Forex ... Hasta La Vista Baby
Monday, August 3, 2009 | Barbara CohenRating:
If you're like me and spend any time watching financial news networks, you have been subjected to thousands of forex (FX, or foreign exchange/currency market) commercials. "Learn forex trading," "trade currencies," "make a steady income with forex," "just click and trade," "I made $18,252 profit in 20 days" ... these are just a few of the commercials you hear in a typical month, really! Literally millions of dollars have been spent introducing the public to a market that was never intended for small investors.
All I can say is ... "Hasta La Vista, Baby."
With the help of the National Futures Association (NFA), trading the forex for smaller American investors just became more difficult and probably more expensive. The rules introduced are so absurd that many forex brokerages are now encouraging their customers to move their accounts overseas where the new NFA rules do not apply. (The rules took effect on Aug. 1.)
Bye-Bye 'Little Guys'...
Many traders like to hedge their positions by opening several positions at once and deciding which one(s) to close. With the new NFA requirements, hedging is no longer an option. Instead, orders will be closed on a FIFO (First In, First Out) basis for RETAIL customers.
Retail customers, get it -- not institutional.
Let's see how this works. Trader Joe purchases 200,000 of the EUR/USD currency pair (i.e., simultaneously buying the euro and shorting the U.S. dollar) at 8 a.m. at price X. And then at 11 a.m., he purchases another 200,000 EUR/USD at price Y.
Maybe the 11 a.m. trade was at a lower price and he wants to add to his position. Combined, he has 400,000 EUR/USD. He averages the two prices to determine his profit.
Before Aug. 1, Joe could decide to close out the 11 a.m. trade and keep the 8 a.m. trade. However, now Joe must close his 8 a.m. trade before he can close the 11 a.m. trade.
Seems arbitrary, doesn't it?
Again, this rule (in fine print) applies to retail customers, not larger institutions.
Is that a misprint? A coincidence?
Here's another problem. Retail customers ordinarily trade with what is known as stop-loss and an order known as an OCO (Order Cancels Order). It is a feature built into desktop-trading platforms.
Joe buys at the current price. He then enters an offer to sell at a higher price for profit right away. And, to protect himself, he enters another sell order at a price lower than his entry price just in case the market moves against him, his "stop-loss" order.
Neither trade executes right away but are offers to sell only. Whichever order price gets hit first is what determines Joe's profit. If the profit target is reached, he gains. But if the price reaches the stop-loss before the profit target is reached, he loses.
Sayonara, Safety Net
Also effective Aug. 1, stop-loss orders are no longer allowed. Instead, brokerages are telling their clients they need to make two new "Sell Entry Orders," one that sells higher than the original buy order and one that sells lower than the original buy order. The new Sell Entry Orders have nothing to do with the original buy order.
Here's the rub. ...
Since these are both entry orders, there is a chance that both orders could be triggered if the market moves up and down quickly, resulting in the original buy order being closed but a new short order being opened. Stop-loss orders were always linked to buy orders. These new orders are not linked to any existing order because the new rule forbids that. Very weird and dangerous.
Another significant change is OCO orders. Joe buys at current price and sets up his stop-loss and profit target trades to exit. With OCO, one order cancels another order. So, if the stop-loss is executed before the profit trade, the profit trade order is automatically canceled. If the profit trade is executed before the stop-loss, the stop-loss order is automatically canceled.
The NFA says, nope, you can't do this any more ... to retail customers.
It would seem that the simple handling here, if you really want to continue trading the forex, is to move your account to a European brokerage and use stop-losses and profit targets.
I Have a Better Idea
Better yet, get out of the forex market altogether and trade the Currency Pairs Futures executing on the Chicago Mercantile Exchange (CME). Futures allow retail customers to enter stop-losses, OCO orders, etc.
One can only assume that the purpose of all these "new features" is to get rid of retail customers and just have institutions trading the forex as it was originally designed. Had it not been for the millions spent on advertising, only institutions would be trading forex today.
As a result of these new regulations, chances are that the trading volume in the futures market will pick up significantly. Many traders do not like having their accounts overseas. and they definitely want to trade with stop-losses and OCO orders.
Bottom line ... we can all hope that the number of forex commercials slows down dramatically with the NFA's new rules. But, God forbid, they start advertising futures trading. Fortunately, you rarely ever see "trade futures" commercials.
If you're ready to jump ship from the forex markets and/or get started in futures, there are plenty of profits for all of us, and without all those crazy new rules!
(Please let us know what you think about Barbara Cohen's article.)
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Barbara Cohen
Contributing Editor
The Tycoon Report
Economic Calendar for the Week of Aug. 3-7
MONDAY, AUG. 3
10 a.m. ISM: Institute for Supply Management
* Importance (A-F): This release merits an A-.
* Source: Institute for Supply Management
* Release Time: 10 a.m. Eastern on the first business day of the month for the prior month.
* Raw Data Available At: http://www.ism.ws
The ISM report is a national survey of purchasing managers that covers such indicators as new orders, production, employment, inventories, delivery times, prices, export orders, and import orders.
The ISM is one of the first comprehensive economic releases of the month, typically preceding the employment report. Though it covers only the manufacturing sector, it can often provide accurate hints regarding the tone of subsequent releases.
Highlights
* The ISM Index for June came in about as expected on the headline number, which was 44.8% versus the consensus estimate of 44.9%.
* The sore spot with this particular report was the dip in the new orders component to 49.2% from 51.1%, as that tipped the closely-watched gauge back to a contraction reading. This report, however, still had several bright spots (or perhaps we should say several less dark spots).
* Production picked up to 52.5% from 46.0%; supplier deliveries jumped to 50.6% from 49.8%; inventories fell to 30.8% from 32.9%; prices paid went to 50.0% from 43.5%; employment rose to 40.7% from 34.3%; new export orders improved to 49.5% from 48.0%; and imports increased to 46.0% from 42.5%.
Key Factors
* The June result marked the sixth-consecutive monthly improvement, although a number below 50% indicates the manufacturing sector is still generally contracting.
* The pullback in the key new orders component provided just enough room to question the pace of the recovery effort, yet the improvement in other areas was enough of an offset to stem any outright bearish interpretations of an otherwise in-line report.
Big Picture
* This is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends.
WEDNESDAY, AUG. 5
10 a.m. Non-Manufacturing ISM: Institute for Supply Management
* Importance (A-F): This release merits an improved B-.
* Source: Institute for Supply Management
* Release Time: 10 a.m. Eastern on the third business day of the month for the prior month.
* Raw Data Available At: http://www.napm.org
The non-manufacturing ISM report is a national survey of purchasing managers that covers new orders, employment, inventories, supplier delivery times, prices, backlog orders, export orders, and import orders.
The index should be far more indicative of the broader economy given its inclusion of service-producing as well as good-producing sectors outside of manufacturing. However, the short history of the index dates to only July 1997 and doesn't provide the insight of a longer period inclusive of varied economic climates. The seasonal adjustment of the index didn't begin until January 2001 with only 3 of the 9 components seasonally adjusted as of April 2001. The lack of historical data and lack of a tight correlation to the non-manufacturing economy leaves the relatively poor "B-" rating compared to the "A-" rating of the well-respected manufacturing ISM index.
Highlights
* The ISM Services Index for May registered a 47.0% reading that was above the consensus estimate of 46.0% and the prior month's reading of 44.0%.
* The component indexes of interest broke down as follows: prices paid to 53.7% (from 46.9%); new export orders 54.5% (from 47.0%); business activity 49.8% (from 42.4%); new orders 48.6% (from 44.4%); employment 43.4% (from 39.0%); backlog of orders 46.0% (from 40.0%); and imports 47.0% (from 46.0%).
* Inventories fell to 45.0% (from 47.0%), suggesting they contracted at a faster rate in June. The upside with the inventory drop is that implies production will need to pick up to replace depleted inventories.
* Supplier deliveries fell to 46.0% (from 50.0%), but this is technically an indication of weak activity considering that a declining number here means suppliers are able to deliver goods faster.
Key Factors
* A number below 50% is an indication activity in the non-manufacturing sector is contracting, although the higher level versus May suggests the rate of contraction has slowed.
FRIDAY, AUG. 7, 2009
8:30 a.m. The Employment Report
* Importance (A-F): This release merits an A.
* Source: Bureau of Labor Statistics, U.S. Department of Labor.
* Release Time: First Friday of the month at 8:30 a.m. Eastern for the prior month
* Raw Data Available At: http://stats.bls.gov/news.release/empsit.toc.htm
The employment report is actually two separate reports that are the results of two separate surveys. The household survey is a survey of roughly 60,000 households; it produces the unemployment rate. The establishment survey is a survey of 375,000 businesses; it produces the nonfarm payrolls, average workweek, and average hourly earnings figures, to name a few. Both surveys cover the payroll period that includes the 12th of each month.
Highlights
* Not good. Nonfarm payrolls fell 467,000 in June. This is worse than an expected 367,000 and still well-above the largest decline registered in the 2000-'01 recession of 325,000.
* Further bad news is included in the payroll report. Average weekly hours fell to 33.0 from 33.1. Hours tend to lead payrolls and the fact that employers are cutting back hours suggests that hiring is a long ways off.
* Also negative from an economic standpoint is that fact that hourly earnings in June were flat. This is below an expected meager 0.1% gain and indicates that consumer purchasing power is falling (when combined with lower payroll levels).
* The unemployment rate ticked up just 0.1% to 9.5%, but that was due to a fluctuation in the labor force that had helped boost the rate 0.5% the month before.
Key Factors
* The June report is quite bad across the board. It could undermine the belief that economic recovery is not too far off simply because a slew of recent data had shown a "slower rate of decline."
* The unemployment rate will be over 10% in a few months.
Big Picture
* There is no reason to expect an improvement in labor market conditions any time soon. Weekly claims for unemployment have to drop below 400,000 before payrolls will stabilize.
* Payrolls had declined a smaller amount each month since a 714,000 drop in January -- until June. The apparent trend of improvement has now been shattered. And the data present little hope of improvement in the near future.
* No raises and declining payroll levels is a recipe for very poor consumer confidence.
Source: Briefing.com
