Dean Popplewell has a wealth of Forex experience: professional currency trader for 10 years, fixed income trader for four years, and head of the global trading desks at various financial institutions in Canada. He is now OANDA‘s resident currency analyst, and has been writing OANDA’s daily Forex blog since January 2007. Mr. Popplewell was gracious enough to discuss Forex trading, currency ETFs, and more in an exclusive e-mail interview with ETF Database.
ETF Database: It seems that the retail side of Forex has grown by leaps and bounds in the fast few years, since online Forex trading has allowed retail investors with relatively small amounts of capital to get into the game. A similar shift has happened within certain categories in the ETF world (hedge fund ETFs, commodity ETFs, etc.), allowing retail investors access to different asset classes which were previously unavailable to them. Is this a good thing? Are brokers and issuers doing enough to educate less-sophisticated investors about the risks inherent in these types of investments?
Mr. Popplewell: I believe it is always a “good thing” to offer a greater range of investment opportunities – but this is not to say that all opportunities are appropriate for all investors. Helping the public understand and make informed decisions with respect to these investment opportunities places an even greater onus on brokers and issuers to provide learning materials and, quite frankly, as an industry our efforts have been hit and miss.
Certainly some brokers have done a very credible job of providing education materials for their clients and the public in general, and I would like to think that OANDA falls in this camp. However, there is also a great deal of published material that is little more than thinly-veiled advertising and self-promotion.
ETF Database: Obviously both Forex brokerage accounts and currency ETFs have a value-add for particular types of investors and for particular trading styles. If one wishes to speculate on currency, when is using a Forex brokerage account appropriate, versus buying a currency ETF through a stock broker?
Mr. Popplewell: I think the basic difference between Forex brokerage accounts trading in the Forex spot market and currency ETFs lies mostly with the type of client to which the instruments are geared. Brokerage accounts typically appeal to self-directed investors intending to take an active role in their currency exposures. As part of their strategy, they expect 24 hour trading windows, often deal in odd-lot sizes, and tend to move in and out of positions fairly frequently. This is the most liquid ‘asset class’ available.
Currency ETFs on the other hand, should appeal to investors hedging future currency exposures with a known delivery date and speculators planning to hold positions for a longer time period. This is a gross generalization of course, but does illustrate the investment objectives of spot market trading and currency ETFs.
ETF Database: What is the most common mistake you see in currency trading, among people new to Forex?
Mr. Popplewell: There are several common mistakes that new Forex traders tend to make, but the two that typically cause the most damage are starting off with too much leverage and trading too close to margin limits. It may seem that I’m simply stating the obvious when I say that the higher the leverage, the greater the potential for gains as well as losses, but this sometimes seems lost on new traders. It is my belief that all new Forex traders should seriously consider constraining leverage to a maximum of 20 or 25% until gaining sufficient experience to handle higher ratios. When you first start trading Forex, you’re first priority should be protecting your initial capital investment while learning the ropes – once you achieve a reasonable level of success, you can increase your ratio – but when starting out, you want to minimize the possibility of burning through your capital.
As a Forex broker, we do not believe that simply churning though clients is a sustainable business model – our goal at OANDA is to build long-lasting relationships with each and every client. We offer a wide-range of news services and commentaries through our blog and websites – we’ve also created a series of education materials to help new traders with more advanced teaching aides currently in development.
The second thing I see happening all-too-often is the tendency for new traders to put their account into a margin call situation. This is simply an over-extension of the account’s available margin that does not leave sufficient room for a nominal rate movement against you and forces you to – depending on the broker – either sell your position at a loss – or add more money to your account. Either way, you should create and abide by a margin rule that ensures your account will always have enough room to weather short-term fluctuations. For a new trader, maybe something like always maintaining at least 40% margin or something along those lines would be appropriate until gaining more experience.
There are a handful of other common mistakes that we see that I would like to quickly mention while on the topic – poor use of stop-loss limits and take profit points are high on the list as is the simple act of over-trading. This is especially common to new traders who feel that they have to have several trades open simultaneously in order to be a “player”. This usually leads to the trader being overwhelmed with too much information too quickly and until the trader gains more experience, it may be best to limit yourself to one or two active trades at a time.
ETF Database: Whether they’re using a Forex brokerage account, or utilizing currency ETFs, most people actively trade currencies over a short time horizon. Is there any reason a long term investor might wish to buy and hold currencies as part of a long-term portfolio? If so, when might this be appropriate?
Mr. Popplewell: Individual investors have various reasons for their trading strategies, but the two most likely reasons for holding currency pairs as part of a long-term scenario are for hedging purposes or speculation for profit. Of the two cases, the idea of a long-term speculation is the most relevant for today’s audience so I’ll just say quickly that hedging a future currency exposure can be managed through a retail Forex broker. The idea of hedging in this example is to mitigate the risk of an exchange rate moving against you when you know that you are either entitled to receive, or are required to make, a payment in a foreign currency at a future time. Simply buying and holding the currency pair with the two currencies involved is a very efficient way to eliminate the risk of the exchange rate moving against you with the spread being your actual upfront cost.
Certainly, the majority of traders holding long-term Forex positions – let’s say a month or more – do so for speculation purposes with strategies that are tied to the fortunes of a particular economy. As I write this, a research note is circulating suggesting that within the next month or so, the yen could gain on the US dollar with a target of 95 yen to the dollar being mentioned.
As an individual investor you could choose to short the USD/JPY currency pair based on this assessment and hold it for the next few weeks. Be aware however, that you will likely be forced to ensure fluctuations in the exchange rate over such a long time frame and not all investors are suited for this form of trading. Trends are never in a straight-line and rates will change constantly so you do need a certain amount of courage to hold to your strategy.
ETF Database: Any words of wisdom–perhaps an unconventional investing tip—you could share with our readers?
Mr. Popplewell: Well, I would first like to say that I think it is an exciting time to be in the Forex sector. With the seemingly daily barrage of bad news coming out of the equities markets and declining yields in fixed income, I believe that Forex is gaining in importance as an ‘asset class’. As far as an investment tip, I believe that of all the investment opportunities available to retail clients today, Forex is the most reactive to news events which means that you have to stay on top of the news for the currencies you are interested in trading. Actions by central banks, interest rates, and other news items can have a tremendous impact on a currency pair and you ignore this information at your own peril.
Lastly, most retail Forex brokers including OANDA offer game accounts which enable you to practice your Forex trading skills. This really is a remarkable divergence from other forms of investing and makes it easy for you to gain considerable experience before committing your money to a live trading account. Read the news, acquire some basic chart-reading and technical analysis skills, and practice on a game account and you will give yourself a real opportunity to succeed.