Joe Ross
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Many times in the past I’ve written about the need to adapt, the need to be able to change your behavior relative to the market because the markets are ever-changing. I’ve stated that mechanical systems may be workable, but for only a short time relative to the life of markets. You must learn to trade what you see, and to understand what you see on a chart.
When I first began trading there was no such thing as futures contracts for foreign currencies. Why didn't they exist? Because there was no need for them! In the 1970s all that changed when the US dollar went off the gold standard and began to float against other currencies. Following that, the Chicago Mercantile Exchange began to create currency futures to provide a place where currency traders could hedge the risks associated with dealing in foreign currencies. Some of these risks are direct and some are indirect. Direct risk is involved for those who deal directly in foreign exchange. Indirect risk involves companies who export or import, and receive payments or make payments in the currency of another country.
Ever since currency futures were created, they have been in a state of flux. In the mid-1990s for purposes of futures trading, currency trading made a massive move away from currency futures to more direct trading in the forex markets. Currency futures, while maintaining their volume and open interest figures, became less liquid than they had been previously. Volume and open interest do not reveal the picture of what was happening in the currency futures pits. Volume and open interest levels were being maintained by fewer and fewer futures traders.
In the period from 1992 to the present, we’ve witnessed currency futures moving from “red-hot” to “cool” and now "red-hot again" insofar as speculators are concerned. Foreign exchange, which in 1992 was one of the hottest plays, first turned dull and then back again to exciting. However, retail forex in the big four currencies is no match in volume to the volume in the futures. Yes, I know you have heard that $2 trillion/day change hands in forex, but most of that volume is done between banks in the Interbank.
That this has happened can be seen in areas of which most futures traders are ignorant. Eight years ago, foreign currency traders were being paid huge salaries and anyone with a track record could virtually name his price. Following that, currency traders were no longer in great demand. Now, again, there is a huge demand for successful currency traders.
Currency futures are but a small representation of the $2 trillion dollar foreign exchange market. Professional currency traders use forex, forwarding contracts, derivatives of all kinds, and the futures markets, to deploy their various trading and hedging strategies. Looking at only the futures, or for that matter retail forex, is like the blind man trying to tell what an elephant is like by feeling only the tusks.
In the 1990s, Midland Bank closed its foreign New York office, laying off dozens of people. Frankfurt Bank had pulled out of New York, and Tokyo closed down its foreign exchange desk. At that time, the world’s largest foreign exchange trader was Citicorp. In the D-Mark alone, they shrank from 39 traders working at 17 different locations around the world to 4 D-Mark traders all working in one room. Keep in mind that these were traders who had been to a greater or lesser extent using the currency futures. The result at that time was that there were fewer big fluctuations in the currency futures than there once were, and therefore much less profit.
However, today, just the opposite is happening. Central banks are presently making much greater interventions in the currency markets. They have stopped publishing targeted exchange rates. Such action by the central banks leaves currency speculators at a loss for what to do, and the result has been a huge surge in foreign exchange trading, with much of the volume going to the futures markets.
Today, forex brokers abound and are actively marketing the idea of currency speculation. This is having a profound effect on the foreign exchange planning of individuals, companies, and nations, especially because of the risk in using a forex broker. There are no guarantees that you will not lose all your money if the broker goes broke, or runs away with your money!
If some day the world's currencies would be the US dollar, the J-Yen, and the euro, who would need thousands of traders to trade them? There would be far fewer currency misalignments to provide a basis for trading. But that is not the way the world is moving. The picture I just presented ignores the rise of China (and the rest of Asia) as a major economic force on the world scene. Almost certainly, the Chinese currency will become a major trading vehicle. The same is true for other emerging countries. Some of them will no doubt have important currencies from the point of view of world trade. But will these currencies be traded in the futures markets or in forex?
The changes in just this one area – currency trading – are an example of how things change rapidly, and point out the need for traders to adapt. There have, of course, been many other changes in recent years. The advent of all-electronic markets has produced markets of a completely different kind. Computers have brought about the ability to trade in various time frames. New exchanges have created new markets and new contracts – so many, in fact, that it is difficult to know exactly where to direct one's trading efforts. It is now possible to trade virtually around the clock. It increasingly seems that somewhere, some market is trading.
When I first began trading there was no such thing as futures contracts for foreign currencies. Why didn't they exist? Because there was no need for them! In the 1970s all that changed when the US dollar went off the gold standard and began to float against other currencies. Following that, the Chicago Mercantile Exchange began to create currency futures to provide a place where currency traders could hedge the risks associated with dealing in foreign currencies. Some of these risks are direct and some are indirect. Direct risk is involved for those who deal directly in foreign exchange. Indirect risk involves companies who export or import, and receive payments or make payments in the currency of another country.
Ever since currency futures were created, they have been in a state of flux. In the mid-1990s for purposes of futures trading, currency trading made a massive move away from currency futures to more direct trading in the forex markets. Currency futures, while maintaining their volume and open interest figures, became less liquid than they had been previously. Volume and open interest do not reveal the picture of what was happening in the currency futures pits. Volume and open interest levels were being maintained by fewer and fewer futures traders.
In the period from 1992 to the present, we’ve witnessed currency futures moving from “red-hot” to “cool” and now "red-hot again" insofar as speculators are concerned. Foreign exchange, which in 1992 was one of the hottest plays, first turned dull and then back again to exciting. However, retail forex in the big four currencies is no match in volume to the volume in the futures. Yes, I know you have heard that $2 trillion/day change hands in forex, but most of that volume is done between banks in the Interbank.
That this has happened can be seen in areas of which most futures traders are ignorant. Eight years ago, foreign currency traders were being paid huge salaries and anyone with a track record could virtually name his price. Following that, currency traders were no longer in great demand. Now, again, there is a huge demand for successful currency traders.
Currency futures are but a small representation of the $2 trillion dollar foreign exchange market. Professional currency traders use forex, forwarding contracts, derivatives of all kinds, and the futures markets, to deploy their various trading and hedging strategies. Looking at only the futures, or for that matter retail forex, is like the blind man trying to tell what an elephant is like by feeling only the tusks.
In the 1990s, Midland Bank closed its foreign New York office, laying off dozens of people. Frankfurt Bank had pulled out of New York, and Tokyo closed down its foreign exchange desk. At that time, the world’s largest foreign exchange trader was Citicorp. In the D-Mark alone, they shrank from 39 traders working at 17 different locations around the world to 4 D-Mark traders all working in one room. Keep in mind that these were traders who had been to a greater or lesser extent using the currency futures. The result at that time was that there were fewer big fluctuations in the currency futures than there once were, and therefore much less profit.
However, today, just the opposite is happening. Central banks are presently making much greater interventions in the currency markets. They have stopped publishing targeted exchange rates. Such action by the central banks leaves currency speculators at a loss for what to do, and the result has been a huge surge in foreign exchange trading, with much of the volume going to the futures markets.
Today, forex brokers abound and are actively marketing the idea of currency speculation. This is having a profound effect on the foreign exchange planning of individuals, companies, and nations, especially because of the risk in using a forex broker. There are no guarantees that you will not lose all your money if the broker goes broke, or runs away with your money!
If some day the world's currencies would be the US dollar, the J-Yen, and the euro, who would need thousands of traders to trade them? There would be far fewer currency misalignments to provide a basis for trading. But that is not the way the world is moving. The picture I just presented ignores the rise of China (and the rest of Asia) as a major economic force on the world scene. Almost certainly, the Chinese currency will become a major trading vehicle. The same is true for other emerging countries. Some of them will no doubt have important currencies from the point of view of world trade. But will these currencies be traded in the futures markets or in forex?
The changes in just this one area – currency trading – are an example of how things change rapidly, and point out the need for traders to adapt. There have, of course, been many other changes in recent years. The advent of all-electronic markets has produced markets of a completely different kind. Computers have brought about the ability to trade in various time frames. New exchanges have created new markets and new contracts – so many, in fact, that it is difficult to know exactly where to direct one's trading efforts. It is now possible to trade virtually around the clock. It increasingly seems that somewhere, some market is trading.
