Forex vs Emini trading
BPA trading room Q&A: March 2, 2016
Al replies to a number of Forex trading questions, covering the differences between Forex and the Emini, and much more. Al also discusses the rationale for creating a separate Forex trading course.
Video duration: 15min 29sec
Forex trading course
As you know, I’m redoing the entire course, and there have been enough requests for a Forex course that I decided that I would go ahead and do that. So right now, I’m working on both the Emini course, which is also basically the same course as for stocks and crude oil, and gold — they trade all very similarly — and it’s also pretty much the same for Forex markets as well, but there are enough little subtleties about the Forex markets that I decided — also, a lot of traders only want to see Forex charts; they don’t want to see Emini charts or crude oil charts. So I’m making a parallel course: Forex Trading. And a lot of the charts are the same; there’s a lot of the charts I don’t show price or time axes; I’m just trying to show bar patterns. So there are a lot of charts that are the same to the Emini course and the Forex course, but there are enough differences to make it, I think, worthwhile to have a Forex course.
Q: Are there significant price action differences between the Forex market and the Emini?
No, but there are some differences and there are differences enough so that if you’re a Forex trader, you might prefer having a course that is entirely about Forex trading, and that’s why I’m doing it.
Q: For special skills, do you need any special skills to trade Forex?
No. It’s basically the same as trading crude oil, the same as trading stocks, the same as trading Emini, but there are a bunch of little differences.
Q: What was my plan with the course?
Obviously, I want to help traders make money, and I’m hoping that the course helps traders make money. A lot of days in the Euro versus the dollar, for example, in the days there’s sideways and small, 50 pip ranges, 30 pip ranges for most of the day, and you have to scalp to make money if you’re going to be trading the Forex markets. But — and the Forex markets are really good limit order markets.<.p>
A lot of Forex days look just like this, and they’re really good. You buy lows, you scale in higher, and you scalp. But other times, you get big breakouts and they can create big breakouts on higher time frame, 60-minute chart, like December 3rd we had that huge bull reversal in the Euro versus the dollar, and at the time I said “60 percent chance we would get a second leg up”. But, the day was so climactic that we may go sideways for a month before that second leg up began. But during that day, it was very easy to buy. Even today in the Euro, we had a small pullback bull trend. Plus, the context is really good for buyers of the Euro right now. This is the five-minute chart. You see that you got to buy. If you’re going to be trading it, you got to buy. And 60-minute chart, three pushes down — now we got three bull bars closing near their highs, probably buyers below and a little bit more up. 240-minute chart; you can see the wedge. Not a very good entry bar so far, but it looks like it could bounce. Pretty tight channel, so — like this, probably a minor reversal.
Any time I see a reversal up like this — I talked about this earlier — look to the left. Is there a gap? And this bar overlaps that bar by one pip, so there is a gap and we may have to get down to this measured move projection before we rally. But I do think we’re going to get back up to that gap, whether or not we go down further first.
If you look at this chart, to me it looks identical to an Emini chart where you trade it the same. The same people are trading; Goldman Sachs, all the big banks, all the big funds. They’re trading Forex markets. The Forex market is huge. It’s, in fact, bigger than the stock market. And it’s not as if Goldman Sachs is afraid to trade Forex because they’re trading against firms that are dedicated to Forex trading. Not at all. Goldman Sachs will not hesitate to trade Forex markets.
An important difference
There’s one, I think, important difference between Forex trading and Emini trading, and that’s that there are more idiots in the Forex market — more experts who are idiots. And there was a show — I forgot the name of it, “Money in Motion” or something on CNBC about Forex trading, and it went off the air. And the reason it went off the air is because the premise was flawed. Every trader looked at a chart and they were trying to buy at support or buy at resistance, and if they were buying they would say, “Oh, the fundamentals are really bullish.” Or if they’re selling, they’d say, “Oh, the fundamentals are really bearish.” And they’d be talking about central banks in different countries and all kinds of fundamental nonsense — you know, China is weak or Australia is having problems with precious metals, or who knows what, Norway — the crude oil price is going down. It’s just nonsense. It’s just total nonsense. And people who are trading thinking that way I think are fools, and I really do not believe they are making money. I certainly do not believe they are making money with the logic that they’re saying.
I do think they are making money if they’re trading based upon support and resistance, which they all are. But the other nonsense about, “Oh, crude oil’s going down, therefore the Norwegian Kroner is going to fall in value, the Australian dollar, the Canadian dollar are all going to get hurt.” And it’s total nonsense, right? The institutions already know all that.
As a trader, all you care about is “Are there breakouts? Are the breakouts strong? Are the breakouts going to reverse? Are we at significant support? Are we at support or resistance on a higher time frame? What is the market doing at the support and resistance?” It’s the same as any other market. Markets function based upon logic. You may not understand the logic, but all markets function on logic. And it’s not as if the Forex market on gold market, stock market all have different logic. No, they’re all representations of rational human behavior, so they’re all going to have the same amount of price action.
Other Forex market differences
One of the differences with Forex markets is that they’re not regulated. Another difference is that there are no exchanges. So the last price on a chart — this last price on the Euro versus the dollar on TradeStation is going to be different from the price on Interactive Brokers. It might be a pip or two difference. And it’s different on the price from any other broker because this broker uses TradeStation data, they’re basing it upon one bank, and the last trade during this five-minute interval for that bank may not be at an identical price as the last trade at a bank that another broker uses, so the charts are not absolutely identical. The prices are somewhat different.
Also, the chart itself — it’s not real trades. In TradeStation, I believe they use bid prices, not last prices. So for example, this price you think, “Oh, that’s the last trade.” No, it’s not. That’s the last bid price. Every price has a bid and an ask, and because charts are made on bid and asks and not last prices, sometimes we get a fill in and we say, “Wait a minute, it never reached my price. How did it get filled?” It’s because it did reach your price. The chart is not based upon actual trades; it’s based upon bids and asks. If the last trade did not reach the bid or it did not reach the ask, the chart is not going to be representative of the price. Sometimes, you’ll get filled on a price below the high of a bar, or up here, or it might get filled down here and you say, “It never got there. How did it get filled?” It’s because you have a chart that’s based upon the bid or maybe can have it based on ask. You can do it either way with TradeStation and with a lot of brokers. So charts are not as accurate.
So why trade the Emini?
Now, why do I trade the Emini compared to Forex markets? I trade the Forex markets all the time, but why do I trade the Emini so much more? Well, because of minimums. For me, the minimum scalp in the Forex market is 10 pips, and it’s hard to consistently make money if you’re trading less than 10 pips. The charts are not entirely accurate. You have bid/ask spreads; you have commissions, and all of that make it difficult to make money if you’re trading for less than 10 pips. Now, why is that important? Well, if my minimum trade is 10 pips on the Forex market, how many 10 pip trades can I get in a day? Forex markets, in general, move less than the Emini, so, on that basis alone there would be less opportunities to make 10 pips than there are if you make a one-point scalp in the Emini. So on the Emini every day, the range is big enough for me to see about 40 one-point scalp trades and about 20 two-point scalp trades. In the Forex market on an average day, instead of 40 one-point scalps there might be 10 one-point scalps. So there are far more trades available on the Emini.
On the other hand, the Forex market trades 24 hours a day. There’s basically a set of three sessions — Asia, and then Europe, and then the United States — so you can be trading any time, day or night. And you can trade the Emini any time, day or night, but so often it’s quiet after the New York Stock Exchange closes, but that’s not true of the Forex market. So if you live in Asia and you want to trade the Emini, you have to be trading at night if you really want to get good movement. If you live in Europe, you can trade the DAX no problem, you can trade European bonds, you can trade any European stock index future, but you probably will not trade the Emini. You probably will not trade the Hang Seng. But if you trade the Forex markets, pretty much no matter where you are in the planet, you can trade pretty much 24 hours a day. There are little gaps between the sessions, two or three hours of tight trading ranges, but for the most part we have the advantage of being able to trade any time of the day, any part of the world, and trade during the day.
So when I go to Asia, if I’m in Hong Kong and I’m trading, I’m trading at 10 o’clock at night until 4 o’clock in the morning or so, and that’s harder to do. It’s hard to stay awake; it’s hard to stay alert. But if I’m trading Forex markets in Hong Kong, I can trade during the day. It coincides more with my biorhythm.
Forex position sizing
Another advantage of the Forex markets — one of the big advantage is you can adjust your position size. In the Emini, there is a minimum position size and basically $100,000 right now. If the Emini’s around $2,000 and it’s $50 a point, basically each Emini contract is controlling $100,000 worth of stock. The standard position size in the Forex market’s 100,000 units, in general, it’s about the same size as the Emini, but with Forex markets you can trade small. You can trade 50,000 units; you can trade 10,000 units; you can trade 5,000 units. So if you’re starting out, Forex markets offer a really big advantage. You can lose a lot less while learning how to trade. You can trade really small. You can trade 10,000 units. You can say, “Well Al, if I take all these scalps of 10,000 units and make $10,” right, it’s true. But when you lose, you lose $10, and that gives you the ability to get a lot of practice. You can practice for a year or two and not really lose all that much money, so that’s another big advantage.
Also, Forex markets, instead of referring to ticks, people talk about pips, which is basically the same thing. I mean, it is the same thing. So each little move up or down is a pip. Whereas stocks and Emini, crude oil, gold — every little move up or down is a tick. And then finally with the Forex markets, a lot of times I’ll take trades on the 60-minute chart or the two-hour chart or the four-hour chart — sometimes the daily chart or the weekly chart. I do that much less in the Emini, and I’m much more willing to hold positions overnight in the Forex markets, in part because I’m a day trader. I take 20, 30, sometimes 40 trades in a day, and Forex markets — I see a lot of patterns on the 60-minute chart and the two-hour, four-hour chart, daily chart, and I can adjust my position size, and the stops are very reliable, and I’m comfortable not getting in trouble. Overnight, I don’t worry about anything. I don’t worry about big gap openings. I feel really comfortable.
Holding positions overnight
If you’re trading a higher time frame chart and holding position a day, two, three days, overnight — which is nice — I would be comfortable doing that with the Emini as well if I were not day trading the five-minute chart. But since I’m here watching it all day long on the five-minute chart trading all day on the five-minute chart, I would override any decisions that I was making on a trade on the 60-minute chart. So if I short the 60-minute chart and I start seeing this on the five-minute chart, I’m going to buy back my short. So it’s really hard for me to — it’s impossible for me to trade the 60-minute chart or the two-hour chart, four-hour chart if I’m also actively trading the five-minute chart because I’ll see moves on the five-minute chart that are opposite to my position on the 60-minute chart, and that does not make sense to me to hold the 60-minute position when I know the market’s going against me and I could get out and get back in at a better price.
Forex markets, if I have a 60-minute trade on that I’m holding overnight, usually I get out — I have orders placed in the market at night, and a lot of times I’ll get my profit in the middle of the night. I’ll wake up and I’ll say, “Wow, I’ve already made my nut for the day,” because of an overnight Forex trade. But I’m not willing to do that with the Emini.
Trading Forex for a living
Anyway, I talk about all of this stuff in the Forex course, and I do think traders can trade the Forex markets exclusively for a living. I do think they can trade the five-minute chart and do it as well, although I think because of the issues with bid-ask spreads and the charts not being as reliable, I think most traders are better off looking to trade 60-minute charts, one or two-hour charts, four-hour charts, daily charts. However, if you’re watching all day long, there are a lot of good trading opportunities on the five-minute charts as well. For example, we start seeing this and say “Wait a minute, the pullbacks are all really small. They’re only one bar one. Al calls this a small pullback bull trend. We’re going higher,” so you just buy for any reason at any point, put a stop down here, and just see how far it goes. And every day, there are things like that in the Forex markets, so I really do think a day trader can do very well. However, as I said, there are fewer day trades, I think, in the Forex market on average — far fewer than there are in the Emini. Certainly far fewer scalps.
Okay, I’m out of energy, but I’m just trying to explain my rationale for going ahead with the Forex course, and I’m hoping that Forex traders find it really useful. I’m pretty confident that they will. All right, hope that everybody has a good night.