tougher for Currency Traders
Forex futures traders tend to breeze through tax time; their brokerage firm sends them an IRS Form 1099, on which their aggregate profit or loss is listed on Line 9.
But since currency traders don't receive 1099s, you are left to find your own accounting and software solutions. Don't be tempted to simply lump your currency trades in with your Section 1256 activity, a common temptation; these trades need to be separatedinto Section 988 reporting, and in cases of loss, you could wind up paying more tax than necessary.As a fast-growing market segment, forex trading is almost certain to come under greater IRS scrutiny in the future. An experienced Traders Accounting tax professional can help you file in full compliance with IRS rules and make the most of your tax advantages.
Forex vs. Equities
If you are interested in trading currencies online, you will find that the Forex market offers several advantages over equities trading.
24-Hour Trading: Forex is a true 24-hour market, which offers a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.
After hours trading for U.S. equities brings with it several limitations. ECN's (Electronic Communication Networks), also called matching systems, exist to bring together buyers and sellers - when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread.
Superior Liquidity: With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.
Because of the lower trade volume, investors in the stock market are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.1
00:1 Leverage: 100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%.
While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.
The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.
Lower Transaction Costs: It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees. FOREX.com charges NO commissions or fees whatsoever, while still offering traders access to all relevant market information and trading tools. In contrast, commissions for stock trades range from $7.95-$29.95 per trade with online discount brokers up to $100 or more per trade with full service brokers.
Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .0001 US cents) in the major currencies. In general, the width of the spread in a forex transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.
Profit Potential In Both Rising And Falling Markets: In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market.The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
24-Hour Trading: Forex is a true 24-hour market, which offers a major advantage over equities trading. Whether it's 6pm or 6am, somewhere in the world there are always buyers and sellers actively trading foreign currencies. Traders can always respond to breaking news immediately, and P&L is not affected by after hours earning reports or analyst conference calls.
After hours trading for U.S. equities brings with it several limitations. ECN's (Electronic Communication Networks), also called matching systems, exist to bring together buyers and sellers - when possible. However, there is no guarantee that every trade will be executed, nor at a fair market price. Quite frequently, traders must wait until the market opens the following day in order to receive a tighter spread.
Superior Liquidity: With a daily trading volume that is 50x larger than the New York Stock Exchange, there are always broker/dealers willing to buy or sell currencies in the FX markets. The liquidity of this market, especially that of the major currencies, helps ensure price stability. Traders can almost always open or close a position at a fair market price.
Because of the lower trade volume, investors in the stock market are more vulnerable to liquidity risk, which results in a wider dealing spread or larger price movements in response to any relatively large transaction.1
00:1 Leverage: 100:1 leverage is commonly available from online FX dealers, which substantially exceeds the common 2:1 margin offered by equity brokers. At 100:1, traders post $1000 margin for a $100,000 position, or 1%.
While certainly not for everyone, the substantial leverage available from online currency trading firms is a powerful, moneymaking tool. Rather than merely loading up on risk as many people incorrectly assume, leverage is essential in the Forex market. This is because the average daily percentage move of a major currency is less than 1%, whereas a stock can easily have a 10% price move on any given day.
The most effective way to manage the risk associated with margined trading is to diligently follow a disciplined trading style that consistently utilizes stop and limit orders. Devise and adhere to a system where your controls kick in when emotion might otherwise take over.
Lower Transaction Costs: It is much more cost-efficient to trade Forex in terms of both commissions and transaction fees. FOREX.com charges NO commissions or fees whatsoever, while still offering traders access to all relevant market information and trading tools. In contrast, commissions for stock trades range from $7.95-$29.95 per trade with online discount brokers up to $100 or more per trade with full service brokers.
Another important point to consider is the width of the bid/ask spread. Regardless of deal size, forex dealing spreads are normally 3-4 pips (a pip is .0001 US cents) in the major currencies. In general, the width of the spread in a forex transaction is less than 1/10 that of a stock transaction, which could include a .125 (1/8) wide spread.
Profit Potential In Both Rising And Falling Markets: In every open FX position, an investor is long in one currency and short the other. A short position is one in which the trader sells a currency in anticipation that it will depreciate. This means that potential exists in a rising as well as a falling market.The ability to sell currencies without any limitations is another distinct advantage over equity trading. In the US equity markets, it is much more difficult to establish a short position due to the Zero Uptick rule, which prevents investors from shorting a stock unless the immediately preceding trade was equal to or lower than the price of the short sale.
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