FOREX: The Alternative Investment Vehicle

This week I have had the pleasure of joining my Online Trading Academy family at the 2018 OTA International Conference. After a packed few days, I can comfortably say that many exciting new things are coming our way into 2019 and the Academy will continue to pave the way for excellence next year, so just watch this space. The theme of our conference this year was Imagine and this got me thinking about the way most people are taught to invest and how limiting the process has become. We are taught to buy and hold Mutual Funds and Stocks for the long term, hoping time will do its work and increase the value of our holdings for the future. That idea is great as a concept, yet reality is presenting us with a very different picture. Equity markets in 2018 have been in a huge state of volatility, threatening to post losses for the year and wiping away most hard-earned gains in a fraction of the time it took to make them.

I joined my friend and fellow instructor Merlin Rothfeld on Power Trading Radio last week where we discussed this very topic after several of our listeners emailed in with questions regarding their fears over equity market declines and asked how to make money buying and holding in these current conditions. The simple answer to this question was that you can’t. When markets are falling into longer-term downward trends, you can buy the dips, but the drops lower will quickly erase any short-lived gains and quickly evolve into a loss…and before you ask, no, dollar-cost averaging is not the answer! The lower the market goes, the more you buy and, ultimately, the more you lose. Cost averaging is just a faster way to lose when you are on the wrong side of the markets.

So, what is the alternative? Enter Active Forex Investing.

I doubt many of you reading this have heard of this investing style before and that doesn’t surprise me at all. Wall Street does not have your best interests at heart and neither to Brokers or Financial Advisors. If they did, then why would they encourage the public to buy and hold? If you are in a long-term position, they can charge you a yearly management fee, regardless of whether you make money or not which benefits them, not you. It’s simply how the system was designed to work, and most people like to follow the advice of the ‘experts’ because they use big words and sound knowledgeable. However, that alone doesn’t mean you are making the right choice. To me, logic and business acumen will always take precedent over fancy words. Let’s look at some charts.

Above we have a chart of Nvidia, a stock which was gaining plenty of hype towards the back end of 2017 and into this year. In January, we had a nice pullback for a buy to add this to our portfolio around $193 per share. Many amateur investors are taught to enter positions at the start of each new year and if you had done so you would have been sitting pretty, right up until now. Here’s how things are playing out today:

At the time of writing this article, Nvidia has seen a 30% drop in price since the highs it created late this summer past. The buy and hold investor still in this trade is sitting with practically no gains on this position. Sure, they may not have lost any money (yet) but that sure is plenty of wasted time and a very inefficient use of capital. Considering buying 1000 shares of this stock in Jan 2018 would have cost over $190,000, that’s a lot of cash tied up for the year and doing nothing. Where could that money have been used more effectively? What is the alternative?

Active Forex Investing

Below is a price chart of the AUDJPY currency pair, which enjoys a relatively positive correlation to the Broad Stock Market. This correlation is due to the complex nature of the Carry Trade dynamic which we can investigate further in a future article.

A possibility at the start of this year was for the active FX investor to look for a longer move in the currency markets and, because they are not restricted by direction. Investors can look to Sell and Hold in Forex as there are 2 currencies in a pair, meaning you are buying one whilst simultaneously selling the other. This allows FX investors to play both the upside and the downside moves in the markets, thus allowing a far greater range of opportunity.

Notice the Supply Zone on the chart? This area suggests institutions are selling Australian Dollars in exchange for buying Japanese Yen. By selling the pair at supply we are basically taking a long term buy on the Yen and using Aussie dollars to do it. Not only are we unrestricted by direction but a $100,000 USD cash equivalent position would only require around $2000 of cash to cover the margin. That is far superior cash efficiency against any stock.

Fast forward to today:

Assuming you were still in this position of sell and hold, you would be currently commanding a profit of around 1000 pips, which equates to around $9000 profit for a $100,000, or in terms of investing a 450% ROI on a $2000 margin. Any investor only used to buying and holding with cash positions is typically turned off by the thought of active trading, but as we can see, Forex does offer the same opportunity for investors as the mechanics and principles are similar with just a different vehicle and much smaller investment.

There are always alternatives out there and the full financial market today is made up of a variety of amazing products which can support the traditional investor as they make their transition to an active investor. I hope this was helpful.

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