Happy St. Patricks Day! Just as most of our holidays around the world are far different than when they began umpteen years ago, so also evolves the markets. People started celebrating St. Patricks day as a feast for the patron saint of Ireland but Now it is a beer drinking, green shirt wearing, pinch fest. Where did all that come from?
Forex has been around forever. Since the beginning, in the olden days, people have been involved in trading foreign currency from one land to buy products across the mediterranean or wherever. Every King Joe wanted his own currency so that it could be manipulated to fit his own needs. This still goes on today but nowadays, that Ripoff King Joe is named THE FED.
Forex trading has changed throughout the years however. It has come from its original form of just currency transactions to the current day trading of futures, swaps, derivatives, options... you name it! Just like Saint Patty's day no longer resembles the orignal reason of the celebration, so goes foreign exchange. Forex is also different now.
Sometimes differences work for the better. Let's take a look at one of those differences. The North American Derivatives Exchange is a place where traders can trade a derivative of a foreign currency transation. Now, Ryan... What tha bleepity bleep does that mean? I'm glad you asked.
A derivative is a product that is derived from another product. Let us start with the ONE main product called currency. Now each country or 'union' has their own currency to manipulate. This is step one in coming up with a derivtive of forex.
Step two involves a transaction from one currency with another currency from another country. Let us pretend that Jim Bob The Swiss Car Part man decides to Buy 1,000,000 doohickeys from Bubba the American from America. He first needs to sell his Swiss Francs and buy U.S. Dollars because being the back woods redneck that Bubba is, there ain't no way he in takin no foreigners money.
Step three involves taking that rate of exchange or the amount that Jim Bob got for his francs and pretty much saying, " Hey ya'll! I know of a guy who makes a market over there. He will take any bet you have that the exchange rate will be higher or lower than the price Jim Bob and Bubba transacted at."
This 'BET' can also be called a derivative with a more formal sounding appeal. Now forex is the actual tranaction, or money actually changing hands. Nadex is a Place, some call it an exchange, where traders can come together and transact opinions but no actual currency changes hands.
These opinions turn into contracts between buyers and sellers and they have to abide by these contracts once an agreement has been met. An agreement between a buyer and a seller can be spotted on the screen of your Nadex Platform. If you see a strike price of 1.2020/1.2025, this means that one trader is willing to buy from you at 1.2020 and one trader is willing to sell to you at 1.2025. If you choose to take either one of these traders up on their bid or offer, then all you have to do is click a button to practically say, " Yes, I would like to buy that at 1.2025."
Now Nadex has a time factor built in that forex does not have. You can buy a forex pair and hold onto it for a minute or 2 years. It doesnt matter. With Nadex, you have a specific amount of time your contract is good for such as the next hour or the next day. If your opinion is right or wrong, you will know at the 'expiration' of this time window.
Forex has no loss limit built in so your losses can run forever and tomorrow you may wake up without a house to live in becasue the market has taken your life savings in 3 seconds, such as what happend when the Swiss National Bank stopped manupulating the CHF. On Nadex, you have pre set amounts that each contract is good for. You can make no more than the contract states and you can lose no more than the contract states. You know you maximum win and maximum loss as well as the time which these wins or losses will be given to you or taken away.
Nadex is sounding pretty darn good right about now but hold your hourses, cow girls... Guess what? Forex has no profit ceiling. If your trade is trending in the right direction, it can run for 10,000 pips and never look back. If you are in that trade, you can hang on and ride right along with it.
Now there was a little primer on forex versus Nadex. They both have their place in trading and they are both unique. What is even more unique is when you can buy a forex pair and sell a Nadex bull spread to hdge your losses. Hedging forex with nadex is something that is flipping awesome! Thats an article for another day. Happy Trading ya'll!!