2016 is the Year to Trade Forex—On Nadex
For only the second time in a decade, the three most common FX strategies are all profiting at once. Bargain-hunters, trend-followers, and carry traders are all seeing positive returns in a rare confluence of fortune in global currency markets. For those with less capital and shorter timeframes, the new best way to trade forex may be on Nadex, using exchange-traded forex binary options (ETBOs). Here's why and how.
By Vikram Rangala
Monday, August 29, 2016 - 00:00
Though most of the ink and airtime in financial news goes to covering stocks, equities are really the small pond when it comes to where the world's money is invested. Commodities are bigger by far. Think about it: how many people drive Teslas or even use Facebook?
Compared to that, how many people drive cars? How many people eat corn?
And what does everyone on the planet who isn't still in a barter economy use to buy corn, oil, or stocks? Money.
The world's biggest market: currencies
The currency markets dwarf all others. Money, in short, is where the money is. And 2016 is the year when the currency markets proved themselves profitable for traders using both simple buy-low-sell-high tactics and more complex strategies.
Perhaps the most straightforward forex trade this year was selling the British pound prior to the Brexit vote. It's easy to forget how unlikely a Leave vote seemed before it happened. Those who shorted the pound did take a calculated risk. Some of those fund managers admitted it was a short term play, with algorithms designed to quickly take profits on dips before and after the vote. The strategy was, for most investors, to take advantage of volatility, not to ride a big drop in the pound.
When that big drop came, however, those short-term volatility trades were positioned to turn into longer-term momentum plays. It was just a matter of not letting the algos exit the positions as planned and holding on instead. It has been that kind of year: even traders who weren't planning to be trend-followers found themselves following profitable trends.
The carry trade
A more complex type of trade is less known to the average investor or forex newbie: the carry trade. The carry trade is mostly used by funds with deep pockets and fast algos. Put simply, it involves using a currency from a country with very low (or negative) interest rates to buy currency from a higher-yield country. If you borrow $1 million worth of a zero-rate currency, you pay no interest on that million. If you turn around and use it to buy $1 million worth of a currency that yields 5%, you'll collect $50,000 in a year, basically for free. Multiply that into hundreds of billions and you can see why people like it.
The carry trade can get more complex. Some strategies involve high-frequency buying and selling, constantly adjusting for fluctuations in the two interest rates. If the effective rate of one goes up or down just a couple basis points, that's millions of dollars when you're playing at this level. However, some carry traders may just ride out large drawdowns while they wait for conditions to move in their favor. That's typical of a lot of trading done by hedge funds and other institutions.
The carry trade is a multi-trillion dollar force that drives many other parts of the global economy, especially now when Japan, one of the main countries people borrow from, has a negative base interest rate. Japan is essentially paying large investors to take yen. Why? For Japan, it boosts investment and, the BOJ hopes, long-term growth and inflation. But a lot of those yen go to this other thing, buying Aussie dollars (a popular carry) or US dollars or Treasuries.
When enough of that trade happens, it can cause odd things to happen, like European bonds becoming more lucrative than safer US Treasuries. Or the price of crude oil being held down by an inexplicably strong dollar. In the past, when the high-yield currency in the carry trade belonged to an emerging market, the result could be not just odd, but devastating. Emerging markets offer high interest rates to boost foreign investment, which they need to supply the cash for their growth and development.
When one of those countries can't pay the interest on its debt, investors flee, the carry trade "unwinds," and markets crash, often with global repercussions. The Southeast Asian crisis of 1998, which began when the Thai baht collapsed, ended up putting the world at risk of recession, something averted mainly by the US tech boom.
That's the downside. The upside is what we're seeing now. The Japanese yen is cheaper than cheap, the dollar is strong enough to keep oil prices low and consumers enjoying a nice gas subsidy. The Aussie and Kiwi (New Zealand's dollar) are making the carry trade lucrative for hedge funds. And the reliable positive returns in currency trading virtually across the board are reassuring central bankers, just as the Fed and others contemplate interest rate hikes and other measures to boost inflation and maintain job and wage growth.
A new way for individual traders to participate
The possible benefits of Fed policy for the average American won't appear for a while. In the near term, let's be honest about who is cashing in for the most part. The carry trade is financial engineering that helps the already wealthy to get even wealthier. It doesn't really create jobs or boost incomes and unless you're a Lord of the Rings fan from Japan taking a vacation to the movie set in New Zealand, the gap between those currencies won't do much for you.
Unless you trade the AUD/JPY forex pair, and do your own mini version of the carry trade. The problem with conventional forex trading is that it involves substantial risk. It's an offshoot of the big players' game, the one for deep pockets and fast algos. The risks of conventional forex are mainly two: you risk getting stopped out with a loss if the market volatility moves against you, and you risk taking a larger loss than you can afford if you have slippage or (not that you would do this) trade without a stop-loss order.
With Nadex, you avoid these risks altogether. You can trade the Aussie Dollar-Japanese Yen forex pair (AUD/JPY) for less than $100 per binary option. You can never be stopped out and you will never lose more than what you paid (less than $100 per contract) to put on the trade. That's the deal with exchange-traded binary options (ETBOs) and why so many people call Nadex the future of trading.
No margin calls, no getting stopped out, no unplanned losses. And you get to participate in one of this decades most consistently lucrative trading opportunities. This is the year to trade Forex, whether you want to trade the trend, catch a quick momentum move, or even do you're own limited-risk, $200 version of the multi-trillion dollar carry trade. And the place to do it in 2016 is Nadex, using secure, CFTC-regulated exchange-traded binary options (ETBOs).
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