Some basic questions about Forex

S

Saltynuts

I'm going through babypips at the recommendation of maximumsuffering, but so far its not really answering my basic questions. I don't think I ever want to be a "trader" (don't think I could), but I really like "active investing". My style might be to say (in the forex market), for example, that, I am fairly certain over the very long term that the U.S. dollar will appreciate versus the Mexican Peso. Always has, probably always will (maybe not, but let's just assume it will). So I'm willing to "sell" the Peso, or "buy" the U.S. dollar versus the peso, however it works, very slowly over time, maybe when the Peso breaks out to the upside for example, I would be selling into that slowly.

Can the forex markets support that sort of thing in general, and provide someone a good rate of return?

Also, if my base currency is the U.S. dollar (as I am in the U.S.), can I still do this? I'm long dollars versus the peso, but I've already got all my assets in dollars or dollar based investments. I think buying the U.S. dollar/peso pair still makes me (even more) long versus the peso.

Also, I read on here about "carry trades" - that is, if one country's central bank or whatever has a higher interest rate than your own, then if you buy that other currency then you get paid the differential. This has me thoroughly confused. I always thought of foreign currencies as me actually converting my U.S. dollars to the foreign currency. For example, if I bought some Pesos, I would then hold some Pesos in an account. But then if I also wanted to put those Pesos to work I figured I would have to use those Pesos to buy Mexican stock or bonds for example. Do I have some fundamental misunderstanding of this? I think so lol.

How are commissions compared to stock? For example, I can buy 100 shares of stock at IB for $1 or close to it. Almost nothing. Are forex commissions comparable or much higher? What about spreads?

Sorry for the newbish questions, and many thanks for any help!
 
There are others here who can answer your carry questions better than me.

On the rest, I think it depends on what you mean by "good return".

Money can be made, even as a cash trade (i.e. non-leveraged). There are times when certain currencies appreciate quite a lot compared to the U.S. dollar, so if "good return" is a few percentage points a year, absolutely. People near the border will often buy foreign currency if it is appreciating in price vs the $us.

For commissions, IB charges a minimum of 2$us on the size trade you're probably talking about ... but it starts to climb a little once you get above about 100k$us (i.e. 20$us on a million or "0.0001 x .2 x AMOUNT = commission" see their commissions web page and click forex tab). Edit, missed your question about spreads ... on spreads, it depends on whether the trade is large enough for their IDEALPRO system or not. If you are trading under 25k$us you'll get the 2$us commission and a trade that is a few ticks off of the (usually tight) spread, still a non-issue for a position trade. Honestly it's barely noticeable .. and the trades execute pretty much immediately. It's amazing, really, that you can just click a few buttons and suddenly have foreign currency instead of $us, and that it happens so fast and at so little cost.


Note that the only reason that presenter's order didn't execute basically immediately is because his order was outside of the spread.

As usually ... this is not advice, standard disclaimers apply, seek professional advice, etc, etc, etc.
 
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Hi Saltynuts.

I'm thinking that by "trading" you mean just intra-day trading, and by "active investing" you mean any positions held longer than a single day?

I never trade intra-day. My trade set-ups that take about 2-3 weeks to develop, I expect to be able to hold the trade at least 2 weeks unless price stabs me in the back early on. Its entirely possible to make a profit from this, with good TA and an appropriate set-up. Forex allows you to diversify and benefit from the strong economy of a competing jurisdiction, and possibly the weak economy of your own.
 
Forex trading is generally harder than stock market trading.
The stock market has a long term bias (it goes up more often than it goes down). Forex pairs swing sideways over the long term (they go up just as often as they go down).
 
Saltynuts said:
I'm going through babypips at the recommendation of maximumsuffering, but so far its not really answering my basic questions. I don't think I ever want to be a "trader" (don't think I could), but I really like "active investing". My style might be to say (in the forex market), for example, that, I am fairly certain over the very long term that the U.S. dollar will appreciate versus the Mexican Peso. Always has, probably always will (maybe not, but let's just assume it will). So I'm willing to "sell" the Peso, or "buy" the U.S. dollar versus the peso, however it works, very slowly over time, maybe when the Peso breaks out to the upside for example, I would be selling into that slowly.

Can the forex markets support that sort of thing in general, and provide someone a good rate of return?

Also, if my base currency is the U.S. dollar (as I am in the U.S.), can I still do this? I'm long dollars versus the peso, but I've already got all my assets in dollars or dollar based investments. I think buying the U.S. dollar/peso pair still makes me (even more) long versus the peso.

Also, I read on here about "carry trades" - that is, if one country's central bank or whatever has a higher interest rate than your own, then if you buy that other currency then you get paid the differential. This has me thoroughly confused. I always thought of foreign currencies as me actually converting my U.S. dollars to the foreign currency. For example, if I bought some Pesos, I would then hold some Pesos in an account. But then if I also wanted to put those Pesos to work I figured I would have to use those Pesos to buy Mexican stock or bonds for example. Do I have some fundamental misunderstanding of this? I think so lol.

How are commissions compared to stock? For example, I can buy 100 shares of stock at IB for $1 or close to it. Almost nothing. Are forex commissions comparable or much higher? What about spreads?

Sorry for the newbish questions, and many thanks for any help!
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Take into consideration that you will be paying the interest rate differential(carry) between countries if you are short the currency that has the higher interest rate. The Mexican Peso has a much higher interest rate than the United States.

The market does not tend to often offer free money for long periods of time.

After you learn enough of a subject, there comes a time when you must sit down and think for yourself. One's thought pattern might be something like this: "Giving what I know about this market and current conditions, is there an opportunity for a profitable trade that meets my time horizon, odds of success requirements, and R/R"?

Currencies can have multiple year movements and can be driven by a combination of strong economic trends and that country's Central Bank monetary policy.

Since you are U.S based, Interactive Brokers requires, I believe, $10,000,000 in your account for forex due to relatively recent regulatory changes. You can trade futures on CME or open a foreign based brokerage if IB's requirement forex requirements are too high.

Commission rates are not that important of an consideration when you are trading longer term. Focus on trading well. Depending on brokerage, forex commissions, typically measured in pips, are low relative to standard trade size. However, also consider that forex volatility is typically significantly lower than for stocks, especially recently. I leave it to you to do your own commission comparison shopping. Be sure to compare other attributes of the brokerage candidates as well before making a decision.

Your choice of perusing longer time frames for your trading is very time efficient, lowers trading costs, and keeps you from competing directly with the best traders in the world. People are attracted to shorter time frames because of the potential to lower per trade stop losses and the potential to increase returns. For example, the average daily range of a trading instrument might be 1%. The average weekly range might be 2.5%. The average monthly range might be 5%. Therefore potential returns, all other things being equal would be 230% day trading, 125% trading weekly ranges, and 60% trading monthly in these hypothetical and simplistic examples.

Remember, when you think for yourself, you will gain a better sense of what is most relevant at a given time rather than being constantly uncertain giving all the information bombarding us all the time.
 
Thanks so much everyone, I really appreciate it. So it sounds like if I "trade" (I would not be trading really) forex at a forex shop, and can not go the step further, and say once I'm long Swiss Francs or whatever over the U.S. dollar, then invest those Fracs in Swiss stocks? I had always figured it would be a good way to get equities around the world, along with some potential hopefully benefit coming via Swiss francs appreciating against the dollar as well.

I appreciate all the time you took for that post maximum!

tomorton, yea, I was thinking interday for sure. Would like to diversify by holding lots of different currencies, but not just that, lots of different equities as well. Probably inter-year as well. :)

Eves, thanks so much, will check out that video!
 
If you could spare at least 1 hour trading the U.S. futures market in the morning between 9:00 and 11:30 EST, I don't think Forex would be of that much interest to you. You'll get everything you want out of trading in the 9:30 - 10:30 EST interval there without all of the mental / emotional weariness talked about in these forums.

I thought about trading Forex at one time, but it's just crazy to have your money either flipped in and out of so many different currencies (adding another risk to your trading) or take out a loan in another currency to make the trade, not to mention overnight risk of some unexpected event wiping out any long-term profit you had planned for a particular pair. And to top it all off, it's an unregulated market with some shady characters in the brokerages.

Win quick / lose quick (e.g. in/out of any one trade < 30 mins). It's easiest on the emotions. The three e-mini contracts: NQ, YM or RTY (Russell 2K, the most "gentle" of the three) will give that to you in buckets these days. Stay away from the ES. It doesn't move well enough compared to these other three and MOVING is what you want.

And if you are bound and determined to trade currencies, then keep your money is USD by trading the currency futures off of the CME, a regulated market. Your USD / Mexican peso pair is there also (symbol 6M).

Just look at the straight-up and straight-down moves within the 1st hour of the e-mini futures on a regular basis. What more is there? Catch a piece of those rides and you're done for the day. What do you see on the 1 min charts? You see stretched-out bars where you could be long (or short) on any one of the first 5 closes out of congestion with low heat, small overlaps on the pullbacks and then more streched-out bars for the next leg up or down. There's a common word for that in trading parlance: PARADISE!
 
Saltynuts said:
Would like to diversify by holding lots of different currencies, but not just that, lots of different equities as well. Probably inter-year as well. :)
More...


You are thinking of diversifying into loads of other currencies when THE CHAMP (USD) is putting on a spectacular show on monthly?
Why?
 
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