Q&A
Futures For You
Inside The Futures World
Want to find out how the futures markets really work?
DeCarley Trading senior analyst and broker Carley Garner responds to your questions
about today’s futures markets. To submit a question, post your question
at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options and A Trader’s First Book On Commodities, are available from FT Press.
CURRENCY FUTURES
What is the best way to build an intermediate- to long-term position in the currencies?
First, traders must choose a venue — whether foreign exchange, futures, or equity products such as exchange traded funds (Etfs). If you have been following this column, you likely know we have supported arguments for and against each method but lean toward the idea of currency futures.
Here is a quick recap, but keep in mind these are highlights and do not encompass the entire argument:
- Currency futures are highly regulated by the Nfa. Forex has recently fallen under the wings of the Cftc and Nfa in the US, but there is still a long way to go to get regulations in these markets up to par with those of futures.
- Some forex brokers (known as dealing desks) go beyond acting as a broker, which brings buyers and sellers together. Dealing desks partake in the transaction by taking the other side of their clients’ trade, posing an obvious conflict of interest.
- Forex traders face counterparty risk (that is, the risk of the person on the other side of the trade defaulting), while all currency futures traded on the Cme Group are guaranteed by the exchange.
- Futures brokers must keep customer funds segregated from their own. In the case of a broker bankruptcy, customer funds are not at risk.
- Etfs involve management fees on top of brokerage commission and are only available for trading limited hours of the day.
Position traders, those looking to hold long or short speculative trades for longer periods, might be better off approaching the market with a scale-trading strategy stripped of some of the leverage built into the market. The most efficient manner of doing this might involve the Cme Group’s relatively newly listed micro forex futures contracts, which provide traders with a relatively low-leveraged alternative to currency speculation.
When it comes to forex liquidity there is a lot of smoke and mirrors, but with futures there is true transparency and in many cases better trade execution — and that is what matters anyway.The Cme Group launched its e-micro forex futures in answer to the micro lots offered in forex that attracted a new type of speculator, one who wants to trade with less than $1,000. Although you may never be able to fund a futures account with a credit card, the e-micro forex futures at the Cme Group are a tenth the size of the standard contract and offer futures traders the same low-margined opportunity. Smaller contract size translates into a fraction of the risk exposure and position volatility, and along with tamer profits and losses come lower margin rates. The euro/US dollar e-micro futures carries the largest margin requirement at a rate of about $430 and the US dollar/Swiss franc e-micro involves the lowest at about $206.
I am not advising you open a trading account with $300 and roll the dice. What I am saying is e-micros might be a great opportunity for moderately funded accounts to establish long-term currency positions with the luxury of scaling in and out of the trade.
The Cme Group itself is the largest regulated forex marketplace in the world. However, the e-micro futures aren’t incredibly liquid just yet. That said, there are fabulous market makers that keep spreads attractive. Accordingly, don’t let the claims of substantial liquidity in forex deter you from futures. When it comes to forex liquidity there is a lot of smoke and mirrors, but with futures there is true transparency and in many cases better trade execution — and that is what matters anyway.
The Eur/Usd has a tick value of $1.25 rather than the $12.50 that comes with a standard-sized contract. A trader making or losing $1.25 per tick will have an easier time adding to the position should the market move adversely and better odds of avoiding a margin call. As of right now, the euro was valued at about $1.4800, much higher than the $1.1800 of summer 2010 that was supposedly the beginning of the end of the euro. On the other hand, the all-time high in the euro is considerably higher, near $1.6000.
Historically, currencies tend to trade within ranges, although there are no guarantees the euro can’t go above $1.6000. A move from $1.4800 to $1.6000 in an e-micro euro is equivalent to $1,500 profit or loss. A moderately funded account might be able to stomach the risk of trading a one-lot from the short side, and even adding contracts every 300 or 400 points. Doing so shifts the breakeven point on the trade to a higher and more realistic level (the higher the average entry price, the less the market has to drop for the trader to profit).
Remember, an e-micro is a tenth of the standard contract so a trader can sell a total of 10 contracts on the way up (at better prices) before reaching the same leverage and risk of a standard contract. The downside of this strategy? If the market drops without the trader having an opportunity to sell all 10 (or whatever the desired leverage and risk amount is). But is that such a horrible outcome? After all, you were right and are making money. I can think of much worse scenarios.