Trading Currencies

There is little doubt that currencies are a very attractive market. The sheer size of it almost guarantees good liquidity and tight spreads. With the huge market size comes volatility which provides us traders with the markets moves and trends we are looking for. So how can you participate in this market? There are three instruments available for trading currencies and while they all allow you to trade the market, their characteristics and associated regulations (or lack thereof) make them quite distinct. So let’s have a look at what instruments are available when we want to trade the EUR/USD currency pair for example.

Forex

According to the Bank of International Settlement approx 5.3 trillion USD have been transacted in the month of April 2015 (https://www.bis.org/publ/rpfxf13fxt.pdf). Of the three instruments covered in this article direct OTC Forex is definitely the biggest market. Here your counterpart is your broker and he sets the stage for your trading while he is connected to the global network of brokerages, companies, banks and other financial institutions. Most brokers provide you with flexible trade sizes and high leverage which makes trading Forex very appealing and available even for small accounts. As Forex is not subject to regulations like the Pattern Day Trading Rule in the US, small accounts can be actively traded 5 days per week. Usually, there are no option contracts available and holding a position over several days incurs overnight holding fees.

Futures

The second option for trading currencies are the global Futures markets. EUR/USD is actively traded in the 6E contracts at the Chicago Mercantile Exchange (CME - http://www.cmegroup.com/trading/fx/g10/euro-fx_contract_specifications.html). On an average single day about 200,000 contracts are traded, each representing 125,000 EUR. There are also smaller contracts trading (12,500 EUR) but here the traded volume is much lower (approx. 20,000 contracts per day). When you are trading Futures your counterpart is the exchange. There are no overnight holding fees and you are operating in a well regulated environment. You get almost the same trading hours (23 h/day) as with Forex and you can trade option contracts. Futures accounts are not subject to US Pattern Day Trading Rules and provide you with fairly good leverage: 3,550 USD maintenance margin allow you to control 125,000 EUR.

ETFs

Your third option in trading EUR/USD are Exchange Traded Funds (ETFs) like FXE. ETFs can be traded like regular stock. The average traded daily volume in FXE is close to 750,000 shares and there is a liquid options market as well. Once more you are trading in a well regulated environment, your counterpart for the trade itself is the exchange. As ETFs trade like stocks those transactions are now subject to Pattern Day Trading Rules which can limit the trading possibilities for small accounts quite significantly. Further, trading is usually limited to the official exchange trading hours. The smoothly flowing trends you can observe on Forex and Futures markets can suddenly turn into non-optimal chart structures which can make proper risk management sometimes difficult.  Compared to OTC Forex and Futures trading your leverage is rather small and depends on the type of account you are trading (cash, margin or portfolio margin account).

You can see that the available options for trading currencies are really different. You as a self directed investor have to decide which type of trading vehicle you prefer and which makes most sense for your personal situation and your requirements. All our trend following strategies work equally well in all three of them.

The Top Ingredients For Successful Trading runs on

• Tuesday 29th September 2015 @ 8pm Auckland, 5pm Sydney, 8am London and 3am New York

Regards,

Philipp Pfitzenmaier

The TWP Team