Monday, August 01, 2005

Day-Trading Currencies, 24/7

CURRENCIES TEND TO BEFUDDLE MOST AMERICANS.

Accustomed to being able to use the same, simple greenback from sea to shining sea, we don’t have the same facility in trading currencies as Europeans, who historically had to swap francs for marks or lira. While the euro has eliminated much of that need, there’s more interest than ever in trading currencies, especially following China’s decision to loosen its tether on the yuan.

Because of the global nature of currency trading, the market is open 24 hours a day, seven days a week, so you can day trade all night long. It’s an extremely liquid market, with daily transaction volumes of $1.5 trillion to $2.5 trillion, and with players ranging from world banks to individual traders.

Since much of the volume is speculative, the spreads vary, which leads to arbitrage opportunities: There is no restriction on short-selling since you’re buying, or going long, one currency when you sell another. Forex Capital Markets (http://www.fxcm.com), which offers online currency trading to institutions and retail investors, states in its “Why Trade Currency?” leaflet that currencies rarely spend much time in tight trading ranges, and have the tendency to develop strong trends. The firm further states that a technically trained trader can identify trends and breakouts that provide multiple opportunities to enter and exit positions. Indeed, currencies tend to have the best-defined trends of any market, perhaps because they aren’t free of governments’ manipulation.

If you’re going to make money trading in foreign exchange, it’s good to have some education and training before you jump in.

You’ll hear the brokers who specialize in forex bang the drum of trading on margin, leveraging a small amount of money to make a huge pile, and so on. Do yourself a favor before following that seductive song: Learn as much as you can before opening an account. As each brokerage service is required to state in its customer information packets, “Forex trading on margin carries significant risk and is not suitable for all investors.” (It’s no surprise that it was the money changers—the biblical equivalent of currency brokers—that Jesus threw out of the temple for turning it into a den of thieves.)

To gain more practical knowledge about currencies, check out “All About...The Foreign Exchange Market in the United States,” published by the Federal Reserve Bank of New York at http://www.ny.frb.org/education/addpub/usfxm/ for some basic information on the structure of the market and the main players.

One way to get into gear is through mock trading. Several online brokers that offer currency trading post trading games, and it’s in your best interest to try out mock trading before you try doing it with real money.

OANDA FXTrade (http://www.oanda.com/), headquartered in New York City with offices in Zurich and Toronto, offers foreign-currency tools and applications as well as foreign-exchange-related content targeted at investors, businesses and travel clients. OANDA’s currency-conversion and localization services cover 164-plus currencies and are available in seven languages. Their mock-trading application is FXGame or fxtrade.oanda.com/fxgame/, and it credits the player with $100,000 in “play” U.S. dollars—and it’s free of charge. It’s a good way to get familiar with OANDA’s platform, and to decide it if will work for you when you start trading real money.

Forex Day Trading (http://www.forex-day-trading.com) provides a good basic introduction to currency trading under its “Education” tab off their main screen. One point the authors make when they discuss taxes is, “Forex traders don’t receive 1099 forms from their broker at the end of the year like stock and futures traders do.” The firm also notes: “Currency traders involved in the forex spot (cash) market can choose to be taxed under the same tax rules as regular commodities [IRC (Internal Revenue Code) Section 1256 contracts] or under the special rules of IRC Section 988 (Treatment of Certain Foreign Currency Transactions). IRC 988 applies to cash forex, unless the trader elects to opt out.”

You can sign up for a 30-day demo account at http://www.forex-day-trading.com/forex-simulated-trading.htm to check out the tools available at Forex Day Trading.

The majority of online forex brokers are market-makers, so they don’t charge commissions on transactions. They make their money on the spreads, and are often taking the opposite side of a trade from yours. Spreads are defined in “pips,” which is a unit of price change in the bid/ask price of a currency. For most currencies, a pip denotes the fourth decimal place in an exchange rate and represents 1/100 of 1%.

FXDirectDealer (http://www.fxdd.com) provides real-time margin-monitoring capability in numerical and graphical format, allowing clients to know where they stand in real time. FXDirectDealer has a charting package with tick charts, and minute, hourly, daily and weekly charts. Chart types include candlestick, tick and bar charts. Bollinger Bands, Moving Averages, Stochastic, MACD and Momentum can also be added. In mid-July, FXDD announced a two-pip spread on the EUR/USD (euro-to-dollar) and nine new currency pairs. The firm says it does not trade against its customers, due to parent-firm Compagnie Financière Tradition’s policies. FXDD allows a 60-day trial of their trading platform, accessible by clicking “Trading Platforms” on their main page.

OPTIONSXPRESS IS ROLLING out futures trading to existing customers, with a subtle “Futures” link added to the selections available under their “Trade” tab. They wrote their own futures-trading interface, rather than borrowing code from a futures house as do most other brokers. Some brokers require you to open a separate account to trade futures, but optionsXpress has figured out a way to allow trading of futures in the same account with stocks and options.

To be eligible to trade futures in an optionsXpress account, an investor must be located in the U.S., have account equity of $100,000, one year of prior futures-trading experience, minimum liquid net worth of $150,000, minimum income of $50,000, and speculation as an investment objective. Existing optionsXpress customers who want to take advantage of this new feature must indicate their interest. Applicants are reviewed on a case-by-case basis, and if approved, can trade financial and currency futures, interest rates, metals, and single stock futures. Commissions are $3.99 per contract plus exchange fees.

ONLINE BROKER NEWS: Ameritrade’s takeover of TD Waterhouse, announced in late June, is scheduled to close by year-end. Joe Moglia, Ameritrade’s CEO, says that he anticipates maintaining the majority of brick-and-mortar branch offices that Ameritrade (ticker: AMTD)will pick up with the TD Waterhouse takeover. One of Ameritrade’s strategies for continued growth is to become a major player in the long-term investor space; its Amerivest subsidiary is evidence of that strategy. Moglia believes that branches are worthwhile for the long-term investor, noting, “We may approach them a little differently because there might be some that don’t make sense.”

Published in Barron’s August 1, 2005

Posted by twcarey on 08/01 at 01:09 PM
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