There are regular risk opportunities in the financial universe, and there are those that have, well, a bad reputation. Typically, commodities cause strange sideways looks from other folks, and there is always someone whose relative has lost his shirt in pork bellies. Of course, it isn’t the commodity that’s the problem. It’s the leverage that’s usually employed in investing or trading in it.
But if commodities have a rather negatively skewed reputation, albeit undeserved, in my opinion, currency or FOREX trading is worse. The problem with currency trading is, the number of people offering to let you trade currency pairs, or open a toy money practice account on their dime is legion. One can barely go to any financial site without finding at least one solicitation from a FOREX trading house. It’s grossly unfair on my part but I somehow feel as if I am being importuned from the doorways of shady nightclubs having taken a wrong turn onto a street in the bad side of town.
Which is not to suggest that those running FOREX trading houses are doing anything wrong. I have a currency trading account on thinkorswim, it’s funded on the off chance I may make a trade, but it’s not something I plan to do. I also once did very well paper trading on another FOREX site but realized it was luck not skill, pocketed my make-believe winnings and had the good sense to quit while I was ahead.
Now, do some folk do well trading FOREX pairs? Yes. But I believe the statistics will tell us that most folk — the vast majority — lose and give up. Rather like commodities, it’s the leverage that causes the problem. I might add that Marketclub does track currency pairs and ranks them all with their trade triangle technology.
Does this mean that we should avoid currency trading and investing altogether? Absolutely not! In fact, I think the well-rounded portfolio should have some element of currency investing in it some of the time. The best way for most folk to do it, though is in ETFs and in unleveraged ones at that.
ETFdb.com lists thirty long, unleveraged currency ETFs. There are only six leveraged and leveraged inverse currency ETFs and they all focus on either the Yen or the Euro. Of thethirty ETFs listed as long, unleveraged ETFs, I am going to confine this review to the nine ETFs offered by CurrencyShares :
And two US dollar index ETFs offered by Powershares, one long, one inverse with the tickers UUP and UDN respectively. The table is as at the close on May 2nd 2011.
You might think that unleveraged currency ETFs would not offer much in the way of returns, but this is not the case. These returns on the CurrencyShares ETFs are through the end of April 2011:
To me, the ringer here is the Swedish Krona, but the fact is that we have annual returns exceeding 20% in three of the nine currencies represented with YTD returns exceeding 10% in three of the nine ETFs too. While most of the work may have been done by the dollar going down, these are potential returns that are hard to ignore. The CurrencyShare ETFs also pay monthly interest if interest income exceeds fees — rather like a currency money market account but without the financial guarantees.
But how should one gauge entry and exit points? This largely depends on how much trading one wishes to engage in. For example, in MarketClub’s World Cup portfolio, which trades the spot dollar index long and short (UUP would be a proxy), the monthly green and red “Trade Triangles” are used for trend and the weekly green and red “Trade Triangles” for timing. entries and exits. A similar methodology is used in MarketClub’s Perfect R portfolio, which only uses long (or sidelines) positions in four ETFs. In this case the portfolio uses the FXE Dollar/Euro ETF from CurrencyShares. We’ll come back to FXE in a little while.
One very simple but effective methodology to trade the longer term trends in these currency ETFs would be to use 200-day moving average crossovers to determine entry and exit points. You may have a few unnecessary trades where the instrument crosses its trend line a few times in fairly close succession, but generally I think you would be pleased with the results.