CAN individuals trade foreign exchange and make money consistently? K Duker, Deutsche Bank head of global liquidity services (Asia Pacific), believes so. But banish any notion that the task will be easy.
"Everyone says FX is easy; you can make money tomorrow. That's completely wrong. FX is difficult but there are huge advantages. It is the most liquid market, it has some of the tightest spreads, and it's virtually impossible to manipulate.
"It's probably the best product for the retail market because you stand on a level playing field (with institutions)."
There are, of course, a number of caveats to this, which we'll get to in a moment.
Certainly technology has opened up a world of possibilities for individuals, who can access real-time prices, charts and research from any number of trading portals. You must, of course, be equipped with broadband connection and a computer.
But now Deutsche Bank plans to raise the ante a few notches. It is launching its own retail trading platform this week, an event that has made several hundred investors sit up. So far, nearly 600 people have signed up for a presentation on trading FX on Thursday. To accommodate others who may be interested, the bank has arranged two other sessions on Friday. The bank was named the No. 1 forex house in 2005 and 2006 by Euromoney.
dbFX is targeted at accredited or sophisticated investors who are self-directed. You can open an account with as little as US$5,000. There are, of course, any number of platforms that individuals can access. These include those licensed by the Monetary Authority of Singapore and several other online platforms that are unregulated.
dbFX says it will offer very competitive spreads as tight as two pips; the latter is quoted on the eur/USD pair. The site will feature a streaming news feed from Thomson Financial. Accounts will also earn interest on rollover positions.
Another key feature is research, which Mr Duker sees as a must; and of course the strength of Deutsche Bank as a counter-party.
Not all platforms are created equal, says Mr Duker. "We're trying to bring an institutional view to the retail market that up to now hasn't had the opportunity. We're bringing a way of trading that looks at three aspects. The first is research. We're not going to tell you that trading forex is easy. There is a lot of research.
"Second is the individual himself. You have to know yourself and your risk appetite... And then it's pure execution. I would go for a platform that offers strong and consistent pricing. It's easy to make markets when they're moving, but when the market is slow, you need a counter-party with the depth and liquidity to give you fair prices."
The strength of the bank's balance sheet also goes a long way in ensuring safety of funds. This is an aspect that should not be underestimated. Investors were spooked in 2005 when clients of Refco here pulled US$200 million in funds on news that its US-based parent had filed for bankruptcy.
dbFX was launched in Hong Kong in the first quarter, and today the volume has doubled every month. Mr Duker says investors there trade FX as an asset class for absolute returns, but there are also those who trade it in conjunction with other portfolios.
Deutsche Bank research on long-term returns from FX suggests that it should be viewed as a distinct asset class, alongside equities and bonds, instead of as an alternative. The research finds that FX exhibits long-term systematic returns or 'beta' that are comparable to or even better than bonds and equities since 1980.
Its view is that the allocation to FX in a global portfolio should be 20 to 30 per cent.
The bank found that the annualised return of a combination of FX strategies outperformed bonds and equities between 1980 and 2005. The correlations of any of the individual FX strategies or a combination of them to bonds and equities range between -14 per cent and +2 per cent.
Interestingly, among FX strategies, FX carry tends to deliver the best returns - 13 per cent annualised since 1980, including interest.
Meanwhile, Mirza Baig, the bank's FX strategist (Asia), will share with investors on Thursday how they can harness medium-term themes in their trades. One of those themes is that of the decoupling of Asian economies from the US, particularly with the growth of China and India. "We think there will be a lot more capital inflows into the region, driven by growth." The inflow of capital is expected to put upward pressure on Asian currencies.
Still another theme is commodities. With China a huge driver of demand, currencies of countries that export commodities will be under consistent upward pressure.
Then, of course, there are the carry trades. "The cycle is extremely overbought. There is too much money in carry trades, and they won't give consistent returns at (the current) level. We anticipate a slowdown of those returns...
"But you have to distinguish between technical and fundamental drivers. On the valuation front, the picture is actually quite bearish for carry trades. On the technical front, it's not too bearish. So you can have a short-term bullish view on the AUD/yen, but also be medium-term bearish on the same currencies."
Mr Duker says dbFX is ideal for those who take FX seriously. "What we're not looking for is those who want a quick tip. What we're talking about is a process. We can't guarantee that every trade will make money. But if you take it as a serious business, do the research, and understand your risk appetite before you trade, you can be profitable... There is no reason for an individual not to succeed in making money on the same basis that a trader would."
Forex in any case is a market where not all participants are out to make a profit. Says Mr Baig: "Most participants are not profit maximisers; they're hedgers and also central banks. That is why there are profits one can capture. As long as your expectations, framework and pricing are right, there is a good chance you can outperform as there is no benchmark. If you're emotional, then you should seriously consider looking into funds."
"We're not going to tell you trading forex is easy. There is a lot of research. Second, you have to know yourself and your risk appetite. And then it's pure execution." - K Duker, Deutsche Bank head of global liquidity services (Asia Pacific)
