I hope the new year is off to a good start for you.
As always, I am looking into new ways to invest, something prompted the interest in FX and here is what I found.
As for speculative FX trading, while it’s the new market of choice for the tech-stock day-traders of the late ’90s, it’s not something that I do (or would) at this point. There’s too much active management and time commitment required, and the markets are so efficient that there’s no chance of uncovering legitimate arbitrage opportunities. Besides, talking to my friends who have been on an exchange floor, and worked in banking for the last decade, I know how badly retail traders get taken on their pricing (to the benefit of Deutsche Bank, UBS, Citi, and Barclays).
Basically, for most who engage in the practice, speculative FX trading is all about volatility plays and heavily leveraged positions (I’m assuming you aren’t thinking about hedging – that would be a different discussion). I won’t get into the whole dissertation here, but a real problem with this sort of strategy that tends to emerge (particularly after a sustained market trend, like the general decline in the dollar), is that traders mistake momentum (or luck) for financial acumen and skill.
The problem occurs when the market hits an inflection point. By the time the retail-traders see it on their PCs, proprietary traders (the Deutsche Banks and Barclays of the world) have already long since reacted and the market prices are already moving faster than trade orders can be entered. To put it in perspective, Barclays and Citi each trade about five times the volume of all retail FX traders combined, and Deutsche and UBS (each) about 10x as much as the total retail market, so by the time they’ve reacted (which is immediate), the market has moved and the damage is done. Basically, if you don’t see the turn in the market coming (and the vast majority don’t), and you have too much riding on one position (which most do, as heavily leveraged trades are a selling point for retail FX brokers), it can set you up for disaster.
That said, an intelligent person that understands the risks, follows the markets, and is smart about structuring their positions can make money trading, and some do. They’re just outnumbered by those that don’t. And most find they can make more money (or the same money with much less risk) by focusing their efforts on other ventures.
Anyway, I can be more specific if you have any particular questions. Alternatively, if you were think of hedging-related transactions, I’d be more than happy to refer you to excellent pros that will provide any insight on structuring, FAS 133, etc.
Onward.
