PLUS: When to trade Forex using Futures contracts instead of spread betting
I really didn’t think things would happen this quickly…
In January, when I wrote about my big trading themes for 2014, I had no idea so much would happen in the space of two short months.
And just in case you didn’t see the ‘2014 trading themes’ newsletter here’s a quick summary.
- We discussed potential opportunities in Gold
- We talked about ways of trading the movements of Crypto-currencies like Bitcoin
- We put a firm tick against Binary Options as a serious alternative vehicle for our currency trades.
Well first of all, I’ve got some very exciting news for you on the Binary Options front. I’ve had a team of Beta Testers crawling all over the binary options strategy I designed.
I first used it almost a decade ago in the T-Bond futures and this thing is still on fire…
I’ve been getting incredible feedback from my testers and we’re now getting ready to open this up to the first group of live traders… more on that in just a moment.
Over in the Gold market we’ve seen an impressive rally off those lows we were eyeing as a potential double-bottom. The global flight to safety also cranked up the price of gold 2% on Monday. Tension in Ukraine is still increasing so we’d better have a quick review of those Gold charts today.
And poor old Mt.Gox…
Until last week it was the largest Bitcoin exchange in the world. On Friday Mt. Gox filed for bankruptcy with a shortfall of 850,000 bitcoins. And the value of those ‘lost’ bitcoins is somewhere around $475m at today’s market price!
Class action lawsuits are being filed even as you read this email. They’re going after the CEO – Mark Karpeles – personally in an attempt to recover the missing coins.
I’m not going to expand on the Bitcoin story today. We’ll have a look how that market stands in a week or two, once the dust has settled a bit.
So before we go on to the Gold and Binary Options items, I’m going to answer a question I received from a reader last week.
Spot Forex V’s Futures
Kevin asked about the differences between trading Spot Forex via a Forex broker or spread betting company, and trading currency Futures contracts on the Chicago Mercantile Exchange (CME).
Now I must say, spot Forex has come a long way over recent years. The difference between spot forex and futures has narrowed significantly. In fact, I would hesitate to say one is better than the other. I think there is room for both routes into the currency markets, it’s more a case of choosing the right tool for the job.
So first of all, let’s have a look at the main benefits of trading spot forex…
- Lower barrier of entry – using highly leveraged accounts (be careful, it can be a double-edged sword) traders can hold significant trade positions with just a tiny fraction of the overall value held by the broker as margin (‘margin’ is the deposit your broker expects you to maintain while you’re in the trade). By contrast, even a single futures contract of EURUSD requires a margin deposit of $2,500 before you can trade.
- Account sizes to suit all – it doesn’t matter how much or how little you want to trade with, there will be a spot forex account to suit your requirements. ‘Micro Accounts’ let you trade with as little as $200 with up to 500:1 leverage. That means at an extreme, you can control up to $100,000 with your $200. But to help you manage your risk – your minimum trade size is 1/100 of a full lot (a EURUSD trade would move in 10 cent increments rather than the full size $10 increment)
- Fast execution and deep liquidity – this used to be the sole preserve of the futures market but with reliable ECN (Electronic Communication Network) exchanges like LMAX in London coming online, you can now trade directly with your counterparty and access institutional grade liquidity around the clock. If you choose carefully, the days of your broker sitting on your order while they try to offset their own risk in the market are long gone.
- No capital gains tax or income tax to pay – if you trade through a spread betting firm, and your trading profits are not your primary source of income, you don’t normally pay tax on what you make. If you are a full time trader, or are making considerable trading profits, do be sure to seek specialised tax advice. You can be sure HM Revenue and Customs will be happy to take a slice of your pie if you don’t conduct your dealings tax-effectively.
For the average trader – reasonably active and looking to exploit the short-term fluctuations in price – Spot Forex is probably the right choice.
Meanwhile, over at the CME, futures contracts can offer you the following benefits…
- You get a completely level playing field – it doesn’t matter if you are Goldman Sachs or Joe Bloggs… everyone’s order gets routed the same way and it’s a case of first-in, first-out. If you spotted an opportunity and placed an order for even a single contract before a block of 1000 contracts comes in, you get filled first. Everyone is equal with no preferential treatment given to the big players.
- Standardised and transparent data – because all participants in the futures market trade through a centralised exchange, every single action is recorded and available for your analysis. You can see exactly how many contracts were traded at what price… how much volume came in at the bid only to be lifted before getting filled (a head-fake). Precisely which areas in the market were used as high-volume support and resistance, and much more… this can all help you make better, more accurate trading decisions.
- Guaranteed Security of funds – if you trade a larger account, this is probably the thing that’ll swing you over to futures. CME Group’s record of never having a default or loss of client’s funds is a huge factor. It works because risk is shared amongst all the clearing firms that are members of the exchange, they each act as guarantor. In effect, every transaction on the exchange is guaranteed.
So the futures market is probably more suited to the professional trader placing larger volume trades. You do get a more transparent marketplace but it comes at the price of larger upfront financial commitments.
I hope that helps you Kevin!
Let’s have a quick look at Gold now…
Here’s the monthly chart we had on our radar in early January:
Gold Monthly Chart – US$/oz.
We talked about watching for a double-bottom pattern forming right inside that area above the red curve.
A breakout above point D would confirm the pattern which then targets the line labeled E.
Like I said earlier, things have moved quicker than I expected – we’re already $110 per oz higher – and the latest uncertainties in Ukraine could inject more volume into Gold as funds are moved to ‘safe-haven’ assets.
Here’s how the chart looks at the moment. No guarantees, but it is one to keep an eye on.
Gold Monthly Chart – US$/oz.
An update on the Binary Options strategy
I must say, I was a bit cautious about sharing this strategy.
It was one of my most trusted weapons in the Bond futures markets. It certainly looked like it could be used effectively to trade binary options, but until it was fully tested, I just could not be sure.
The beta-test team started live testing in January. I’m just gathering in their feedback now and I can’t say how thrilled I feel when I read things like this:
“What can I say, one of the very few strategies I have seen for a long time out there where you can actually not lose money, but make money”
“It is elegantly simple, and when I saw the pattern repeat itself day after day I just knew that I can make profits. I really appreciate the ability to go about my normal work day without missing out on the trade opportunity. It’s just not necessary to sit in front of a laptop waiting for the signal to occur.”
And even this…
“A brilliant strategy 10 trades in 10 days and 10 winners what more could one ask for in life!!!!!”
I made sure my testers came from a wide range of backgrounds with varying amounts of trading experience. They have proved to me conclusively that anyone can take this strategy and use it to take regular profits from the forex markets.
So how would you like to try it out yourself?
The official release will be announced very soon. If you would like me to keep you updated… you can send a quick email to me now kato and type “Binary Profits” in the subject line.
Be Prepared: Market Moving Data Coming This Week (London Time):
Wednesday 5th March:
09:28 GBP Services PMI
13:15 USD Nonfarm employment change
15:00 USD ISM Non-manufacturing
Thursday 6th March:
12:00 GBP Interest rate decision
12:45 EUR Interest rate decision
13:30 EUR ECB press conference
Friday 7th March:
13:30 USD Employment numbers
Monday 10th March:
Tuesday 11th March:
09:30 GBP Manufacturing production
I hope you enjoyed today’s issue. As always, don’t hesitate to drop me an email with any comments or questions.