|
Trading forex
the
mini way
While foreign currency is the world’s largest financial market, it
can also be quite cost prohibitive. However, with mini forex futures
and mini spot trading, traders can participate in the forex world
with much less money at risk.
By Darrell
Jobman
Because
of its global reach, the forex market
has become a
favorite of traders from professional money managers seeking to
diversify their portfolios into a new asset class to
individual
retail speculators trying to make a profit. The forex market is
attractive to traders for many reasons. Because it trades virtually
around the clock, it reacts instantaneously to geopolitical
tensions, natural disasters, and economic reports.
“For some
traders, abrupt price changes could be devastating if they trade the
larger forex contracts,” says Jim Wyckoff, senior market analyst for
TradingEducation.com. “Trading mini forex lots or mini currency
futures contracts gives them much better leverage than they can get
in stocks, where they must put up at least 50 percent of the
purchase price, and with much less risk than they might have in the
futures markets.”
Where to trade?
Traders with
experience in futures may want to trade forex futures; those more
familiar with stocks and bonds may be more comfortable in a spot
(cash) forex account. The decision could also depend on the amount
of money available. Trading both futures and spot forex requires
separate accounts, although firms that handle transactions in both
venues can transfer money quickly from one account to the other.
Futures.
The Chicago Mercantile Exchange lists futures
on a number
of foreign currencies, including the Polish zloty and Israeli
shekel, as well as some cross-rates. However, most of the activity
is in the “majors” — euro, Japanese yen, Swiss franc, British pound,
and the New Zealand and Canadian dollars — vs. the U.S. dollar. Most
of the trading is done electronically. Each trading “day” begins at
5 p.m. and runs overnight through 4 p.m. the next day. The best
liquidity is between 7:20 a.m. and 2 p.m., the regular pit-trading
hours.
There are
only two mini-forex futures contracts: the euro (E7) and the
Japanese yen (J7). Both are half the size of the regular contract,
with a one-point move worth $6.25. Typical margin set by the
exchange (which can change) is around $1,400 per mini contract
compared to $2,700-$2,800 for the full-size contracts.
The quoting
convention for some currency futures may be a little strange.
Instead of a cash market price of, say, 110 yen per U.S. dollar,
forex futures trade in terms of dollars per yen, or 0.009091 in this
case (9/10 of a cent).
The
advantages of futures include trading in a centralized marketplace
with multiple bid/ask prices; pricing is transparent and available
to everyone, regardless of size or location; there is no counter-
party risk because the exchange clearing organization is on the
other side of every trade; and anonymity for those who want it.
Futures advocates contend that your biggest risk as a spot forex
trader may not be market risk, but the firm you are dealing with.
Many spot forex firms are not regulated by any government agency.
The cash forex market.
The standard trade-lot size
in the cash
forex market is 100,000 units of a currency, but each lot in a mini
forex account is only one-tenth that size, or 10,000 units. A
one-point change in price (i.e., a “pip”) is usually worth $1 in a
mini lot instead of $8-$10 in the fullsized version. As a result,
risk in a mini forex account is much less, and the amount of margin
needed may be only several hundred dollars. However, a larger amount
is recommended (the minimum is set by each firm, not the exchange as
is the case in forex futures).
For the
trader trying to learn the ropes of forex trading or wanting to test
a trading strategy, the lower financial outlay is welcome news. Of
course, profits also aren’t as large, but if one mini lot is too
small for you, there’s nothing that says you can’t trade two or
three lots, or five lots or 100 lots, especially as you become more
experienced in forex trading. This provides more flexibility to
scale in and out of positions at different price levels.
Most spot
forex firms also list 20 or more pairs, so you aren’t limited to
trading a foreign currency against the U.S. dollar. It’s just as
easy to trade, for example, the British pound against the Japanese
yen, giving you additional opportunities to profit.
In almost
all cases, whichever pairs are available for trading in a full
account can be traded in a mini account. However, you should
double-check with the brokerage just to be sure.
In addition
to the smaller size, lower margins, less risk, and greater
flexibility, there are other advantages to mini forex spot trading.
There is true 24-hour trading with no overnight gaps (Table 1);
bid/ask prices are always available, even in thin trading hours; and
there are no quarterly contract expirations, so time and contract
month are not considerations as they are in futures.
Plus, spot
forex firms typically provide customers with real-time quotes,
charts, and news at no charge (even for mini forex traders), as well
as a trading platform and demo or simulated accounts in which
traders can practice before they begin trading with real money. If
you are shopping for a mini forex firm, be sure to check out all of
these features as well as its margin and leverage rules.
The mini
forex contract may seem small, but it’s one of the best ways to get
more bang for your buck with the least risk.
Darrell Jobman is Editor-in-Chief of
www.TradingEducation.com, which provides free daily and weekly
commentaries for traders. He is an acknowledged authority
on the financial markets and has been writing about them for more
than 35 years.
Source:
TradingEducation.com |
