Forex trading

Water Cooler Investing
#1

Anyone here into forex trading?

Been doing a lot of it myself lately. Its defintely not the get rich quick thing I originally thought it would be. But enjoying the ride and learning and trying to discover new ways to trade and back testing ideas.

Ive blown out a couple of accounts after experiencing massive gains, but learnt a lot doing it.

Would love to hear some of your stories of success and woe.

#2

There are broadly three ways to make money in Forex:

  1. Arbitrage : if you can find mispriced currencies (and can get to them before the banks and brokerages and dealers who have computers bigger than your neighborhood can), you can make money. Of course, you’ll still have to pay the bid-ask spread to a dealer on each transaction, so they would have to be substantially mispriced to cover the spread(s) and still show a profit.
  2. Speculation : if you can predict which currencies will appreciate against your home currency, you can make money. Of course, you still have to pay the bid-ask spread to a dealer on each transaction, so you have to be right in your speculation more than 50% of the time just to break even, more so to show a profit.
  3. Be a Dealer : so that the suckers trying to do 1. or 2. will have to pay you the bid-ask spread whether they make money or (more likely) lose money.

When people tell me that they’re planning to try their hand at Forex, I generally tell them that it’s a lot simpler if they just give their money to me. This has two advantages:

  1. It’s a lot less work to lose your money simply by giving all of it to me in a single transaction than by giving it to Forex dealers a fraction of it each time in a few hundred transactions, and
  2. I can use the money a lot more than most Forex dealers.
#3

Nice summary.

It is starting to feel a lot like gambling these days. I often get the feeling the whole market is fixed to a large extent.

#4

Forex really is close to gambling. If you can’t get razor thin bid-ask spreads and/or act faster than major banks, it’s best not to try to play that game. Soros said that currency markets were the one market he never felt he mastered, which is ironic since his most famous trade was a 1992 trade, long the deutchemark short the pound, on a bet that the bank of England woudl decide that inflation was too painful and thus revalue the pound downward.

Some people feel that technical analysis can offer help for intelligent speculation in currencies. Currencies do seem to take a long time to revert to fundamentals, so there is more room for the technical approach.

#5

Agreed with bchad, it’s a result of liquidity. Large very liquid markets like FX are unlikely to produce any strategies with remarkable results.

Though, because they are so liquid, they are very mean-reverting on small timeframes, unfortunately, it requires a large capital investment to do the volume necessary to get transaction costs small enough to capitalize - but then this is largely the case with most markets.

#6

I would add that trading forex is very different from investing in short-term deposits or fixed income securities in denominated in different currencies. Most regular (using the term loosely) people trading forex are massively levered and the small swings endemic to currencies causes people to get wiped out. For those who take a more conservative approach, there is evidence that the carry trade is profitable (though when markets go down, the carry trade goes down with it).

#7

Funny you should mention this now: I’m writing the Level III Stalla study guide on currency management (reading 28), and just finished the bit about carry trade. You’re right, when things go South, they go South in a hurry (and carry trades are always leveraged).

#8

Right, but that likely conflates cause and effect. When margin calls come in because some major non-currency market is collapsing, it tends to push up the cost of leverage, or others sell carry positions to cover losses and/or reduce portfolio risk. And in emerging markets, the flows of foreign portfolio investment tend to push currency prices around a lot more, when one market goes, foreigners pull out, which tends to push the local currency downward. These aren’t the only reasons that carry trades collapse, but it’s one of the more common ones.

The other risk in currencies is that the fat tails are very fat. In general, currency fluctuations tend to be fairly small, so one has to lever up massively to make any money. But then one becomes massively exposed to a fat tail event, which happens periodically when some word gets garbled at a central bank meeting, or a central banker’s wife has a miscarriage or something, and if you’re on the wong side of the levered trade at that moment, say goodbye to your capital.

Interesting that you write the material for Stalla. I used to teach for them before they got Schwesserized.

#9

So did I.

I also was Level III curriculum manager for Stalla for a while.

Do we know each other?

#10

^Dudes just hijacked my thread to discuss their CFA swinger parties from back in the 80’s!

#11

'80s?

Hardly.

(And “_ your _” thread?)

#12

Dude, you should have been there, transferpricingCFA, those things were da shytz!

#13

I can imagine. Everyone knows CFA chicks give a mean bj!