Are you aware of Forex rules and regulations in different jurisdictions? Well, you should be. It’s a fact that trading in financial markets is a daunting task. Uncertainty reigns as the markets move all the time.
Wait – one may argue that financial markets are closed over the weekend. Even the Forex market, where currencies are traded, closes on Friday and opens again next Monday. Technically, this is correct.
However, reality tells us that events over the weekend may impact next week’s opening prices. In some cases, the impact is so severe that various markets may open with a gap. If that is the case, the broker cannot trigger an eventual stop-loss order if the market “was not there.”
Therefore, one may say that financial markets are open 24/7 and not 24/5. Imagine a presidential election taking place over the weekend, with a surprise outcome. Or, some deal made by a central bank, government, or even a company, during the weekend hours.
It happened in the past (e.g., the European Central Bank negotiated a deal with Cyprus during the sovereign crisis in Europe), and some pairs opened with a gap. In this case, the EUR/USD gap was so big that it became known as the “Cyprus” gap.
Why you should understand Forex rules and regulations in different jurisdictions
The point here is that understanding the Forex rules and regulations puts you one step closer to succeeding in trading in the Forex market. Given the example above, what would be the best approach to handling such a risk? The right answer is to avoid having open positions over the weekend.
However, the statement contradicts many of the trading styles used by retail and institutional investors. Three trading styles exist: scalping, swing trading, and investing. One may also add algorithmic trading, but that is something taking place on such small timeframes that is only possible using expert advisors or quantitative trading.
The difference between the three trading styles is given by the time the positions are kept open. Scalping refers to quickly opening and closing trades, aiming for a small profit.
Swing trading, on the other hand, refers to opening and closing positions with a horizon of a few hours or even a few days. You see, sometimes the market is not moving, no matter what a trader wishes for. So such traders looking for the market to move have no other chance but to wait patiently – thus, swing trading.
Investing is a different story. Here, traders open positions based on fundamental analysis (i.e., interpreting economic data, geopolitical events, etc.) or on technical analysis applied to large timeframes, such as weekly or monthly charts.
Coming back to the risk of having positions open over the weekend, the traders belonging to the last two categories would likely not mind having to do so. The reason is that their trading style (and the size of the trading account) allow for market swings due to their distant stop-loss orders.
But scalpers, or traders looking to profit from even the smallest market swing, should aim to close their positions at the end of each trading week – and, ideally, at the end of each trading day.
Have something to say about Forex rules and regulations? Leave a comment below.
Watch this space for updates in the Hacks category on Running Wolf’s Rant.
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