Forex is a trader’s market. So many complex factors go into foreign exchange rates, it’s really impossible to conclude what will be the EUR/USD in 1 year, 10 years, or 50 years – as explained in Splitting Pennies. Investing in Forex is like betting on the weather. And frankly speaking, given the right climate, it can work. For example, during the post 9/11 global market, it was assumed that USD would go down, and it did – thus propping currencies like NZD, EUR, GBP, and others. Take a look at the monthly GBP/USD chart – interesting to ponder also because of possible Brexit looming:
It took the credit crisis of 2007 to reverse the trend. And in the end – looking back 15 years, what changed with the GBP/USD rate? Right back to where it was, 1.41 handle. With talk of Brexit, Bremain – what is a Forex investor to think? Flip a coin – you’ll have better odds. Psychological factors in Forex work against investors as well. Do you really have what it takes, to sit on a GBP/USD position for 6 years? From 2001 to 2007, it would have been without leverage, a 48% gain – with 10x leverage, or 10:1 – that’s 480% – plus the swap (which still would have been positive for a GBP/USD long in that time). So here’s a situation where the climate was ripe for long term Forex investment. Since then, such an opportunity hasn’t presented itself, with the majors. Maybe Brexit will be a new trend of GBP/USD – the start of a new super cycle. But it’s too complicated to bet on. There are other examples, such as the 4 decade long CHF bull run that ended with the SNB (Swiss National Bank) bending over for their US masters. Investors who bought CHF post Nixon shock, would have had without leverage 400% + return, since the recent super cycle top, and final meltdown and manipulation of the Swiss Franc.
Everyday, we wake up and check the markets – what’s the news? Even with a 24/7 dedicated analysis team, it’s difficult to even conclude what the market outcome will be, based on the facts. Market perception in Forex can be completely off. For example there are those that believe Brexit can be GBP positive post vote.
Investing in Forex requires years of experience, a crack analysis team, loads of investment capital to weather any short term storm, and nerves of steel.
Trading Forex
So, let’s explore ‘trading’ Forex – meaning – day trading, short term, to capture price movements, regardless of direction – as an investment strategy PER SE.
If anyone has ever tried trading Forex manually – it’s nearly impossible. Statistics about individual Forex traders can be misleading. Brokers are now required to publish statistics about accounts, how many are positive, and other data. But this data doesn’t include how many accounts are managed, or use signals, algorithms, or other robot-assisted trading. Because trading Forex is so difficult, many traders will develop or purchase trading algorithms (such as this one named “Liquidity”) to assist their trading. It’s similar to hiring a manager such as an RIA (Registered Investment Advisor), the difference being it’s a software system that manages your account, placing trades based on a proprietary algorithm. (An algorithm is a series of steps)
This type of algorithmic trading in Forex is so common, it’s almost unheard of that someone will blindly trade Forex without the aid of an algorithm, signal system, or other aid. A technical indicator system such as technical analysis, qualifies as a signal system. So, is it possible in Forex to find good algorithms, and trading systems, that work? Yes – of course it is! Companies such as Fortress Capital, offer Forex Managed Accounts services (in the case of Fortress, for QEP (Qualified Eligible Person) only ). Other companies such as Elite E Services, offer algorithms for purchase and lease, for traders to trade their own accounts. But of course, it’s an ever growing problem for US Citizens, who are only allowed a few small choices of Forex brokers, who are over regulated (due to the overwhelming Forex fraud which is .. knock knock .. a thing of the past).
One day, perhaps the Forex regulations will change, and robo-advisors will be an asset class by itself. This is happening outside of the US, as the lax rules and higher leverage allow algorithms to live and breathe. Until that day, US investors who are interested in Forex, are left with the difficult choices of expatriation, qualifying themselves as QEP, or sticking to the good ol’ stock market, where it’s possible to buy products that you enjoy every day, like Microsoft (MSFT).
In conclusion, here we have simply decoupled Forex investing from trading, and hinted at the hybrid mix – when a trader uses an algorithm, it becomes an ‘investment’ just as one invests in a currency, one ‘invests’ in a robotic strategy. But the good news about robots, they can be tested, and used in a plethora of ways. Whereas, with simple vanilla currency investing, there’s only so many ways to sell a covered call on a GBP/USD position to earn extra ‘dividends.’
If you’re interested in learning more about what Forex is – the starting place is to checkout Splitting Pennies – Understanding Forex. It’s only $6.11 on Kindle, about $1 in 1970 when Forex was created. For those who remember when markets were traded on paper, there’s a paperback edition of the book Splitting Pennies for only $14.98. The book was published by Elite E Services, Inc. – a Forex technology company.
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