Tuesday, July 28, 2009

EES - The Forex Conundrum

It's difficult to know what one can say publicly about Forex. If performance is mentioned, it should first be approved by the NFA (as should any marketing material). Comments from insiders and partners are told in trust that it will not be repeated. Talking about market direction could be construed as a solicitation to invest or place a trade, opening potential liability issues. It seems there isn't anything one can mention without someone having a problem. Take a position, someone will be on the other side. And then readers complain about trader's making idiotically benign statements such as 'the market goes up and it also goes down.'

Even as this text goes to print, someone somewhere is thinking "what do they mean by this," and "are they talking about me?"

In an industry that revels in anonymity and secrecy, had its credibility ruined by fraud and misrepresentations, that is misunderstood and widely misinterpreted, is it any wonder that 95% (some sources say 99% others say 90%) lose money? As soon as it seems one trend is forming, forces come from out of nowhere and knock the market to another direction. Examples lately have been the SNB revaluing the franc, and announcements by the Fed purchasing US Treasuries.

Speaking of which, that is one investment that can be recommended without having various persons, agencies, and other organizations irritated by comments – TIPS. TIPS are the only haven investors have left to put their savings. Although not tax free, TIPS provide an excellent hedge against inflation and ultra high credit ratings. In fact, based on the perceptions about Managed Futures, Forex, and day trading, it may be simpler for CTAs to simply stop managing accounts and just invest their client funds in TIPS.

Advice for traders

With all the complexities in Forex, it should be an easy case to make that any trader should only use quantitative automated strategies to trade Forex. In order not to upset your counterparties, any strategy should be market-neutral and not take any 'position' in the market. This is easily done with options and much less easily done in spot Forex. However, with the use of automated trading tools, it is very possible. A trader must extract alpha from spot Forex at the same time, no one should know about it, or else those who are peddling other strategies may become jealous and feel threatened. One should use a broker that charges high commissions, so the broker doesn't see the strategy as some sort of intellectual competition to the broker. A tough market to trade, just ask McDonalds.