Investing in forex


I’ve been working on a short article that will likely end up on a Reuters blog at some point in the not too distant future. The subject matter is investing in the foreign exchange market. It took my a while to kind of wrap my head around how best to address the subject, but I think I finally have done. I’ll post a link when it goes up.

In the meantime, though, I wanted to hear what you thought about the idea “investing in forex”. What does that term mean to you?

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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  • Tom Molina

    John
    To me there is no difference. It is all about preserving your capital and riding the trend.

    tom

  • Larry Schutte

    “Investing” in the FX markets is a very pertinent and interesting topic. I think that “investors” are basically mid to long term position players. There is a lot of interest now in this area due to unleveraged multi-currency bank accounts (flight from holding dollars), and also for investor ETF positions that one does not want to manage too actively due to the time committment involved. Another hall-mark of the currency “investor” is low leverage; consider the zero leverage multi-currency bank account or the at most double or triple leverage (ignoring margin) of currency ETFs.

    My gut feel is that an “investor” is looking for trends of around 3 months at the very minimum. Less than that would just be corrective action and would not justify the investor’s reallocation of funds. Really, the “investor” wants to be on the right side of a currency trend for the next 6 months, or a year, or several years. So of course an investor would be looking at longer term charts for assessing trends. An “investor” generally has some degree of hesitation in shorting a currency because (a) he can’t do that in a multi-currency bank account, and (b) he is dependent on the availability of inverse ETFs for the ability to do that in an “investment” or retirement account.

    Just like traders, investors are especially interested in collecting interest plus appreciation; so buying longer term lows in traditionally high interest currencies is of very high interest to investors.

  • http://www.theessentialsoftrading.com John

    Comment received via email:

    I consider forex investing to be an oxymoron.

    It may be a fine vehicle for traders and their charts, but investing? No way.

    Of course, that’s a bias because I know nothing of forex. And neither does any other individual investor.

  • http://www.theessentialsoftrading.com John

    Comment received via email:

    This actually an excellent exercise for this trader in training. So, here is my dollar’s worth.

    I would say almost everything we humans do involves some form of “trading”. Whether we traded sea shells for magic spells, or apples for oranges, etc. Today most of us work 8 hours a day in exchange for some weekly salary or wage – that is a trade of skills/labour in exchange for some agreed upon monetary amount, which is an auction, but also an investment.

    I don’t think there is much difference between “trading” and “investing”. They’re both require to varying degrees speculation, risk, experience, capital and investments in equipment, knowledge, skill, time, etc. “Trading” requires an “investment” of some sort and “investing” requires some form of “trade”. They, in my mind are not mutually exclusive or one better than the other, regardless of “time frame”. It’s really just a matter of personal preference and ability.

    According to the definition of investing, “to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value”, trading is a form of investing.

    If there is a difference, I think it is more a matter of perception of “trading” not being “investing” because there seems to be a general perception that all “trading” is “day trading – short term” and thus “gambling”, to the exclusion of “swing – mid term” and “position – long term” trading. The perception of “Investing” for most is, from my experience, a matter of “buy and hold” for the long term. I believe “investing” can also be gambling.

    Gamblers, “speculate” based on very little basis of skill, probabilities, experience, knowledge, practice, etc. That is, they don’t really know what they’re doing, they just “role the dice”, taking a chance that they’ll eventually win.

    I would also venture to say, that “long term investing” is actually much more “speculative and risky” than short term trading. The further out in time one goes, the more things one has to consider, the more complex things get and the harder it gets to “forecast” or “predict” what the probable scenarios could be, and the more time it takes to see the results and the less time available (assuming one is going to eventually die) to recover from bad results. One only needs to consider one term: geopolitics to get the drift of that.

    Every bubble, whether housing or equities, etc. was fueled by “investors” speculating on nothing more than chance, and very, very little knowledge, skill, experience, research, etc. behind their “Investment”. Nobody ever calls it for what most retail “investors” do – gamble, because that just doesn’t sell very well and that is certainly not what most retail “investors” believe they are doing. At the other end of the retail “investors” trade is a skilled, trained, well equipped and experienced professional “trader/investor”. The probabilities are overwhelming in favor of the professional, yet the retail investor thinks s/he is playing at the same level. Result; at minimum 95% of retail “investors” lose, usually by an unrecoverable amount.

    Whether one is a “trader” or “investor”, or any other human endeavor for that matter; to have any measure of success, one must acquire the skills, experience, knowledge, practice, study, research, work, continuously learn, and understand and control risk, etc. Life itself is subject to all of the above.

    I am not yet a professional trader, but at least I have an idea of the difference and have no delusions of my probabilities of success if I don’t acquire what is necessary to succeed. The real distinction for me is whether one is a professional speculator or an amateur gambler whether one calls one self a trader or investor.

  • Rod

    IMHO, it depends on the forex pair.

    For cable or the euro (DM before 1999), you can check a long-term monthly chart of 20+ years to confirm that these are mean-reverting series. Thus, any activity in these markets cannot fall under the “investing” category, even when taking very long term positions.

    However, shorting the Swissie or “investing” in Swiss Franc futures from 1986 to the present day would qualify as a successful investment. A huge long term trend with no sign of stopping. There are fundamental reasons for this. The same can be said about the Japanese Yen.

    To summarise, an investing approach is valid in the forex markets when there are fundamental underlying trends that do not reverse over time. This is not very different, in my view, from being an investor in the stock markets, i.e. you must be aware of long term fundamentals. I would not hesitate to invest heavily in US growth stocks if I saw the market’s 10-year normalized P/E ratio (Shiller CAPE) under 7.

  • Rod

    However, the potential returns of an unleveraged investment in a forex pair would be much smaller than the potential returns on stocks. To do anything interesting in forex, you need leverage.

    And once you introduce leverage into the equation, timing of the investment, discipline to follow rules, honoring stop losses, risk management and money management become crucial. These concepts have much more to do with trading.

    It is this need to leverage that makes it hard to approach forex with an investment mindset.

    • http://www.theessentialsoftrading.com John

      Rod – I’d counter that argument by suggesting a look at a chart like USD/BRL. Between 2002 and 2008 the Brazilian currency more than doubled in value against the US dollar. There are meaningful trends in the currency market at the longer timeframes. It’s more in the shorter timeframes where the use of leverage makes up for the lower relative volatility of forex.

  • Rod

    John,

    I acknowledged what you are saying in my first comment. But my point is that if you are going to make an unleveraged investment, Forex is not your best bet in terms of potential returns. You are better off with other asset classes: Gold is a 4 bagger from 2000, and it is not difficult to find equities that have gone up by even larger multiples.

    • http://www.theessentialsoftrading.com John

      Indeed, you can find bigger movers in many places. But how do they stack up on a risk adjusted basis? I don’t actually know the answer. Sounds like the makings of a blog post. :-)

  • http://www.theessentialsoftrading.com John

    Comment received via email:

    For me, I see FX as trading with rules more applicable to short term trading rather than investing. I have bought gold coins as an investment which have a parallel with FX, perhaps that is a difference?