currency trading for us

7/29/2019 Currency Trading for Us

1/4

need an understanding of this mar-ket and how it operates. Its featuresare distinct and different fromfutures trading. Heres a summary ofthe key differences:

There is no official price for aspot currency. In the currencyfutures market, everyone sees thesame price. In the spot currencymarket, rates are negotiated tradesbetween buyer and seller. A quote

delivered by a particular firm is arepresentation of the price. Spot currencies have no avail-

able volume data. The spot currency options mar-

ket is not accessible to the retail pub-lic. OTC options on spot currencies

are limited tolarge accounts.The PhiladelphiaExchange offersexchange-tradedcurrency options,but at this timemost of the e-

forex firms arenot registered tooffer this instru-ment. Further,most equity firmsdo not offer e-forex. The resultis the retail traderis denied accessto an importanttrading tool.

There is little,if any, broker-assisted trading,

It has the potential to revolutionizeinvestment behavior and providemore trading opportunities thanever before.

Just consider the leverage. E-forex trading can boast levels farhigher than futures and certainlyequities. Its common for tradingplatforms to offer 50-to-1 and 100-to-1 leverage, enabling trading of$100,000 worth of a foreign curren-

cy (considered a one-lot) with only2%, or $2,000, cash in the account.More than $1 trillion is tradedthroughout the world every day.

See spot trade Before you start totrade spot foreign exchange, you will

An average individualarmed with a computer, amouse and an Internetconnection can trade spot

currencies from 19:00 (EST) onSunday evening to 17:00 (EST) onFriday evening. It seems overnightan industry has sprung up to satis-fy this market. Firms that didntexist one or two years ago are grow-ing at 20% per month.

Such firms often provide freecharts, signals, quotes, technicalanalysis, full simulation platformsand sometimes even financing toopen an account. Futures commis-sion merchants and introducingbrokers are racing to offer e-forextrading as iftrading and ser-vicing exchange-traded futuresaccounts isntdifficult enough(see The effectsof FX, page 78).

What beforewas the domainof banks, corpo-rations and fundsis now accessibleto everyone. E-forex, or directaccess trading ofspot currencies,is now easierthan ever, and,like electronictrading of stocks,it is here to stay.

E-forex: Currency tradingfor the rest of us

3 8 w w w .futuresmag.comDecember 2001

Foreign exchange markets are no longer just the domain of large traders with multi-milliondollar accounts and connections at big banks. The e-forex revolution is here and is providingtraders of all sizes legitimate options for trading foreign exchange.

By A be Cofnas

DAY TRADING TECHNIQUES

ONE SIDE OF THE BOAT

The chart shows the downward spiral of the euro in response to the better-than-expectedNAPM report released on Sept. 4. This kind of move happens often in currencies.

0.92

0.91

0.90

0.89

0.88

8/8/01 8/12/01 8/16/01 8/21/01 8/24/01 8/29/01 9/02/01

Euro, 60-minute

The world is not round it can be best understood in three

parts: The U.S. dollar, the Japanese yen and the euro.

Source: Actforex Java C harting Tool

Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.

Copyright 2001 by Futures Magazine Group, 250 S. Wacker Dr., Suite 1150, Chicago, IL 60606


2/4

dollar to rebound because Europeanproductivity is significantly less thanAmerican levels. The pattern for theeuro has been a reversion to itstrend after a news shock. The eurosreaction to American news surpris-es, such as the Sept. 4, 2001,National Association of Purchasing

Managers report, indicates an inher-ently high volatility level for this cur-rency (see One side of the boat,left). It also suggests that eurotraders tend to travel in large stam-pede-prone herds. The Sept. 11events further confirmed to eurotraders and, in general, all forextraders how the currency marketsswing in relationship with and inreaction to the equity markets. Forextrading, while disrupted in NewYork, did not stop when the U.S.equity markets closed.

Currency traders need to developa global perspective and a feel forintermarket relationships. Interestrate trends are the most importantexternal information source. If theU.S. Federal Reserve cuts rates,

then the dollar should weaken.However, if the European CentralBank (ECB) is expected to followsuit, interest rate trends will con-verge, and the value of the currencymay not change at all. You need tofollow not only Fed Chairman AlanGreenspan, but his counterparts inthe ECB and the BoJ as well (seeBookmark it! left). Finally, thoughfew e-forex firms track other mar-kets, the savvy currency tradershould monitor gold. If the price ofgold rises in a given currency, it sig-nals weakness therein. Nothingmay signal an end to global defla-tion trends faster.

Technical factors Currencies tend tobe trendier than either stocks orphysical commodities. It is importantto understand the trend from both afundamental and a technical point ofview. The factors re la ting twoeconomies or two sets of interestrates are more persistent than, say,weather factors in grains, so thisshouldnt be a surprise. Currenciescannot reverse trends that easily

because economies do not reversequickly relative to one another.The forex trader likely will see a

movement of data to try to offer bet-ter analytics, now available only toinstitutions. Quotespeed, currently acompetitor to Bloomberg, includespoint-and-figure analysis on spotcurrencies with its feed. KillneyInvestments offers a platform thatallows advanced backtesting of indi-cators. The future looks bright forimprovements in trading tools.

A successful trader will recognizehow fundamentals and technicals

combine to indicate a trend reversal.Of course, finding the trend reversalbefore it happens is the Holy Grail oftrading, and you cant expect to besuccessful 100% of the time. Thatdoesnt stop software developersfrom trying though.

One of the packages devoted tocurrency trend analysis specificallyis the neural net-based program atwww.profittaker.com. This softwareuses intermarket analysis to projectmoving averages of currency futures,using spot prices, gold, S&P,

resulting in the need for total self-learning.

News is fragmented and difficultto access. Reuters and Bloombergprovide the news to institutions,but a retail trader without these

services is trading in the dark. Toooften, the news is too late in arriv-ing to be of any real trading value.

These features are inherent intrading e-forex. But to be forewarnedis to be forearmed. The opportunityto pinpoint several trading opportu-nities on a 24-hour basis with lever-age of 100-to-1, enabling the tradingof $100,000 of a foreign currencywith only 2% cash in the account, isan overwhelming attraction for any-one who loves to trade.

Currencies & economic fundamentalsAn e-forex trader needs to brushup on fundamental knowledge aswe ll as learn how to use basictechnical tools. Currency pricesoften reflect the underlyingstrength or weakness of the coun-trys economy. For example, thestrength of the dollar reflected theboom of the U.S. economy over thepast decade. If U.S. economicgrowth is declining or is expectedto decline, the expected return onAmerican assets will fall, and the

U.S. dollar may be pressured rela-tive to other currencies.Knowledge of macroeconomic fun-

damentals is critical for trading anycurrency (see The Fundamentals ofForex, Fu t u r e s , May 2001). Forexample, Japan has suffered a no-growth economy for years, and itsnominal interest rates have hoverednear 0%. A trader needs to knowthat a strong yen is not a solution tothese problems. Therefore, in periodswhere the yen strengthens, tradersshould be wary of an official policyresponse to drive the yen lower.

Japan cannot tolerate a strong yenfor long, and the Bank of Japan(BoJ) will do whatever is necessaryto keep it within a target range. If acurrency is very strong, the traderneeds to know who is hurt and whois helped by that condition. A strongyen hurts the Japanese exporterwho has to sell to the United States.It helps the U.S. car makers in com-petition with Japanese exports.

Euro traders need to recognizethat even if the European economyis growing, the trading bias is for the

Futures December 2001 39

BOOKM ARK IT!

The Web sites of the major central banksshould be at the top of your bookmark list.

European Central Bank: www.ecb.int

Bank of Japan: www.boj.or.jp/en

U.S. Federal Reserve Bank:www.federalreserve.gov

Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.

Copyright 2001 by Futures Magazine Group, 250 S. Wacker Dr., Suite 1150, Chicago, IL 60606


3/4

bonds and other variables forits forecast. Of course, other neuralnet software, such as WardSystems Groups Neuroshell Trader,can be used to develop custom pre-diction models.

Trading guidelinesTackling any mar-ket is a challenge, but the difficultycan be alleviated somewhat by hav-ing a carefully constructed planfrom which to operate. Here aresome guidelines and steps that areuseful in framing price action incurrencies:

Scan daily price chart action.Download the charts with your

morning coffee and never ignorethe action of the euro, Swiss franc,British pound and yen against thedollar. Plot a simple 200-day mov-ing average to get the big picture.Big currency traders tend to betechnical trend followers, and theywill act on such simple signals asthe crossover of a 200-day movingaverage. Buy it when it goes above,sell it when it goes below,and youll be amazed athow tough this system is tobeat (see The fund manag-ers game, above).

Read your favorite bankreport. Every morning manyof the large banks issue cur-rency analyses. The Web sitewww.ecommerzbank.de/free/tech.pdf gives a goodsummary of the major cur-rency markets.

Construct a 60-minutechart (see Powers ofhours, above). This timeperiod is big enough to pro-vide some importantinsights on the price action

trader, below). Many traders try toget in and out of positions quickly.This is sometimes called scalping.The 15-minute time frame is a goodinterval for this kind of trade. It isclose to the action but leaves enoughspace for some objectivity and use ofindicators. For this time frame, the13-/50-period moving averagecrossover is useful as well; it can beenhanced greatly by a parabolic indi-cator, which keeps you in a positionat all times. Currency markets movequickly intraday, and you have topay to play.

Your specific regimen will depend

on your approach. Because curren-cies reflect economic realities andtechnical conditions, there are sever-al trading styles you can consider.

Looking for breakout trades is astrategy that places orders to buyand to sell above and below the mostrecent points of resistance and sup-port. It assumes that the currencieswill move through one of the posi-

tions and keep going. It canbe used for weekly, hourlyand even 15-minute timeperiods. Its strength is thatcurrencies move through

support and resistancepoints. The weakness is tootight a stop can take yourposition out before it has achance to profit.

Other traders will leg inand out of trades. This is astrategy that provides formultiple lot trading wherelots are put on at differentlevels and times. For exam-ple, instead of buying threeyen at one time, you tradeone lot at the market,

40 w w w .futuresmag.comDecember 2001


THE FUND M ANAGERS GAM EThis is one example that illustrates how

currencies can trade around the 200-day moving average,repeatedly regressing to the mean.

.96

.94

.92

.90

.88

.86

.84

.82

.80

J une Aug. Oct. Dec. Feb. April J une Aug.

POWERS OF HOURSThe hourly time frame tends to capture most of the significant

moves in currencies as well as provide some key supportand resistance levels based on the bar highs.

.923

.917

.911

.905

.899

.893

.887

.881

74.058.042.026.0

8/8/01 8/12/01 8/16/01 8/21/01 8/24/01 8/29/01 9/02/01

during the previous few hours.First, note the highs and lows ofeach 60-minute period. It is moredifficult for the market to penetratethese 60-minute highs and lowsthan the ranges of the smaller timeframes. Consider probable priceaction. The 60-minute chart willindicate levels whose rupture willlead to a new price direction.

There are many indicators viablefor the 60-minute time frame, but agood start is a 13-/50-period movingaverage crossover. Simply look tobuy when the 13-period averagecrosses above the 50-period average,and sell when it crosses below. The

relative strength index (RSI) workswell as a confirming tool. If the RSIcrosses 50, it constitutes a signal, abullish one when it crosses aboveand a bearish one when it crossesbelow. On the 60-minute chart, lookto see if both the moving averagecrossovers and the RSI agree.

Finally, take a look at a 15-minute chart (see The 15-minute

The euro just brokedown again below the

200-period movingaverage, indicating theend of the uptrend.

13-period movingaverage crosses the50-period, indicatinga buyof the euro atabout 8840. 13-period moving average crosses back

below 50-period moving average for a sellat 9110 for a 70-pip profit.

13-period moving average crosses below the50-period to indicate euro weakness beforethe price retreats on NAPM news Sept. 4.

THE 1 5- M INUTE TRADERTo supplement your 60-minute analysis, consider the 15-minute chart.

Its a popular option for those who like to scalp small profits.

.918

.914

.910

.906

.902

.898

.896

.892

.886

8/31/01

22:00 3:45 9:15 14:45 00:45 6:15 23:15 05:00 10:30

9/02/01 9/04/01

The 13-period moving averagecrosses the 50-period movingaverage, indicating weakness.

Trading decisions on a 15-minutechart allow for effective use of movingaverage crossovers, plus momentumindicators like parabolic analysis.

Source: A ctforex Java C harting Tool Source: A ctforex Java C harting Tool

Source: Actforex Java C harting Tool

Euro, dailyEuro, 60-minute

Euro, 15-minute

Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.Copyright 2001 by Futures Magazine Group, 250 S. Wacker Dr., Suite 1150, Chicago, IL 60606


4/4

a second lot on the movingaverage crossover and a third loton pure emotion.

Scalping or momentum tradingseeks quick results. It is more diffi-cult with currencies because volumedata is missing. If scalping, get out

quickly if you are wrong.

Trading & risk management Once adecision to trade has been made,the next step is to formulate a trad-ing tactic. How many lots shouldtraded. How should stops be used?

What do you do? When trading aone lot, there is no clear answer.But when you add a second lot,you can use one lot to get in or outon the basis of emotion or cashmanagement and the other lot forthe technical indicator.

Generally, stops in currenciesneed to be much wider than a per-son initially assumes. A 50-pipstop, having a general value of$500 will allow for more of thevo la ti li ty of the currency to beexpressed without taking the tradeout prematurely.

Ongoing improvement Education cer-tainly is one of the most importantchallenges facing the currency trad-er. The e-forex platforms aredesigned to execute trades and notto educate the trader. The situationtoday for the beginner is like drivinga car at night without a dashboard.A digital dashboard for currencytrading is necessary to bring analy-sis and news to the trader withouthaving to spend a great deal of timebrowsing the Web.

Still, there is one educational toolthat the trading firms are best atproviding. The e-forex trader has anadvantage in access to demo, orpaper trading, accounts. All of thee-forex firms offer a demo platform.

Although it sounds like a great

learning tool, online paper tradinghas its pros and cons. Often a trad-er sees big gains in demo tradingbut loses money in real trading.This happens because demo tradingremoves the emotional conditions ofa real trade. There is no fear orgreed driving decisions. However,the demo platform can become aneffective tool for training andimproving your trading.

Use the demo to test new tradingideas, such as putting on two lotsinstead of one or putting on widerstops. Too often when people start

trading, they abandon their demoaccount. In fact and this shouldbe emphasized demo tradingshould be used all the timebecause trading is an on-goinglearning experience.

Abe Cofnas uses interact ive chatrooms

and w hiteboarding technology in courses

introducing forex and technical analy sis at

w w w .cms - fo rex . com, w w w .ga incap i t a l .

com and a t w w w .day fo rex . com. In the

February issue, he w ill begin a bi-monthly

column on t rad ing the forex mark e t . E-

ma il: forexlearn ingsyst ems@earthlink .net.

The most frequent error made bythe beginning trader is positionsize. Trading one lot is the mostpopular. But trading one lot opensa trader up to sloppy, emotion-driven habits. For example, youmay have a target of making $500

and have achieved it. Should youget in or out? What if you havepromised your spouse a great din-ner off your trading profits? Youmay wish to take the money andrun, but what if your indicatorsstill show to stay in the trade?

FM

42 w w w .futuresmag.comDecember 2001


Reproduction or use of the text or pictorial content in any manner without written permission is prohibited.Copyright 2001 by Futures Magazine Group, 250 S. Wacker Dr., Suite 1150, Chicago, IL 60606

A complete, real-time look at how the winners

trade with their own money.

Watch the winners in action!Their picks, their trades , their money. Go to

worldcupadvisor.com/fut to take advan-

tage of our get-acquainted offer for Futures

magazine readers. For a limited time, register

for one free month of Market Watchdog

service, and add discounted Live Update

ac co unts to your subs cription if des ired. With

Live Update, youll have a full view of your

advisors live trading account and receive

Instant Message and e-mail notification of all

ac co unt ac t ivity . . .orders entered , f illed ,

cancel led , or expired . Open and c losed

position screens make it easy to monitor

account status and track performance.

Live Update Advisors

2000 Kurt Sakaeda 595%

1999 Robert Bloch 216%

1999 Ryan J ones 42%

1998 Neil Peplinski 95%

1998 Steve Hutson 89%

1995 J ohn Mills 42%

1987 Larry Williams 11,376%

worldcupadvisor.comToll free 877-456-7111 773-714-8200 [email protected]

Futures trading is not suitab le for everyone . There is a subs tantial risk of loss in trad ing futures a nd options .

Pa st pe rformance is not neces sa rily indicative of future results. The trading s trategies e mployed by trad ers in

the World Cup ma y be d ifferent from those used b y the traders in giving trading a dvice or manag ing acc ounts

for others. Accounts trading in the World C up may b e subject to margins and commission rates different from

those charged accounts they advise or manage or from accounts traded by those relying on their advice.

NOT J UST TRADING ADVICE.

Live

Updatefrom

worldcupadvisor.com

currency trading for us

Documents