Argus Intelligence Group Managed FX Market

Foreign Exchange As The Trader’s Alternative

While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers. Until recently, large international banks dominated the foreign

exchange (FX or forex for short) market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.

RISKY BUSINESS?

Is forex as risky as everyone thinks? One way to measure risk is to compare a financial product's risk relative to its return. If you take the time to compare an investment in forex to common investments such as equities and fixed income, you will find that from a risk/reward standpoint, forex investments provide respectable returns and should be considered viable portfolio diversification tools. For example, 2001 annual volatilities for the Dow Jones Industrial Average (DJIA), 30-year bond futures, and US dollar/yen (USD/JPY) were roughly 21.5%, 10%, and 10.5%,

respectively. An investment in a basket of major currencies (or USD/JPY) last year was comparable to 30-year bond futures (which was one of the best returns for the fixed income markets in years), and clearly outpaced the negative returns generated by the DJIA. Although forex trading can lead to very profitable results, there are risks involved. When it comes to trading forex, you'll need to worry about exchange rate risks, interest rate risks, credit risks, and country risks - things you may not consider when trading stocks.

THE TREND IS YOUR FRIEND IN FOREX

Approximately 80% of all currency transactions last a period of seven days or less, while more than 40% last fewer than two days. Given the extremely short lifespan of the typical trade, technical indicators heavily influence entry, exit, and order placement decisions. Further, approximately 85% of all daily forex transactions

involve "the majors," which include the US dollar, yen, Euro, British pound, Swiss franc, Canadian dollar, and Australian dollar. The depth and concentration of the market in just seven currencies provides a statistically significant dataset for trend analysis.

DIVERSIFY YOUR DIVERSIFICATION STRATEGY

In addition to the market's trading opportunities, foreign exchange can be a solid diversification component in your financial portfolio. Most diversification strategies involve a combination of sector allocation, foreign and domestic equities, and fixed income. Some participants have branched out into precious metals and/or energy products; however, Trading opportunities in the

forex market deserve serious consideration as a diversification strategy for your portfolio. few traders consider expanding into forex. Why? The reason may be in the simple fact that in the US, investors tend to be underexposed to foreign exchange. Unfamiliarity typically breeds misconceptions, and foreign exchange in the US is no exception.;

SHORT-TERM NATURE

The foreign exchange market is unique in that central banks intervene from time to time to affect the price movements of their respective
currencies …

On the surface, this may disturb those who use fundamentals to make investment decisions, trusting that the “invisible hand” guiding free-market behavior is not being manipulated. However, it has been proven time and again that

central banks can only influence currency values for short periods; over time, the markets adjust to the changes. This leads to the formation of trends, which your trend-following strategies will help you trade.

Since most currency trading is short-term in nature, speculators can cause erratic fluctuations in the exchange rates.

WHY FOREX?

24-hour trading: Traders benefit from the ability to respond to breaking news immediately, day and night.

Superior market liquidity: More than one trillion dollars are traded every day in the FX market. The sheer volume of this market helps ensure price stability, as well as less gapping and price slippage.

Narrower dealing spreads: Normal bid/ask spreads are five pips or less, much tighter than a typical stock transaction.

No up tick rule: It’s easy to establish both short and long positions.

Increased leverage: Firms offer traders a 2% margin, compared to a 50% margin for equity markets.

No commissions or fees: Overall, FX has much lower transaction costs than equities or futures — an important point for active traders.

When considering trading currencies, you cannot ignore fundamental factors. These include:

Relative interest rates

Relative economic stability

Relative political stability, and

Relative trade deficit/surplus.

These fundamentals or market forces should be strong enough to initiate the formation of discernible trends in order for you to apply profitable technical trading strategies. Further, the length of the trends needs to be sufficient for you to recognize them and be able to take advantage of market swings.

CONCLUSION

Of the more than one trillion dollars a day transacted in the foreign exchange markets, an estimated 95% comes from speculative trading. While large international banks are responsible for the majority of this volume, there are retail investors all over the globe trading forex on a daily basis. Without a doubt, investors in the US are behind the curve with regard to learning about

and participating in this market. Active equity and futures traders who appreciate liquidity, strong technical indicators, and a multitude of short-term trading opportunities will find the forex market especially appealing. But at the very least, trading the foreign exchange market deserves serious consideration as a diversification strategy in anyone's portfolio.

COMMON MISCONCEPTIONS OF FOREX

Forex has a higher risk component than other investment alternatives. (It doesn’t.)

Technical analysis does not translate well into forex. (It does.)

Fundamental analysis is ineffective due to central bank intervention. (Fundamental analysis is very effective.)