Forex Trading

[positivecashflow]

Anybody into trading in the Foreign Exchange market? I was on www.forex.com and was impressed by its advantages over trading in equities and futures. Anyhow just wondering if you guys had any first hand experience on this.

Cheers,

J.

 

[wayneL]

What advantages are those?

 

[positivecashflow]

Hi Wayne,

From the Forex website:

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.

100:1 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 5 pips or less (a pip is .0005 US cents). 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.

I haven't done any investing in the forex market just thought you guys might know more about it.


Cheers,

J.

 

[positivecashflow]

Forex vs Futures

The global foreign exchange market is the largest, most active market in the world. Trading in the forex markets takes place nearly round the clock with over $1 trillion changing hands every day. It is the main event.
The benefits of forex over currency futures trading are considerable. The dissimilarities between the two instruments range from philosophical realities such as the history of each, their target audience, and their relevance in the modern forex markets, to more tangible issues such as transactions fees, margin requirements, access to liquidity, ease of use and the technical and educational support offered by providers of each service. These differences are outlined below:

More Volume = Better Liquidity. Daily currency futures volume on the CME is just 1% of the volume seen every day in the forex markets. Incomparable liquidity is one of many advantages that forex markets hold over currency futures. Truth be told, this is old news. Any currency professional can tell you that cash has been king since the dawn of the modern currency markets in the early 1970's. The real news is that individual traders from every risk profile now have full access to the opportunities available in the forex markets.


Forex markets offer tighter bid to offer spreads than currency futures markets. By inverting the futures price to compare it to cash, you can readily see that in the USD/CHF example above, inverting the futures dealing price of .5894 - .5897 results in a cash price of 1.6958 - 1.6966, 8 pips vs. the 5-pip spread available in the cash markets.


Forex markets offer higher leverage and lower margin rates than those found in currency futures trading. When trading currency futures, traders have one margin rate for "day" trades and another for "overnight" positions. These margin rates can vary depending on transaction size. FOREX.com currency trading gives the customer one rate all the time, day and night.


Forex markets utilize easily understood and universally used terms and price quotes. Currency futures quotes are inversions of the cash price. For example, if the cash price for USD/CHF is 1.7100/1.7105, the futures equivalent is .5894/ .5897; a methodology followed only in the confines of futures trading.

Currency futures prices have the added complication of including a forward forex component that takes into account a time factor, interest rates and the interest differentials between various currencies. The forex markets require no such adjustments, mathematical manipulation or consideration for the interest rate component of futures contracts.


Forex trades executed through FOREX.com are commission free. Currency futures have the added baggage of trading commissions, exchange fees and clearing fees. These fees can add up quickly and seriously eat into a trader's profits.
In contrast, currency futures are a small part of a much larger market; one that has undergone historical changes over the last decade.

Currency futures contracts (called IMM contracts or international monetary market futures) were created at the Chicago Mercantile Exchange in 1972.


These contracts were created for the market professionals, who at that time, accounted for 99% of the volume generated in the currency markets.


While some intrepid individuals did speculate in currency futures, highly trained specialists dominated the pits.


Rather than becoming a hub for global currency transactions, currency futures became more of a sideshow (relative to the cash markets) for hedgers and arbitragers on the prowl for small, momentary anomalies between cash and futures currency prices.


In what appears to be a permanent rather than cyclical change, fewer and fewer of these arbitrage windows are opening these days. And, when they do, they are immediately slammed shut by a swarm of professional dealers.
These changes have significantly reduced the number of currency futures professionals, closed the window further on forex vs. futures arbitrage opportunities and so far, have paved the way to more orderly markets. And while a more level playing field is poison to the P&L of a currency futures trader, it's been the pathway out of the maze for individuals trading in the forex markets.


Cheers,

J.

 

[Joe Blow]

Very interesting indeed.

Will have to look into this a little more carefully!

Thanks pOsItIvEcAsHfL0w!

 

[positivecashflow]

No problem.. We are all here to learn...

Sharing is Caring

Cheers,

J.

 

[wayneL]

Hi,

I will go into it more when I have time but there is one point here which is a bit of a clanger....transaction costs.

A five pip spread is in fact costing you $50 per round trip. A futures deal will cost you 1 tick spread plus $4.80 commission = $14.80.

You will find almost all professional currency traders use the futures.

There are more points but will go into later.

Cheers

 

[positivecashflow]

Hi WayneL,

Look forward to reading your opinion.

Cheers,

J.

 

[banjo_pete]

the forex game is good too, to get a feel for it.

 

[hoobadriver]

I believe you can get much tighter spds like 2-3 pips with some online brokers.

 

[stefan]

Interesting. Are there any Australian brokers offering forex trading similar to www.forex.com?

 

[Trader01]

I have been trading Forex for about five years now and find it very profitable!!! I also teach forex trading and write currency analysis on the major pairs.
If you would like to contact me I will help all I can!!!!!!!!!!!!

Cheers

 

[Smurf1976]

A few comments from my experience trading forex (not advice, just observations).

1. Have a plan. Know before you check the markets for the week/day/hour/minute (depending on your trading frequency) what would make you to go long, what would make you go short, what would make you close a position, what would make you stay out altogether.

2. Your plan needs to include some means of setting stops. Guessing or "she'll be right" isn't really a good idea IMO.

3. You need to know that the method is actually profitable unless you really do like sitting up at all hours worrying about your account being wiped out. TEST IT!

4. You need to know the maximum drawdown that the method is expected to produce. Position sizing (amount of leverage) needs to be CALCULATED based on this. Don't guess when it comes to leverage.

5. If you are going to limit yourself to a reasonable (say, 20%) maximum drawdown then I would be very surprised if you are going to be able to use leverage greater than 5:1 and most probably the leverage will need to be less than this. Want to use higher leverage? Back test to see what happens when you have a bad run and you'll probably decide that very high leverage isn't such a good idea after all... There are trading systems that work with high leverage though, you just need to be SURE before you start leveraging your trades.

6. 100:1 leverage WILL blow your account sooner or later. Probably just after you think it's starting to go well...

7. Keep away from dodgy brokers. This is far more important with forex than with stocks. Be particularly wary of overseas-based market makers that rely on traders' losses, rather than simply collecting the spread, to be profitable. I probably shouldn't mention names here but there's a real problem when your broker WANTS you too lose and isn't regulated by anyone.

8. The cheapest broker is not necessarily the best.

9. Don't forget to include buy/sell spread when designing and testing trading systems.

10. Just because a system works really well long or short DOES NOT mean that it works in reverse. Logic might suggest that it ought to, but that's not necessarily the case in practice. You can lose a lot of $ if you assume that it works both ways without testing it.

Just a few thoughts. It's certainly not a comprehensive list though.

 

[philnaylor]

Smurf,

Great list. There is a lot to be taken form that list. I guess I would like to expand on finding the right broker, but I will save everyone the sales pitch!
Just make sure they are transparent and regulated. The National Futures Association (NFA) in the US has a really good website with heaps of useful information on investor protection. The site is www.nfa.futures.org
From the trading side of things, I was speaking to one of our dealers here who has done a lot of analysis on our clients trading. In general our clients are picking profitable trades over 50% of the time, but the number one way they get unstuck is having average losses far exceeding average gains.
I can't stress enough how important it is to have exit points clearly defined before getting into trades. And if you think you will take profit at 20 pips, don't have stop losses at 40! If you do this and pick the trade over 50% of the time, you will still loose.

Just some of my thoughts.

Phil Naylor
FX Sales, Australia and New Zealand
IFX Commerce
www.cbfx.com

 

[TheProphet]

Hi all
Interesting thread. Any comments on trading forex with CMC?

Cheers

 

[Milk Man]

CMC use a market maker CFD format I think. This means the prices are somewhat artificial and are not necessarily hedged in the market. These types claim their money is made through the buy/sell spread. Just remember that they are market makers. I would like to hear from someone as to whether they place large orders through market maker CFDs and consistently turn a profit and as such any shananigans these guys pull (market makers; not just CMC). Like stops being triggered by price spikes and such.

The other format is DMA or 'direct market access'. These positions are fully hedged in the market so you can actually see them go through in market depth. I think man/e-trade and macquarie are the only two in Australia; thats who im looking at signing up to anyway. They make money through commissions although it would be possible to manipulate the market so it triggers your stop. This is probably less likely since they have nowhere near as much to gain.

I could be wrong, see below message.:screwy:

 

[Whathell]

Does macquarie do forex and indices??


I'm currently trading in forex at the moment... i'm finding it hard to tame

 

[mit]

Forex is one place I haven't had much to complain about with CMC, but I have only ever been a very small and not particularly profitable forex trader. Macquarie is purely shares.

MIT

 

[Double Six]

do we not have any forex traders here ?

 

[Smurf1976]

My forex trading is up and running with real money and has been for a little while now. It's a rather complex system which uses different triggers for different currency pairs.

I'm not planning on disclosing the system for the moment. At least not until it's got a proven track record with real money over sufficient time (years).

I consider it impolite to be disclosing how wealthy an individual is/isn't on an anonymous forum. Just a personal moral view. I will simply say that my trading is done with a normal retail broker but the scale is sufficient to get decent spreads.

Currency pairs traded are:

AUD/CAD - long and short
AUD/JPY - long only
AUD/NZD - long and short
AUD/USD - long and short
CAD/JPY - long only
CHF/JPY - long and short
EUR/AUD - long and short
EUR/CHF - long only
EUR/GBP - short only
EUR/JPY - long and short
EUR/USD - long and short
GBP/CHF - long and short
GBP/JPY - long and short
GBP/USD - long and short
NZD/JPY - long only
NZD/USD - long only
USD/CAD - long and short
USD/CHF - long only

Based on testing and paper trading, the system results in (approximately) 200 trades per year, return on funds (unleveraged amount) of 80%, maximum drawdown (based on profit / loss of completed trades only and ignoring fluctuating value of open trades) of 6%. These figures are net of all costs except internet access, computer, stationery etc.

Trading is based on spot fx day trading. Certainly not the cheapest method in terms of fees paid to the broker but as I said, the 80% is net of those fees. My priority is to trade profitably, I'll worry about reducing costs later.

Actual profit is up 23% since mid-November. This consists of a strong run between November 16th and December 16th and broadly flat since then with a small dip recently. This performance is in line with expectations. It's basically a strong run up followed by a flat period and then a dip. Then the cycle repeats.

Actual trades so far (buy / sell / open date / close date / profit or loss) have been as follows. These figures are net of brokerage.

Please note that all trades open on 31-12-05 were closed that afternoon as a precaution due to (my) computer problems. They were not reopened but trading resumed as normal from the beginning of the year. I also haven't worked out the % profit / loss for trades this year yet so I've had to leave that off.

EUR / CHF / 16-11-05 / 25-11-05 / PROFIT 0.083%
NZD / USD / 17-11-05 / 7-12-05 / PROFIT 7.012%
CAD / USD / 21-11-05 / 1-12-05 / PROFIT 1.546%
NZD / JPY / 21-11-05 / 8-12-05 / PROFIT 6.279%
GBP / CHF / 25-11-05 / 6-12-05 / LOSS 0.130%
AUD / USD / 28-11-05 / 16-12-05 / PROFIT 1.627%
GBP / EUR / 30-11-05 / 6-12-05 / PROFIT 0.368%
JPY / GBP / 7-12-05 / 9-12-05 / LOSS 2.039%
GBP / USD / 8-12-05 / 21-12-05 / LOSS 0.448%
JPY / EUR / 8-12-05 / 12-12-05 / LOSS 1.457%
EUR / AUD / 12-12-05 / 21-12-05 / PROFIT 2.180%
NZD / USD / 12-12-05 / 15-12-05 / LOSS 2.032%
JPY / CHF / 14-12-05 / 27-12-05 / PROFIT 4.259%
JPY / EUR / 14-12-05 / 16-12-05 / PROFIT 1.375%
JPY / GBP / 14-12-05 / 31-12-05 / PROFIT 4.752%
USD / CHF / 16-12-05 / 27-12-05 / PROFIT 2.037%
USD / CAD / 19-12-05 / 21-12-05 / PROFIT 0.089%
USD / EUR / 20-12-05 / 27-12-05 / PROFIT 0.229%
USD / GBP / 21-12-05 / 27-12-05 / PROFIT 0.612%
CAD / USD / 26-12-05 / 31-12-05 / PROFIT 0.555%
AUD / JPY / 27-12-05 / 31-12-05 / PROFIT 1.719%
CHF / JPY / 27-12-05 / 31-12-05 / PROFIT 0.267%
EUR / JPY / 27-12-05 / 30-12-05 / PROFIT 0.078%
NZD / USD / 28-12-05 / 31-12-05 / PROFIT 0.299%
AUD / EUR / 30-12-05 / 31-12-05 / LOSS 1.273%
GBP / EUR / 2-01-06 / 11-01-06 / PROFIT
NZD / USD / 2-01-06 / 17-01-06 / PROFIT
GBP / USD / 3-01-06 / 19-01-06 / PROFIT
USD/ CAD / 6-01-06 / 11-01-06 / LOSS
USD / EUR / 10-01-06 / 11-01-06 / LOSS
GBP / CHF / 10-01-06 / 11-01-06 / LOSS
USD / CHF / 10-01-06 / 18-01-06 / LOSS
EUR / CHF / 11-01-06 / 18-01-06 / PROFIT
NZD / JPY / 11-01-06 / 18-01-06 / LOSS
CAD / USD / 12-01-06 / 17-01-06 / PROFIT
USD / CAD / 19-01-06 / 20-01-06 / LOSS

Just posted this for interest. Forex trading is not a guarantee of wealth. I'm not a financial advisor etc. Do your own research and trade at your own risk.