Still Trading Philippine Stocks? Here's Why You Should Trade Currencies
Updated: Mar 30, 2018
We have been in a bull market since 2009 and while we believe the three year range transition is done, it’s just good sense to to diversify your portfolio by including other asset classes. Remember, PH is still just a LONG ONLY stock market and what it has meant for us the past three years is that we’ve had to be very nimble and active as we waited for market conditions to improve and bring us to where we are right now.
Range markets can be very frustrating at times and waiting means your financial goals get pushed back unnecessarily during periods of corrections and consolidations. While we’re confident that we’ll be able to provide you with the trade support you need to make money in any market, we believe that trading FX can help you generate higher returns and lower the volatility of your portfolio because of DIVERSIFICATION. Our work in the financial industry has shown us that personal portfolios stand to benefit the most from allocations to FX in the order of 20%-30% when market conditions call for it. This way, the quality of returns can be enhanced and and reduce your downtime waiting for the next market cycle.
Contrary to popular belief, FX isn’t more difficult. In some ways, it’s actually easier than trading stocks because you only track a limited number of securities or pairs (in my case I track 29 pairs only) compared to the 200 plus pairs we cover in the Philippine stock market.
More importantly, FX probably has the LOWEST VOLATILITY across all asset classes so if you’re used to trading stocks that move 15% to 50% in one day, you’ll be surprised to know that FX volatile pairs on average move just 2%-3% in a day and only under very special conditions.
This begs the question, why do 90% of RETAIL FX TRADERS blow up their accounts in the first 90 days of trading? I can personally attest to blowing up my account twice (once in 2011 and another one in 2014).
The answer is LEVERAGE. You see, in FX, you get to do margin trading. What this means is that you’re able to buy currency contracts more than your capital by borrowing money from your broker (using your deposit as collateral). In FX, retail brokers are known to allow clients to margin trade their capital up to 100–200x. For example, if you deposit US$2000.00 into your FX account, a broker that allows you to leverage that deposit by 100x means on aggregate you’ll be able to open currency contracts of up to US$200,000! Fun right? WRONG!
While it’s true that leverage will allow you to magnify your returns, your downside gets magnified if you get the direction wrong. In other words, if you use excessive leverage you will below up your account guaranteed!
If it’s just a matter of leverage, why do retail traders insist on using too much leverage? Is it because they’re greedy? Is it because they’re lazy and think they can get rich quickly without putting in the hard work? Or is it because of the LOW VOLATILITY in currencies? The answer is a mix of all three. Let me explain.
As you all know, I was raised and trained to be an equities person so I’m used to trading securities that move more than 4% in a day. In equities, I didn’t even need to use leverage to generate returns. I just had to be right about the direction of the trade, position size accordingly, and I made money. Boy, I was super wrong about FX!
Currency pairs move extremely slow averaging a mere 0.30% return per day on a good day, less on bad days. So to make money, I fell into the leverage trap where I would force positions by loading up even when there was no volatility. And this is a problem in FX because you’re automatically in a losing position as soon as you enter into a trade.
Market timing becomes super important because leverage will work against you if the pair doesn’t move according to your expectation. Even if a pair just moves 0.2% against you and you’re fully levered up, you’re dead. You won’t be able to sit on positions because instead of just trading, say US$2,000, when fully levered up, you have nominal contracts of up to US$200,000, and your margin deposit will just be eaten up by each pip move against your position.
This is the real reason why retail FX traders blow up. Retail traders use too much leverage and they do this because they’re forcing trades even when volatility doesn’t warrant it. These days, I use models not just to rank currency pairs based on momentum, I also run them against a volatility model so I’d know which pairs are in play and are relevant to me.
I hope you take the time to explore FX trading with me over the next three years. I’ve already shown proof of concept since I resumed trading FX in July by nearly tripling my small account. I’ve started trading my big account and I expect to fully migrate my PH portfolio to FX by next year if my performance holds up.
Again, it’s all about process. I really believe in the process. The results should follow. #woosah