FOREX ANALYSIS IS SIMPLER

FOREX ANALYSIS IS SIMPLER
From an analytical point of view, tracking the forex market is a much simplified
trading vehicle when compared to the futures products. One reason
is due to the uniform contract sizes. In the forex market, the standard lot
size is $100,000. The tick, or PIP, value varies in the futures products based
on the contract, and the contract size varies on the different currencies. For
example, the euro is $125,000, and the tick value is $12.50 per point; the
Canadian dollar is $100,000, and the tick value is $10 dollars per point. The
British pound futures have a contract value of $62,500, which makes each
tick worth $6.25. The yen is worth $125,000, so every point is valued at
$12.50; but it is quoted inversely to the cash market. For instance, the futures
is quoted at 0.8610, and at the same time the spot forex would be bid
at 116.50 and offered at 116.54. Forex traders do not have to deal with what
is known as rollover. Every quarter in the futures markets, there is an expiration
of the contracts. The rollover period takes place in the second
The Business of Trading Money 19
FIGURE 1.4 Currencies and Their
Respective Average Weights
week of every June, September, December, and March. It is at that time that
you need to convert or roll out of the old contract month and then into the
new month or next expiration contract going forward. Commodity markets
can cause confusion and can create errors during a rollover period. Often
times, when I was a frequent guest on CNBC, Joe Kernan hated the crude
oil market because it rolled every month. Generally there was a $2 premium
from one month to the next; so in early November 2006, crude fell to
just $55.00. But when the front contract month expired and the next rolled
over, prices were quoted $2 a barrel higher. The same scenario exists for
currencies; however, the rollover is every three months.
The first notice day and last trading day combined with the options expirations
can hinder trading and cause confusion; there are situations
where traders place orders for the wrong contract months during this
“switching period.” This rollover period gets confusing even for an old pro
like me; but if you know what to expect, then you can prepare for the event.
We have not covered this topic yet (which will be covered in depth in the
next few chapters), but the greatest technical tool for forex trading is pivot
point analysis. It is based on a mathematical formula to predict future support
and resistance target levels. If you are calculating pivot points for the
futures markets, you already know that you need to constantly switch your
analysis from the expiring contract to the new contract month. This can
cause “gaps” in your analysis. Take, for example, the rollover that occurred
in March 2006. On March 7, the March futures contract was still trading and
was quoted at 0.8485. The June futures contract had become the lead
month and was quoted at 0.8597. That would mean that there was a gap of
over 100 PIPs due to what is called the basis—the difference between the
cash market today and the futures contract for delivery in June. The basis
includes what is known as the carrying costs.
As a trader, I would need to adjust my numbers and analysis for this
gap or start backtracking prior sessions to accommodate for the price differences.
It is done every quarter; and, believe me, it is a royal pain. So not
only do you have to be careful placing the right contract, but you need to
know the various margin requirements, the right expiration dates, the contract
values, and the value of each tick (point). I am not going to give you
the “let’s turn lemons to lemonade” line here; futures rollover is a pain in
the neck.
To summarize, the benefits of trading the spot forex market outweigh
trading the futures markets from many perspectives. If you acknowledge
that paying the PIP or spread for your trades is not cutting into your profits,
especially since you do get free charts, news, and order execution privileges,
then trading in the spot forex market is better than the futures
markets. Granted, most forex dealers trade platforms and charting capa-
20 FOREX CONQUERED
bilities are not high-powered systems but they do allow a beginner to execute
trades without additional software expenses. The analytical tools such
as volume analysis and open interest studies combined with the CFTC
Commitment of Traders (COT) report data can and should be integrated
for spot forex trading. If you can learn to merge the benefits of both worlds,
then perhaps one of the best short-term trading vehicles is the spot currency
market known as forex.