Very sorry about this long essay, but I really do freaking appreciate any insight.....thx! I'm considering adding some forex to my stock portfolio...specifically selling USD/CAD. 1.4 really, lol. I have zero experience in forex, but I'm not stupid...but I'm also not stupid enough to not ask questions so I avoid as many mistakes as possible...even before I paper trade this sheeeet. Slap me across the face with a dead fish please if my thinking is out-of-bounds, by all means! I cannot stand reading about pips and sheeet. I think of only the total notional value(how much freaking real currency I am moving) multiplied by the % movement of the currency to get my ending profit/loss. Attached is my excel sheet which only shows a one directional move in the USD/CAD. Is this a bad way to think about forex? Or should I start dreaming of pips and per pip profit? Next question I want to ask is complicated...I was always taught to make sure no single stock position in your portfolio is > 5%. If I wanted to segment off 5% of my portfolio into short USD/CAD what amount of notional value would make sense roughly? This is a tough question b/c if my portfolio is 1mm and I only subject 5% of that(50K) to a forex trade my gain/loss may almost be so small to be insignificant to the portfolio. Is there a formula so to speak to crank up the forex exposure to match the standard dev of a typical stock to get some type of serious gain/loss in the forex exposure as to help out the entire portfolio? From the look of things forex swings(ie. std dev. are much smaller than stocks, so I may need 10%-15% of notional exposure). Last question, is since the currencies are now trading at spot vs a futures or forward contract is there no contango/backwardation or any kind of erosion of the price going on? Thanks!
No you don't need to keep track of pips, percentage moves are fine. Don't know where you got the idea that forex moves are small they can move several percent in a few days which is great for shorter term traders. Long term exposure to FX isn't really safe especially when you take advantage of leverage. You don't know where a central bank is going to make a surprise move and next thing you know you are signing the deeds of your house and kids college funds to your broker. FX is more of swing/intraday instrument IMO. I couldn't imagine building a portfolio out of FX.
Forex is less volatile (historically at least) than most stocks. That said, the available leverage can make it into a killer if you go lever up in the "gambling" direction. For example, some "retail forex" places offer 100x margin, which ends up being far riskier than almost any (unlevered) stock. I don't think there's anything particularly wrong with making foreign currencies part of a portfolio, at least on the order of months or even a year -- I did it myself very successfully at one time, but that was in response to a particular situation that no longer pertains, and I haven't traded foreign currencies since then. I always used CME futures rather than "retail" forex. "Retail" forex isn't really foreign currency, at least in a direct sense; it's a contract between you and your broker in which your broker trades against you, and they also get to determine the price and the spread. Let's just say that on average this doesn't work out so well for the client. That said, I'm sure some of the more reputable brokers do a decent job and offer a decent product. But even if they're reputable, "retail forex" is still not centrally cleared (so if your counterparty goes bankrupt you're out of luck), nor does it trade with a competitive bid/ask, as on the CME. Of course, the CME products are futures, so anyone trading there needs to be very cognizant of the expiration date.
think of fx as the cash portion of your portfolio, rather than a hedge on a particular stock. Now if you want to trade forex, that is a different matter. For instance, many bond investors got worried about rising rates and went into long cash positions, but then they were simply long USD. Out of the fire into the frying pan. But I totally agree. No conservative money manager or asset allocator, can be in any cash without also considering the currency risk and spreading that risk appropriately. As far as big name stocks and bonds, I figure the main currency risk is already priced in.
Thanks for the replies...I take it since this is client vs broker that there is no erosion ie backwardation/contango seen in rolling futures contracts?
an ecn like ib trades with the the major banks and charges a commisssion. The spreads are tighter than what you find at the CME. And no there is no rolling out, but all in all down to the penny futures are cheaper. But spot allows you to put on a position that is custom tailored to your risk. Ib offers 40:1 margin but you don't need to use it if you don't want to.
There is another risks because of leverage and volatility. Use pairs with adequate swaps and moderately volatile pairs.
I wish I entered this trade for real, but I threw it down for 200K notional usd value as a paper trade. I'm up ~3700 then now. Let's say I was up 20K so that the USD took a massive hit against the CAD and I was partying. Say I wanted to lock in 10K without selling out, ie I wanted a pure hedge....what is the best 1 or 2 ways to hedge a currency exposure?
no good way. You could sell CAD against the other majors and buy USD against the other majors, but that is far from a perfect hedge. Why not just close out enough to take the 10k and let the rest ride?
Yea I think that is the way to go...I'm going to paper trade a few more currencies to make sure I get the hand of it. I'm willing to risk half of my cash position resting in CAD vs sitting earning basically zero here in USD. I remember not too long ago(ie. 2007 I rolled 9 month CD's earning 3.5%) Unreal where we are today