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It's a simple question and I give a few reasons not to try day-trading them. If you are successful doing so please feel free to prove me wrong. So here it goes:
Why trading currencies is so complex?
1) I never read it but I know from experience that pairs support each other. That's right cross pairs also have significant volume and they all play significant role in changing the price for 1 currency. But since everything is related with something else, you would need a VERY complex system to measure all these bearish and bullish forces.
2) Volatility very inconsistent. Once it is small, than it gets very volatile. That's a disaster for risk management. You could only take advantage of volatility when it is very small and you know it will be a lot bigger but usually that's impossible to tell. (Or scalp counter-trend when volatility is high)
3) News come out way too often and they ruin the original picture of price action. You can't trade the news because of slippage.
I understand that currencies offer some good opportunities too. I like to trade the London open because that's the only time I can play volatility with good expectancy on my side.
There are also good fundamental stories to back certain trades...
My point is: trading the ES or Bund seems like a piece of cake compared to trading currencies. So why bother day-trading them?
Can you help answer these questions from other members on NexusFi?
If thought of this way I believe every instrument is 'complex'.
I am a firm believer that 'they' who know and who are capable of significantly moving the markets usually know what they are doing (though sometimes they may be wrong too), and what we are actually trading in a market are other traders and not the underlying.
So instead of analyzing the fundamentals as you are attempting to, why not those who are better equipped financially and technologically do that and why not simply analyze to recognize their footprints and act in tandem with them rather than against them?
That is the wrong question to ask of a trader. Valid theories can be traded to pauperdom and invalid theories can be traded to riches. Ultimately the answer to the question has to be phrased in the form of the first question you asked - 'How do you trade it?'
I am not live trading but I am developing an automated trading system against multiple spot forex instruments.
I do understand there is some correlation between multiple pairs, but my current strategy is not based on correlation. Each pair is traded independently.
Why am I interested in day/weekly swing [automated] trading spot forex?
Backtesting and market replay data is available for free.
For the most part the pairs do not behave the same providing multiple market "behaviors"/variability.
When I do begin to trade with live money in order to test the profitability of the strategy my relative money at risk is very low.
Because of these reasons I believe if the strategy is profitable across multiple pairs then it should be robust and profitable for index and commodity futures and I can scale it up/in based on the size of my trading account.
I think that is a very subjective opinion. I enjoy trading spot forex. I see very clear price action and support/resistance on forex charts. Just look at the current 4hour EURUSD chart. The price action and levels could not be more obvious.
Compare with the 4 hour ES chart (5pm EST 28Feb), the price has whipped around way more than the EURUSD.
I've been developing my skills in forex for 3 years and the no.1 reason is that I can trade microlots (MB Trading via NT). So I can pay pennies for an amazing education. My goal is to step up to futures when I've the confidence to do so.
My belief is once you have progressed to a certain point, you can trade pretty much any instrument after a few months familiarity, so why not hone those skills with skin in the game (i.e. not SIM) with as little risk as possible?
The specific issues you raise about correlations, volatility and news are all part and parcel of the game. After 3 years I have pretty good handle on the those factors.
That said, many stories of the most successful forex traders trading off 4hrly charts and playing for decent swings. S&R levels on that time series are key and should be on your radar whatever your trading time frame.
I am not expert in this but my simple thinking is: Trade what ever you have studied, practiced and feel comfortable with.
Currencies are no more unpredictable than any thing else. ES shows more whipsaws, oil is even worse. News always affects a certain instrument. look at bonds the last few days. They are supposed to be the most stable instrument but last few days they have been in wide trading range. 3. If you are trained with currencies, stick to currencies if Es stick to ES.
In my experience currencies do have smoother charts than many other things.
You are right, currencies are all related and are affected by each other. The king currency is still US dollar. So, every thing revolves around the US dollar. To make is easier and simpler, pick one pair with USD in it. When fundamentals affect dollar every currency paired with USD will move. So, pick just one pair with USD and other major like EUR or GBP, get good at it. No derivative pair like CHF.JPY.
The attraction for currency trading for beginners with not enough money: Brokers will allow you to open an account with as small as 50 dollars and ask you to trade "microcontracts". Good for practice but you can never make enough money with those. The spreads will eat you up, they have specially high 2.5 to 3.5 pips spread on those.
For those who have money, attraction is the leverage. For non US residents, there are brokers who will allow you 500:1 leverage. You cannot do that in futures.