Forex

Haha this blog just started and I am already behind in my blog posts – been busy at work and all.

I have been experimenting with Forex trading of late. For the uninitiated, forex trading is the short term trading of currencies, betting that one currency will appreciate against the other in the short term. Many factors influence why one currency appreciates against the other. These range from interest rate policy, announcement of trade figures, general doom and gloom stories from said country.

I have researched quite extensively into forex trading recently. I recall in March 2012 when I first started stock trading, I did look a little into forex trading. But honestly, the forex quote itself scared the hell out of me – add to the fact that forex trades were so highly leveraged (up to 98% omg!) – I simply swore I won’t touch forex and will start responsibly with good old stocks and blue chips. I decided to take a closer look at forex trading a year into my trading journey because I discovered a few things about myself during my first year of trading.

1)      I have a severe distrust of the market. I am trying to move to a buy and hold passive dividend income strategy, but usually my trades are short, never more than a year. I believe limiting exposure to the market is the best bet of all

2)      I am not very greedy. You know the saying “lets your profits run”? For me, as long as profits start to jog, I take them off the table.

3)      I buy risky stuff. For a first year investor, I have bought into dubious declare-massive-profits-but-no-dividends S chips, Myanmar counters, pennies. Actually that is quite bad. But I digress

4)      I can take massive portfolio draw downs. Stock lost 20% of value? Shrugs, let me look into averaging down.

From all this, I was just thinking that actually forex trading could suit me really well. It’s short term get in get out, very risky (which I can take) and I’m not greedy (so it rises tens of pips and then I’m gonna go). So all this led to me to exploring forex a bit more.

Ok, let me impress upon the reader that I am honestly quite shit at exchanging money. Like, I even have problems reading the quote at a money changer. So imagine my horror seeing a forex quote like this:

EUR/USD = 1.3077/1.3081

Wert. I’m never gonna master this.

But I read on and I began to realise some basics. For example, putting money in SGD banks gives you quite a shit rate yeah? But imagine converting SGD to AUD where the Aussie banks give you a better rate. You earn just on interest alone! [So I asked my hubs, why on earth doesn’t everyone in Sg convert all their spare SGD to AUD and earn the higher interest rate? He  mumbled something about interest rate parity and said that was something I should have known in J1 econs. But anyone knowing me during J1 will know that I pay close to no attention in econs class so obviously how would I even know about interest rate parity.] Anyway, apparently one of the basics of forex trading is something called the currency carry which means that if you use SGD and buy AUD, and you have an overnight position, you get the difference of the higher interest rate credited to you. It’s like wow. But of course that is assuming ceteris paribus no movement between the SGD/aud pair, which in a 24 hrs totally liquid forex market is not possible. So really, the appreciating factor of one currency vis a vis the other is of paramount importance here.

Ok So lets say you think EUR is totally going to depreciate against USD cos of all the horsemeat thing and the Italian elections. What you should do is short the EUR/USD pair which means you sell EUR to hold USD. So that next time you can use the AUD to buy back a weakened SGD and get more SGD! Few things to consider:

1)      Spread

Ok rmb the quote I put up there? EUR/USD = 1.3077/1.3081. The 1.3077 is the bid price and the 1.3081 is the ask price. If you want to long (buy) the EUR/USD, you have to pay USD $1.3081 to get 1 Euro. If you want to sell this 1 euro immediately, you get paid only USD$1.3077. So the market earns the spread of USD$0.0004 (4 pips). This is the cost the forex broker charges for opening the position. Apparently there are no transaction costs unlike stock positions. Dunno why. 

2)      Currency Carry

Ok I mentioned this above. And if you buy a higher yielding currency by selling a lower yielding currency, then you get paid the difference in interest rate. The reverse means you pay the interest rate difference.

3)      Overnight closure of positions

Ok I read somewhere that some brokers close your positions overnight and reopen them in the morning which means each day you incur the spread fees (omg), I am not sure if CMCmarkets do this (I am experimenting with their demo account now), so I guess I will have to email them to us before I get a live account

4)      Holding fees

So I also read somewhere that if you hold a position overnight you have to pay holding fees to your broker. Again I think this varies amongst forex brokers so I gotta make sure that any brokerage I open with will not have holding fees like that.

So I have started a demo account with CMC and initially long-ed the EUR/USD pair until my hubs was like, dafuq are you doing, aint ppl fleeing from EUR now cos of the whole anti austerity vote in Italy. Then I was like oh yeah, so I closed that position.

I bought like 100 Euros, put up $3.25 sgd as margin and lost like $0.50. As you can see, not a great start.

So I started shorting the Eur/Usd, selling 1000 euros this time, putting up SGD 32 as margin. Omg, just as I did that, Euro started recovering, and my loss went up to SGD 12 before bouncing back to sgd 4 (at time of blogging). I wondered if it were real money and in much larger portions, would I have the mental strength to hold on or would I have cut losses pronto? All this is really hard to test with a demo account. It also showed me the great importance of stop loss.

Stop losses protect your profits and limit losses. But trading currency pairs with great volatility could mean you can stopped out of a trade prematurely. The one thing I do not understand is the trailing stop loss. You see when I sold Eur/Usd on my demo account for 1.3077, I set a trailing stop loss at 300 pips (half the margin). But when the Eur/Usd started recovering, I found that the trailing stop loss also moved! This baffles me and I still cannot explain it. Is not the trailing stop loss supposed to remain at the same level when price movement is not favourable? Only when price movement is favourable to the trade then the trailing stop loss follows it upwards? How can a trailing stop loss move down with a bad price movement – surely that defeats the point of a stop loss? I have no answers to why my trailing stop loss reacted this way but I guess I will have to experiment a lot more before I put real money to this.