Forex Trading – Part1of2 – Emini-Watch.com

Forex Trading – Part1of2 – Emini-Watch.com


I’m going to do something a little bit different
in this video. I’m frequently asked: “Do the ‘Better’ series of indicators work on Forex
markets?” and I’ve recently kind of changed my tune on this. Historically I’ve been a
bit of a zealot, a purist in terms of just trading the Emini, but I’m going to show you
what my current thinking is in terms of the Forex markets. First of all, just need to recap very quickly
the ‘Better’ series of indicators. There’s the Better Sine Wave, which is based on price
alone. Then we’ve got Better Momentum which is based on the volume traded at the bid and
the ask. Then Better Pro Am which is based on the average trade size. The beauty of these
three indicators is they’re non-correlated. They’re each looking at a very fundamentally
different piece of data and so you get maximum amount of information with the minimum number
of indicators. Traditionally what I’ve said about Forex is,
“Well, because we don’t have volume data, we can’t tell the average trade size”. We
can’t tell the volume trend at the bid and the ask. We should avoid the Forex markets.
The very best you can do is use tick count, a proxy for volume. However, I’m starting
to rethink that and the reason for that is the advent of the growth in the Forex futures
markets that’s happening on the CME. I’ll show shortly some volume trends that are happening
there and they’re starting to become more representative of the cash Forex markets.
Most of the Forex market trading that goes on around the world is the interbank Forex
market, there’s no central exchange, there’s no clearinghouse and as a result there’s no
volume disseminated to traders. However, there are futures contracts for the
Forex markets and they’re traded on the CME and they’re starting to become larger and
a bigger part of that market. And I believe they’re starting to become more representative
and you can use it to trade using the ‘Better’ series of indicators. The other problem that I’ve had with Forex,
kind of historically, is that you’ve got too many decisions. With Emini trading you’ve
got one market to look at. All of the equity markets are tightly correlated, whether you’re
looking at the Dow, the S&P, the NASDAQ, the Russell and so on. Then even across different
markets, so if you’re looking at the DAX, if you’re looking at the Spi in Australia,
whatever it might be. All of those equity markets tend to move quite closely together. With Forex, because you’ve got a dozen different
pairs out there, you’ve got far too many decisions to make and again, I’m starting to rethink
this. Just like the equities markets being highly correlated, a lot of the Forex markets
are highly correlated and they kind of break down into two different camps. The first one
is the risk or the growth camps, which are things like the Euro, the Aussie Dollar, the
Canadian dollar, Brazilian Real. They represent markets where people go to get high growth,
to find risk plays and to take more risk in their trading. Versus the flight to safety
currencies or the currencies that are being used to fund carry trades and the largest
one of those is the Yen because of the low interest rates in Japan. Then recently, we’ve
added the US dollar again because of the low wholesale funding rates. What that means is you should not be trading
currencies within a particular grouping – so not the Euro versus the Aussie or the Aussie
versus the Canadian Dollar because they’ll be very tightly aligned. You should be trading
across those two kinds of categories, so you should be trading the US Dollar versus the
Euro or the Canadian Dollar versus the Euro or the Aussie Dollar versus the Yen. The largest Forex market out there is the
Euro versus the US dollar and that represents almost 60% of the total Forex market. So if
you wanted to trade Forex, why not stick with something that represents a huge part of the
market and you don’t have to worry about the other smaller components of the market? The other choice is to go for something which
has very large ranges because of the nature of the two different markets and a good example
there is the Aussie versus the Yen. The Aussie is a high growth currency so when people are
looking for exposure to growth they’ll go to the Aussie and then they’ll fund that in
Yen. So you’ll get a very large differential in movements between the Yen and the Aussie
compared to something like the Euro and the USD. The moves aren’t as great as the Aussie
and the Yen but the total size of the Aussie/Yen market is smaller. So the Euro/USD is a good
compromise and I’m starting to think that if you were just to trade one Forex market
you’d stick with the Euro/USD and that would be the equivalent to trading the Emini as
representative of all the equity markets around the world. Then the last criticism I’ve traditionally
had is that it’s a 24 hour market. In the Forex market you have to be on your toes in
order to catch moves in the right time zones and there are pros and cons of that. One of
the pros is that you can actually choose a currency pair that actually works for your
particular time zone. In the US time zone the natural trade would be something like
the US Dollar versus the Euro. If you’re in, for example, the Asian time zone the Aussie
versus the Yen is an extremely good currency pair in that particular time zone. So I’m starting to change my tune in terms
of trading Forex. My preferred market is always going to be the Emini, no question there,
but when I’m asked the question now these days “Do the ‘Better’ series of indicators
work on the Forex markets?” I’m beginning to say “Yes” because you can use the Forex
futures contracts which has volume data. Then you can trade one or two Forex pairs and get
rid of the ‘too many decisions’ type problem. Just as an example I’m going to show you how
big the futures market is versus the cash market. These numbers are a little bit difficult
to get behind because we don’t have absolutes here. As an example, in the cash market, the
interbank Forex market, there’s roughly $4 trillion US Dollars traded a day, in that
total market around the world. Then if you think that there’s about 21 trading
days a month, roughly 60 percent of that market is Euro versus USD. That gives you a figure
of about $50 trillion traded per month in the Euro/USD contract. Then you could compare
that with the futures market. We know the total, the average volume traded at the moment
is about 6 million contracts a month. Each of those contracts is trading a notional value
of 125,000 Euros and then just using a rate of $1.35 USD to the Euro that gives you about
one trillion per month of the Euro versus the USD. Do you can see that the futures market
is still extremely small. It only represents about 2% of the cash market, however, I’m
going to show you some charts on TradeStation to show you how, even though it’s a much smaller
market, you can still take trades using the ‘Better’ series of indicators and using the
volume data that comes from the CME futures contract. Now I’m going to show you some TradeStation
charts for the CME futures Forex contracts and the first one I’m going to show you is
the EC contract and I’ve just brought up a long term chart here. This is in TradeStation
@EC which gives you the continuous contract for the Euro versus the US dollar. Sometimes
this is referred to as the 6E contract on Globex. In TradeStation they’re identical
so the EC is the pit traded and the 6E is the Globex traded, just the data that comes
through TradeStation is all represented on the EC symbol. You can see that there’s been actually some
pretty rapid growth over the last 18 months or so. We had a lot of activity a couple of
months ago in the Euro when we got up above 9 million contracts traded in a month here.
But we’re starting to average about 6 million contracts traded on the CME Globex exchange
on those futures contracts. That’s starting to get decent size volume that we can start
to use for the ‘Better’ series of indicators. When I compare that with the Emini Euro contract.
This is the E7 contract, again a continuous contract @E7 on TradeStation, you can see
here the volumes that are going through are only about 100,000 contracts – so it’s a lot
smaller than the EC contract. Then the other contract that’s available on the CME exchange
is the M6E contract here. There’s not a continuous version of this one so I’ve just plotted this
latest one, just showing the last month of data here. This is even smaller still. This
is known as the micro contract on the CME and here we’re only trading about 40,000 contracts
in a month so extremely small. But if we go back to the EC contract, the Globex Euro contract,
that’s a pretty decent size at 6 million contracts traded. We know the Euro’s the largest contract
traded. What about the British Pound? Similar chart
here. Just looking at monthly volumes traded we were trading about 6 million on the Euro.
The equivalent number for the Pound so this, again, using TradeStation symbols @BP for
the British Pound here. This is only trading about two and a half million contracts so
it’s less than half the size of the Euro. So again another reason to trade the Euro.
Lots of liquidity there and that’s fairly representative of what’s going on in the cash
market.

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