My Experiences Trading Euros and Currency Commodity Futures Contracts and Options

Thomas Cathey
 


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The Euro has taken over the currency trading arena! Here's some valuable hints and kinks taken from actual trading experiences.

The Euro is the new European currency. It's easy to confuse the Euro with the "Eurodollar, " which measures interest rates for funds held in European banks. The Euro has become the primary source of foreign exchange globally. It's competing with the US Dollar as the primary store of value. It's the most liquid and active currency futures contract traded and is well suited for day trading as well as longer-term positions.

An account margin of $3000 will control a $150,000 Euro futures contract. (at today's market) Each full-point move in the Euro equates to a $1250 profit or loss. There is also a mini-contract that is one-half the full-size Euro.

More and more countries are becoming members of the Euro confederation. The Euro will probably become even more popular and liquid in the future. Euro futures trade 24 hours electronically on the Globex, stopping Friday evening and starting again on Sunday night. Euro options are pit traded and trade within specific hours.

The full-size Euro futures contract is perfect for seasoned traders. Novices have the choice of trading mini-contracts, which are also available on many of the other currencies. Since the trading hours are extensive, traders must be vigilant to a multiplicity of reports. Many of these will occur in the dead of night when most traders are sleeping in the U. S. This is one major reason why you need to use protective techniques for futures or short option positions.

Euro futures trade like the Swiss Franc. Their price charts look very much alike. The British Pound will look a little different but has a similar chart as well. The Japanese Yen will look much different but the turning points are usually the same. Currency traders are constantly looking for disparities and advantages that can be traded due to interest rate and political changes. The US Dollar Index also trades but is relatively illiquid compared to the Euro or Yen.

The other currencies that lend themselves to trading aggressively would be the Canadian Dollar and the Australian Dollar. The Canadian Dollar trades well and sometimes trades like the U. S Dollar, though other times it trades counter. The Australian Dollar is sometimes in synchronization with other Asian currencies. There are times when it trades more in rhythm with the Euro. In other words, these relationships are always changing and we need to study what is happening right now.

There are methods to trade other currencies against each other. For example, there is a Euro-Yen contract. The Euro-Yen contract maintains the relationship between the Euro-Yen without involving the US Dollar. You will still have to convert back to dollars after the trade is finished. Some of these currency contract combinations are quite liquid while others are not. Check the open interest and volume to see if you can enter and exit without getting a haircut.

Technically, the currencies exhibit patterns and wave structures that can be traded effectively. Patience is the key to let the market come to you. Day-traders are attracted to the currency markets. The short term swings, quick fills and great liquidity make this ideal for the trader who can handle the heat of the moment. If you are a short-term trader, make sure you trade that way. If you are long-term trader and can handle the risk, stay that way. I have seen many traders lose in the long run when they jump back and forth between methods in the middle of trades.

Here's how I look for opportunities in the currency markets: First I generate a TimeLine forecast that shows a strong move up or down in a particular currency. The TimeLine is based on time cycles and other preprogrammed patterns. I then determine if the move is expected to be choppy, trending, and for how long. This helps us focus on possible directional futures/option positions or writing options in a range, or even writing options with the trend.

Next I use automated option software to search for the best of 1600 strategies based on the expected market move. I compare these option to option combinations against futures to options combinations. At some point I will find a compromise between risk, profit and simplicity in one or two strategies. In hindsight there's always a best strategy we could have used. Keep this is mind when narrowing down the choices. When finished, we want to have one or two potential trades to work with. We call the selected few, "high probability, low risk trades. "

Remember there is more to planning a trade than just coming up with a forecast. The market may move as predicted but we can still lose by choosing the wrong trading vehicles. Pick the right vehicles and strategies that will allow us to stay in the market without excessive fear, but still carrying calculated risk.

We NEED to take on calculated risk or the market will not pay us for our services. In addition, the vehicle has to move far enough to make a profit without letting the expense of protection eat us up. Excessive protection (risk avoidance) can come in the form of option premiums, too close-in stop loss orders - and overdone, complex spread strategies. Matching a forecast to a strategy is an important skill to succeed in commodity trading.

Good Trading!

There is substantial risk of loss trading futures and options and may not be suitable for all types of investors. Only risk capital should be used.

Thomas Cathey - 27-year trading veteran heads the managed futures division of Thomas Capital Management, LLC. View his market forecast TimeLine Trading charts and get his complete 44+ lesson, “Thomas Commodity Trading Course - all free. " http://www.thomascapitalmanagement.com/commodity/welcome.htm Main site: http://www.ThomasCapitalManagement.com

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