Forex Issues

A few days ago, Mish took on some of the views of the US bond market – and by extension ways the currency market as well. Part of the discussion relates to some of the stuff I’ve written here in the past, most recently in Interest Rates Due for a Breather Before the Taper, but goes a bit more into the perspective of foreign central banks in all of this. In doing so, Mish takes on the idea that if/when the Fed stops buying Treasury paper there won’t be any buyers.

This gets into the functioning of global trade. If the US is operating at a deficit of trade, which is the case, then it means there is a surplus of USD in the global system being held by those countries running a trade surplus. Those USD have to go somewhere, and invariably that’s into US Treasuries. As Mish notes, the argument gets made that those surplus countries like China can/should invest the dollars into hard commodities, but that has negative implications in terms of the strength of their currency (buying Treasuries means not selling their USD, thus weakening the dollar) and in stockpiling stuff they don’t necessarily need at potentially inflated prices.

I will add another argument to the case.

The Fed does Q.E. by purchasing Treasuries in the open market. Who do they buy from? Holders of Treasuries, meaning those who have previously bought them either in the market or from the Treasury at auction. In other words, there was already a group of buyers of Treasuries in the market before the Fed came in to buy them. The Fed can be looked at as just another big portfolio manager in the market. Will there be an effect on rates when they slow/slop their purchases? Of course. Just as there would be if PIMCO and its massive capital base got out of the market.

The interesting aspect in the situation looking forward is what will happen in terms of Treasury issuance. If the economy continues to positively progress it will mean improved tax revenues, and thus a lower federal deficit. If Congress is able to also meaningfully reduce the expense side of things (the bigger ask of the two), that will accelerate the deficit reduction process and further reduce the need for the Treasury to issue paper. That reduced supply will have an offsetting impact on the Fed cutting back on its purchases, which no doubt is part of the thinking of Bernanke (and his successor) & Co.

Bringing it back to the currency question, as Mish notes in his piece, one of the common claims by the loudest voices in the interest rate prognostication debate is that reduced Fed buying will negatively impact the dollar. This is said to be the result of no one wanting to hold depreciating bonds and because all the money in the economy will produce inflation-driven greenback devaluation.

The first part of that equation assumes the buyers/holders of Treasuries care about intermediate fluctuations in valuation. This is also something voiced in terms of the impact rising rates will have on the Fed’s balance sheet (which I discussed before in Prospects for More Upside in Interest Rates). I don’t abide by that argument and neither does Mish.

The second part of the equation, as I’ve noted before in different contexts, fails to take into account the other side of the exchange rate. The USD is valued in terms of other currencies. If that currency is equally at risk and/or exposed to the same factors said to put the dollar at risk of devaluation, then the greenback will not lose ground. In fact, the current situation sees many of the other major economies fairing worse than the US. This is far from a recipe for the type of rapid depreciation in the dollar some folks expect.

In June of 2012, a proposal by the National Futures Association requiring stricter regulation of PAMM accounts went into effect, sending many money managers and CTAs scrambling for PAMM account alternatives.

A PAMM account, or Percentage Allocation Management Module, is simply a way for investment management firms and CTAs to manage individual investor accounts more efficiently. Multiple individual accounts are aggregated into one “Master Account,” which is traded by the money manager or CTA. It is operated as one pooled account and the P&L is divided equally among the investors based on their equity in in it.

In April of 2012, James Bibbings, a former NFA supervising auditor, wrote a very informative post discussing the implications of the pending proposal. Appearing on, the post explained how the NFA felt PAMM accounts too closely resembled Commodity Pools, without being registered as such.

The points they brought up described multiple instances of structural problems. Issues with liquidity and margin were posing risks to investors and contributing to questions about the fairness of the division of P&L among sub-accounts. In the proposal, the NFA recommended the restructuring of PAMM accounts as a means of eradicating any dangers they could cause participating investors.
Bibbings also notes that PAMM scrutiny has reached the state level. Pennsylvania state security regulators saw the PAMM allocation system as a mechanism that was generating a “synthetic securities product.” This view made PAMM accounts subject to many additional securities laws and regulations in Pennsylvania, and could do so in other states, too.

At the time of Bibbings post, things weren’t looking good for PAMM accounts as they fell under intense regulatory scrutiny. Two months later, after the proposal took effect, “traditional” PAMM accounts began disappearing to make their necessary compliance changes. Some companies have seized the opportunity to create PAMM alternatives and others offer consulting services to help existing PAMMs comply with the new rules.   These instruments play an integral role in providing CTA’s and Money Managers with the key benefit of PAMM accounts: centralized management.


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.


I spend a good deal of time reading about what’s happening in the currency markets. Whether it’s the eurozone crisis, the US debt ceiling or individual countries and currencies, I am always curious as to what’s happening in the world and how it might affect particular currency pairs and my investments. In full disclosure, I’m not a professional currency trader. I have dabbled in the foreign exchange market as a trader, but quickly realized that my real skill lies less in being a great trader and more in being able to recognize the folks who are.

That’s why when I read a blog post this week in Reuters called “Do you have the heart for foreign exchange trading?” I was annoyed and disagreed with some of the premise of the post.

The blog made two assertions. First, that autotrading is something that only the professionals should undertake and that few firms know what they’re doing. Next, that if you don’t have the stomach for this market - or the heart as the author puts it - you should steer clear.

I’ll tackle the second part first because both points are intertwined. Right off the bat, it’s not my heart...or any savvy investor’s heart, that keeps them balanced and in the markets. It’s their brain. Semantics? Hardly. If you allow emotions to drive your investment decision in any industry, fund, exchange or financial area, you’re starting from a position of weakness.

As with practically anything in life, education is the key to a deeper understanding. I’m an avid boater. Part of being a good boater is knowing what you’re doing on a detailed level, whether it’s docking, handling bad weather or understanding how to use your GPS and radar. You can’t just say ‘this feels right’ or you’ll run aground or end up in a major storm. A recipe for disaster.

In Forex, the dangers are similar. If you don’t embark on your investment journey with goals, strategy, the proper attitude and a sound game plan, you might not achieve the gains you’re shooting for and is why most traders end up losing. This is where the second point comes in.

Autotrading is exactly the type of process and technology - when correctly configured and presented - that can mitigate risk, provide investors with a sound strategy and provide the opportunity for a successful Forex investment experience without having to know all the ins and outs of the market and when to place the trade. It puts those decisions in the hands of the professional trader.

In fact, the best autotrading programs keep the individual investor from pulling the trigger on specific transactions and currency trades himself. Most investors and traders are unsuccessful with autotrading programs when they given systems to follow that are not proven. Professional traders have a method to their madness and deferring to their expertise is what makes investors successful when using an autotrading program.

So, step back and be rational about any trading decision. The foreign currency market is a growing asset class and with volume quadrupling since 2001, it might be an interesting and positive way for you to enter another market segment.

But when you do so, don’t do it on gut instinct alone. Put in some research and spend some time understanding any program you’re evaluating.

Ultimately, Forex can be a viable investment and it can be a great way to diversify any portfolio. This article, and others, underscore the reality that the general public still has a lot to learn about the opportunity to invest in Forex.


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

As promised here is Part 2 of our interview with PIIGS panelist Charlie Fell. Charlie will be joining us on Thursday for our live webinar discussing the Eurozone debt crisis.

What country would a Greek default affect the most and why?

Contagion would be immediate to Portugal and Ireland, as investors would immediately speculate that the two troubled nations would follow suit.  If the default was disorderly, it could prove impossible to prevent Spain and Italy from being dragged into the quagmire.  Loan losses would also be an issue – the write-downs would bankrupt the Greek banking system and blow a large hole in the balance sheets of French, German and Portuguese banks.  A full-scale financial crisis across the euro-zone and the globe could erupt.  The fear that a Lehman-style meltdown lies in wait is very real.

The Eurozone is typically painted in a bad light, in terms of the USA - how do they measure up?

Public debt has increased at a faster pace in the U.S. than the euro-zone in aggregate and the debt-to-GDP ratio is ten percentage points higher in the former than the latter.  However, unlike the U.S., the euro-zone is not a fiscal union and thus, an individual country with large external debt in euros is much the same as an Asian country that fixes its exchange rate to the greenback and borrows in dollars.  Just as several East Asian countries collapsed in the late-90s when external financing stopped, the same would have happened to Portugal, Ireland and Greece, but for the support of the ECB who have kept the respective banking systems afloat.

Can you explain the relationship between Greece and Spain and how supporting one may mean no funds for the other?

The further support of Greece reduces the available lending capacity of the EFSF, which currently stands at about €320 billion.  This is not sufficient to cover Spain’s financing needs over the next two years, so European leadership must take credible action to contain the crisis, before it spills out of control.

What would happen if one of the PIIGS countries dropped out of the Euro?

Such an outcome is still unthinkable at this juncture, as it would almost certainly precipitate a financial crisis.  It is important to remember that euro membership is effectively irreversible, as exit would unleash the ‘mother of all financial crises’ on the seceding country.

Do you think Italy should be part of the PIIGS?

Italy has, from the euro’s inception, has been the so-called ‘elephant in the room’ given its high level of public debt, which is approaching 120 per cent of GDP, and is low trend growth at just one per cent.  However, the Italian economy does not possess the large macroeconomic imbalances evident in the periphery.  Private sector debt is low as too is the level external financing, the current account deficit is relatively modest at 3.3 per cent of GDP, and the fiscal position is moving in the right direction.  The primary fiscal deficit was close to balance last year and the Italians are expected to have the largest surplus across the euro-zone this year.  Furthermore, its banking sector has relatively little exposure to problem assets abroad.  Italy does not belong to the PIIGS, but unfortunately the markets may think otherwise.


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

There is nothing more telling that something has gone mainstream than seeing it as a skit on SNL. Facebook movie, Martha Stewart imprisonment, airport security scandal – pick the topic and if it’s hot, it’s been exposed in an often crass and typically hysterical way, on SNL.

I am moderating our Plight of the PIIGS panel this week with esteemed panelists Charlie Fell, Jamie Coleman, Bob Iaccino, and Spencer Beezly, and it reminded me of the Strauss-Kahn Eurozone Crisis skit that SNL opened with back on May 21st.

It depicts ex-IMF chief Dominique Strauss-Kahn at Riker's Island. In the skit, two other inmates talk about their feelings about the eurozone crisis including their views on what Germany needs and why Spain needs something different. I won’t spoil the fun for you – watch it for yourself.

While it’s a great parody and made for a good laugh, it also amplifies the dire and desperate situation we face in the eurozone. I am looking forward to Thursday’s webinar and to hearing what the panelists have to say about what’s next for the eurozone. Be sure to tune in for what promises to be a lively debate.

You can register for free here.


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

This Thursday join Currensee and an all-star panel for a no-holds-barred discussion of what the Eurozone debt crisis means for the Euro and all who invest in it around the world. Of our panelists we are lucky enough to have Charlie Fell. Below Charlie tells us a little bit about himself, and a lot about his stance on the Eurozone debt crisis- This is just Part 1. Part 2 will be posted on Wednesday. Enjoy.

Tell us a little bit about yourself.

I have been involved in the financial markets since the late-80s.  I managed funds for a leading Irish investment manager for more than a decade, before venturing out on my own.  I have lectured finance and investment across the globe and currently write a well-known column on market matters entitled ‘Serious Money’ for the Irish Times.  I set up my own advisory firm a number of years ago that provides investment advice and training to corporate clients.

What is your overall take on the financial state of the PIIGS countries?

Portugal, Ireland, Greece and Spain all benefitted from massive capital inflows priced at ridiculously low interest rates during the early years of monetary union.  The availability of cheap financing contributed to massive macroeconomic imbalances as reflected in large current account deficits that were brutally exposed once the financial crisis struck.

Portugal, Ireland and Greece all required financial assistance and the question now is whether the three sovereigns can stabilise their public finances and return to sustainable growth without some form of debt restructuring.

Low savings rates, a low degree of trade openness, inflexible product and labour markets alongside a lack of political unity means that the Greek situation is virtually hopeless.  The Portuguese face the same negative factors and are also crippled by large private sector debts, which means they are unlikely to generate the growth necessary to reverse the unstable public debt dynamics, even though their government debt burden doesn’t look particularly large versus Greece or Italy.  Ireland possesses several positive factors that may save the day including high private savings rates and a balanced current account, but the dysfunctional banking sector may prove too big a burden.

Why do you think Greece has decided to do little to help with its debt, while countries like Ireland and Portugal have been aggressive?

It is unfair to say that the Greeks have done little to help themselves.  The scale of the task is simply too great to begin with.  Greece reduced its fiscal deficit from 15.4 to 10.5 per cent of GDP last year – a remarkable achievement given that the economy shrank by 4.5 per cent.  The cyclically-adjusted tightening amounted to 8 per cent of GDP – the largest one-year consolidation in recent history for any advanced country.  However, the tough austerity programme is self-defeating, as low savings rates and a relatively closed economy have lessened the economy’s ability to absorb the fiscal tightening.  Fatigue has now set in, as reflected in increasing social unrest, and a default is all but inevitable.

When people refer to how quickly Greece’s economy needs to grow in order to steer away from default - how rapidly are we talking? What would it take?

Assuming the Greeks can return the primary fiscal deficit i.e. before interest costs, to balance this year and assuming no further improvement in the budget balance, the Greek economy would need to record nominal growth of roughly seven per cent per annum simply to stabilise the public debt at roughly 165 per cent of GDP.  Greece did manage growth rates of this magnitude during the ‘good’ times, but primarily as a result of abundant cheap financing and relatively high inflation rates.  The capital markets are now closed to the Hellenic Republic and low inflation rates are required to restore competitiveness.  In a nutshell, the best that can be hoped for is three per cent nominal growth and the fiscal adjustment required thereof is simply too large to be considered realistic.  The government needs to produce primary surpluses of about six per cent of GDP consistently in the years ahead as against a previous best of less than five per cent in 1998.


Stay tuned for Part 2, posting on Wednesday!


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.

There's a lot of talk these days about inflation and the impact of Fed policy on the dollar and the extension through the weaker dollar into higher commodity prices. Those looking to flame the Fed for its quantitative easing (QE) and generally loose monetary policy point to the falling dollar as the cause for oil going up above $100 and gold crossing $1500. While it's certainly true that the greenback is lower (the USD Index has been as much as about 12% off it's January peak), is the weak dollar really to blame for things like the rising cost of gasoline at the pump? Let's take a look at what the charts have to say about it all.

First is a comparative chart of oil prices in dollars and oil priced in euros. The chart below covers the last year's trading. The red line is the dollar value of a barrel of oil, referencing the left scale. The black line is the euro price of a barrel off oil (using front month futures), with that price on the right scale. Both scales are logarithmic so they express similar percentage moves between noted levels.

Now, the chart above doesn't show relative % gains for oil in the two currencies. Those are +31.3% in USD terms and +22.6% in EUR terms. This is about what we'd expected given the relative performance of EUR/USD over that time. The point of the chart is that aside from wiggles where oil has done better in one currency than the other for a period of time, the pattern of the two lines is consistent. Oil has been moving higher in roughly the same pattern, regardless of what currency we're talking about.

Now let's take a look at gold (again front month futures). Once more, the red line is in dollar terms and references the left scale, and the black line is euro terms referencing the right scale.

In this case, gold is up 29.6% against the USD and 19.4% in EUR terms. Again, that difference can be explained by the change in EUR/USD over the last year, which is as it should be. Here, though, we see a lot more variation in performance. In dollar terms gold has been in a fairly steady uptrend with only two relatively minor retracements. In euro terms, however, the ride has been much more dramatic. Those periods when the EUR line diverges considerably from the USD line are periods when EUR/USD was selling off.

The chart below highlights the variation between how gold and oil trade relative to the dollar. It shows EUR/USD on the top with the correlation between EUR/USD and gold plotted in red and the one with oil plotted in green.

Notice how much choppier the green line is than the red. That means the correlation between oil and EUR/USD is much more fickle than the one between EUR/USD and gold. That said, however, oil has spent more time with a positive correlation (meaning rising oil with rising EUR/USD and falling oil with falling EUR/USD). The gold correlation has been much more balanced. In particular, the gold correlation has been more negative when EUR/USD is falling.

Now, correlation does not mean causality. It just shows how similar the movement patterns are without looking at why that might be. The way I would tend to read the above, however, is to say that rising gold is more a factor of what's happening in the currency arena than rising oil prices. If you think about the implications of increasing money supply (which is what loose monetary policy is), then it makes sense. Gold is something with what could essentially be called a near fixed supply (very slowly increasing), so the more dollars there are the higher the value of gold per dollar (or any other currency). Oil has a different dynamic which is must more closely tied to economic considerations and geopolitics.

On the Currensee Facebook page yesterday a link was provided to a Fidelity article about how the stock market is climbing a wall of worry. In light of that, I thought it would be worth taking a look at the last time the stock market was seen to be climbing a wall of worry back in 2003/04 as it recovered from the tech bubble bursting and the impact of 9/11.

Here's a weekly chart of the S&P 500 index going back to 2002. The two lower plots are the Normalized Average True Range (N-ATR) and the Bollinger Band Width Indicator (BWI). The former is a measure of range volatility (find articles I’ve written about N-ATR at Trade2Win and TASC) while the latter looks at the volatility of closing prices by measuring the width of the Bollinger Bands relative to their center point (the 20-period moving average).

The thing I'd like to focus on is how N-ATR has followed a similar course recently as it did during the recovery in 2003 in that it has fallen pretty steadily as the market has rallied. It's not back to about the top of the range it was in for most of 2004-2007, during which time the market was working steadily higher. Similarly, BWI has also fallen back down into the area where it was during last decade's major bull market. This doesn't mean we're sure to get a repeat of the that kind of rally, but it certainly makes a good case to expect something like that, especially given the underlying general investment psychology in the economy. Bear markets are often indicated by rising volatility, not falling volatility.

We can take a comparable look at the Dollar Index.

Here we obviously have a bit of a different pattern. Volatility in the USD Index as indicated by N-ATR (remember, that's period range volatility) has fallen, but is nowhere near where it was in 2007 before the financial crisis began. I'd argue that you don't want to give those lows too much thought as any long-time market pro will tell you that was an unusually quite market, despite the persistent down trend. I would say that the index has basically normalized, with both N-ATR and BWI at about the midpoint of where their readings have been over the last decade.

What this indicates to me is that in the currency market we are no longer in crisis mode trading. The risk-on/risk-off swings that were so common are no longer to be seen as a major driving force barring some kind of major new event. Instead, we're back to trading more on the big macroeconomic drivers like interest rate differentials, and trade and capital flows.

Adam at Forex Blog has posted a critique of a Wall Street Journal article which discusses the pending loss of primary reserve currency status for the US dollar. The WSJ article, written by Barry Eichengreen, provides some very interesting information about the use of the dollar in global trade and financial transactions. For example, 85% of foreign-exchange transactions world-wide are trades of other currencies for dollars, and the dollar is the currency of denomination of half of all international debt securities, though in the latter case I'd ask what share of those debt securities are actually US government and related agency debt. Eichengreen believes, however, that the dollar will lose preeminence in the next 10 years.

Here are his reasons why:

1) Changes in technology mean exchanging less prominent currencies is less difficult and expensive than it was.

2) The dollar will soon have real rivals with the euro and Chinese yuan as the most likely candidates.

3) The dollar is at risk of losing its safe-haven status.

Let me address these points individually.

Changing Technology
I've been around long enough to remember when trading was done by telephone, not online. The technology has come along in leaps and bounds in the last decade or so. It's not just better tech, though, that makes for lower costs. It's also the fact that as forex market volumes have increased, and there's become more competition in the brokering and dealing arena, spreads have come down significantly. That's where you get the real cost savings.

It's worth noting, though, that as transaction costs have declined, we haven't seen any real marked shift in currency reserves. The dollar is still just about the same proportion of global reserves now as it has been for years. Technological improvements, as Adam notes in his piece, don't really impact the supply and demand for a currency. Maybe just a bit on the margins.

Rival Currencies
There have always been rivals to the dollar for the top spot. When the euro was launched it was immediately viewed by some as a challenger for the crown (though obviously not by those who thought the Euro Zone would blow apart). Why else do you think the SWIFT code for the exchange rate to the dollar was chosen to be EUR/USD rather than USD/EUR? It's been a dozen years now, though. As Adam notes, the euro suffers from being comprised of diverse parts. The debt and equity markets are fragmented among the constituent countries, countries with different credit and economic profiles. This makes for a much more shallow market for global investors to park their cash.

As for China, until the yuan is fully floated, it's not even a debate. Even if the yuan were freely floating right now, it would still be a big ask for it to challenge the dollar for prime reserve currency status. The Chinese financial markets are in their infancy. It will take much more than just 10 years for them to get big enough to be able to support major capital flows. Even the Asian Development Bank doesn't see the yuan as being a major factor in the currency reserve area. Adam notes that they forecast it will only account for 3-12% of international reserves by 2035.

What about the Swiss franc or the Japanese yen? Switzerland is too small an economy for the franc to ever be a major reserve currency. The Japanese economy is obviously a major one, but a key factor in being a prime reserve currency is having a balance of payments deficit. Japan does not have that (though things could change as the population there continues to age). This is also something that works against the yuan.

Loss of Safe-Haven Status
Eichengreen makes the point that recent economic and fiscal developments have caused the world to rethink the stability of the US markets and economy, putting the country's ability to sustain its track record of paying its obligations in doubt. It's a fair point. As Adam commented, though, this is old news, and is also of concern for the likes of the Yen and the Euro as well. The financial crisis didn't only do damage to the US system.

I disagree, however, with Adam calling the yen a, if not the, premier safe-haven currency now. Yes, the yen absolutely benefits greatly when the markets go into flight-to-quality mode. That, however, is related to the carry trade where yen are being borrowed to fund investments in other currencies. Scared investors bail out of those investments, meaning they convert their money back to yen and pay off the loans they took out. This is not the same as capital flowing into yen-denominated securities the way it flows into US Treasury securities in a panic.

For all the issues with deficits and the like, the US Treasury market remains the place risk averse money goes. So long as that remains the case, the dollar will remain the primary safe haven currency. There may be times when other currencies step in to the spotlight, as the franc has done recently on geopolitical developments, but those are transitory periods and not the real panic situations.

The Bottom Line
The dollar is not going to lose its position at the top of the heap any time soon. That's not to say there won't be variation in its exchange rate values, because there most certainly will be. That's also not to say countries and companies won't diversify their holdings, because they will as suits their needs. It's just that no major alternatives are going to be viable in the near future.

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My first internship was working for Bear Stearns long ago.  I was cold-calling potential clients for stockbrokers trying to spread the news on the attractive offerings that we had to offer.  One day, when I was tired of pitching Paramount as takeover target, I was perusing the Wall Street Journal and stumbled on to some interesting story.  I don’t remember the company that the WSJ was mentioning but I do remember what my respective stockbroker said that day when I showed him the article: “It's yesterday’s news, kid. Who cares. Find me the company that will be making headlines tomorrow”.

I didn’t take any offense to what he said as he is right because when you are trading equities you should not be trading ‘yesterday’s news’.  Equities gap, and they gap quite sizably from day to day.  When a story comes out, the market-maker will adjust the price accordingly.  Thus, if you are trying to buy or sell a security that just had news, you will not be receiving yesterday’s closing price.  Not even close.

Luckily in the currency markets there are no individual market-makers that control the spot prices.  Just imagine if you were a trader this week and wanted to buy EUR/JPY after the China central bank announcement regarding the CNY.  If you had to go through a market-maker you’d probably pay an additional 30-50 pips as the market initially saw this as a reflection of confidence on the global economy.    Of course in the end the announcement from China was considered not such a big deal and EUR/JPY would eventually collapse.  Luckily you probably figured this out and would have gotten out of your trade close to even.  If you had paid the market-maker the additional 30-50 pips then it would have been similar to buying a house in the US in 2007 and trying to sell today. Ouch. Similar to the real estate market trading equities is far from always being a liquid and transparent market.  If they could offer liquid equity markets throughout the day then don’t you think they would do so?

I harp on another instance where all markets were caught by surprise which is on February 18th of this year.  This is when the Fed raised the discount rate by 25 bps to 0.75%.  They did this action 30 minutes after US equities closed their normal trading session.  So as an equity trader if you wanted to be involved you had to stray outside your favored market as your market was closed!  Hopefully you didn’t buy or sell too many futures contracts as those become very expensive in a hurry.  Currency traders could have just clicked “Mine” or “Yours” and if you felt your trade had gone to its limits you could have closed it out at any time.

There is nothing like trading the markets profitably when the market-makers have all gone home or are stuck on a subway and may be oblivious to current market events!

If you want to trade a market on a short-term basis there is only one market to trade which also happens to be the world’s largest market, the foreign exchange market.

This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.


Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.