If you know forex, you eschew it ? These times the industry is putting a lot of money on forex market promotion and everywhere you look at you will see seminars, ads, books on how to make money on cash currencies. It really seems that forex markets are a big opportunity for retail traders. But reality is different from the perception we have of it ? First of all we need to start from a firm standpoint: what you do not know is much more risky than what you know. Why this ?

As we know forex market is not regulated, there is not a physical venue where trading is executed, not official prices. If you compare different data vendors you will discover that prices can have slight differences because contributors are not the same. If you are a quantitative trader you will see that trading systems results will vary according to the broker you are trading with. The highs and the lows of the bars are never the same, and the worst if you consider an intraday price chart. If prices are not the same for everybody how it works with commissions ? How much will charge your broker if you do not know what will be the real price based on which he will place the rebate ? “A broker makes a fortune on forex trading, CFD and all the other over the counter products – confess a broker on condition of anonymity – while just good money on futures and almost nothing on stocks”. This is the first reason forex is so much advocated by the industry as the best trading tool. Best not for the traders, it seems, but surely for the brokers.

Moreover if you compare a forex daily price series with a CME futures daily price series you will see that prices are much more … let’s say overlapping in forex trading than in actual futures trading. Much more noise, less trends, less profits. And then let’s fight against another misconception of forex trading: the advocates of forex trading name always “liquidity” as a major advantage.

But we know that too much liquidity is a drawback in trading like little liquidity. Liquidity is an abstruse concept that should be kept at a medium size, a size that nobody knows where is but it is sure that it exists somewhere. It is much more easier to build up a working system on Russell or on Dax than on Sp500 emini. It is much easier to make money with swing trading on Sugan than on Tbond. For the same reason the skilled forex traders know that it is easier to trade breakout on Euro / yen pair and on GBP / Usd  than on Euro / Usd. On the latter pair there is too much noise, too many traders around and too many news that affect prices. Better to choose another pair where information flow is not so brutal … a pair that we can define much more illiquid provided somebody knows what is liquid and what is illiquid.

In 20 years I am in this business I met personally (no contention that this is the only one … there will be many traders but I did not meet them) just one good forex trader. His name is Stefano Trulli and his is the winner of the Forex category of the Top Trader Championship 2008 with a return of + 493,72 % in just 2.5 months. In front of the audience during the final round in Rimini in May 2008 he made 16 trades and none ended up in a loss. Unfortunately forex trading has never been much appreciated by the participants of the Top Trader Championship versus a big success of the futures and stocks categories.

But Forex markets has another big advantage: in many European countries  regulators forgot about them and currencies markets are not considered financial instruments so that everything is possible without much bureaucratic burden. This aspect could not be seen in a negative perspective: innovation flowers were limits are low and prohibitions are impossible. It is why it happens that it is relatively easy to find at the retail level a good forex management scheme. Derivative industry is much more regulated and innovation has trouble to spread if too many restrictions and safeguards are applied.


About Author

Emilio Tomasini is Chief Editor of the Italian edition of TRADERS’ MAGAZINE (www.traders-mag.it), the leading monthly publication in Europe for trading and investment, and since 1999 he organizes the TRADERS’ CUP the most important real money European trading competition (www.traders-cup.it). His personal weekly free newsletter L’Indipendente di Borsa (www.indipendentediborsa.it) is one of the most reputable Italian financial media and counts more than 100.000 readers. His website in English is www.emiliotomasini.com

Leave A Reply