When you trade around other interests (like sleeping), the use of entry orders is a necessary evil. Today was one of those trading days when using entry orders ended up a frustrating experience. I have a very simple trading strategy that uses entry orders, round numbers, and the London open. The system attempts to execute low risk, high probability trades while I sleep. Occasionally the market will deal me a hand like the one I was dealt this morning. I had a five lot entry order waiting to go long EUR/USD placed at $1.3380. The market missed my entry point by four pips. My dealers trading platform pegs EUR/USD’s low price for today at $1.3884! It stinks to miss out on 120 pips for the sake of four pips, but this is the game played when using entry orders to mange trades in our absence.

I think trading support and resistance with entry orders is a lot like fishing your favorite fishing hole. You have a good idea where the fish are biting, you even cast your line in the right spot, but sometimes the fish swim right by your lure without taking the bait. Just because a fishing hole is familiar to you, doesn’t mean you’re going to bring home dinner every day. I bring this trade (or lack of a trade) up as a reminder to those of you who are new to trading price action. Support and resistance trading is an imperfect science, and even when everything is correct you still might miss out on a killer trade. This is the compromise we make for the convenience of sleeping, or working a day job. You have to take trades like this one in stride, or trading will drive you mad. I hope your line was cast at $1.3390 last night instead of my fishing hole at $1.3380.

Best of luck,

Ryan

If the Commodity Futures Trading Commission adopts a proposed regulation to limit maximum leverage available off-exchange, many traders will move their accounts overseas where trading regulations are less stringent. In fact, many accounts have already left the United States following the NFA’s rules against hedging, and First-In-First-Out (FIFO) order execution. I have not moved my account overseas, although I probably will if regulation 5.9 is adopted by the CFTC. Trading with a reputable dealer through an overseas subsidiary is a straightforward process, but I was concerned that taxation snares may await U.S. based traders. To clear the air, I contacted Mr. Robert Green CPA/CEO, CEO & Founder of Green & Company CPAs LLC. Mr. Green is a well respected authority on trader taxes, and publishes many excellent articles via his website GreenTraderTax.com. In today’s post I’ll share Mr. Green’s response to my questions.

Note: This post does not constitute direct tax advice. The details of your situation are fact dependent, and I highly recommend you consult the services of a competent tax professional. I don’t think you will go wrong calling Mr. Green or visiting his forums at GreenTraderTax.com if you have questions.

Q: Are there any special forms a trader with an overseas account must submit at tax time?

A: All offshore bank and brokerage accounts need to be reported to the IRS each year on Form TDF 90.22-1. The FXCM UK accounts are foreign bank accounts (FBA). FBA reporting and the rules are clearly stated at www.irs.gov. It’s a simple tax form just listing account information. No income or wealth tax is
associated with the form. Non compliance has very stiff penalties, like $10,000 per occurrence. There was a big stink last year with non compliance on offshore accounts as part of the IRS vs. UBS (Swiss) tax battle and IRS voluntary disclosure program, which I covered on my blog.

Q: Are there any tax “gotchas” waiting for traders who make a profit in an Australian or European currency account?

A:  To date, we have not learned that US residents are taxed in the UK locally on their forex trading accounts. In most countries, including this being the case in the US, the non resident alien tax regime calls for no taxation on capital gains and losses – it’s not effectively connected income (ECI) or
“source income” – but there generally is local tax withholding on dividends and sometimes interest too. In the case of tax withholding, the taxpayer is generally not required to file a tax return, so there are no complexities or burden for tax compliance in a foreign country. Considering that there are
no dividends on forex and rarely interest too, and usually just trading gains and losses, forex traders should generally not have any tax costs in a foreign country. Traders should seek formal answers from local tax authorities and/or local tax professionals and also check US vs. other country tax treaties.

If a trader does pay taxes to another country, they can receive a foreign tax credit in the US, to prevent double taxation. However, if the foreign country tax rate is higher than the US tax rate, they will be paying that higher foreign country tax rate, since the foreign tax credit only allows a credit against the US tax rate amount. In the case of forex, the US tax rate might be 23%, the futures tax rate if the trader elected into Section 1256g. In the UK, tax rates are approximately 40%.

Frankly, it doesn’t sound all that bad in this trader’s opinion. I’d prefer to keep my account in the United States, but I will move if the CFTC adopts regulation 5.9.

Howdy Folks!

On May 26th I will be speaking to a group of currency traders in Vancouver, and I’d like to invite you to join us! I will be giving my favorite presentation titled Day Trading Around a Day Job. This presentation includes price action trading strategies you can execute around a busy schedule, regardless of your time zone. This event is open to anyone who can make it, but seating is very limited. There are only 29 seats remaining so act fast! You can get more information by following this link:

http://www.meetup.com/forextraders/calendar/12984061/

This trading group is sponsored by Samuel Araki, Founder and CEO of TradingMetro.com.  If you would like more information, visit the following link:

http://www.meetup.com/forextraders/

I hope to set you there, it will be a lot of fun!

Ryan

Howdy Friends!

When I began trading currency I visited my local book store for help, and I was disappointed by what I found. Every book I looked at focused on day trading, but trading with New York or London wasn’t an easy option for me. I slept while London traded, and I commuted to work while New York traded. The challenges associated with day trading around my day job didn’t stop me from trying, but it wasn’t pretty. It wasn’t long before getting up in the middle of the night, or trading on my smart phone became completely annoying. I decided there had to be a better way to trade currency, even if you’re stuck in a staff meeting when the market is roaring!

Nearly three years ago I began to blog my thoughts, tactics and trades taken on longer time frames. These trading tactics offer you the flexibility to trade around a busy schedule, regardless of what time zone you live in. In my new book “Making Money in Forex”, I’ve compiled some of my favorite trading strategies you can execute around a day job; and the lessons I’ve learned while mentoring traders from around the world. I’m a trader, I am not a “wall street type” or a professional analyst; my book is written in a straightforward and accessible style you’ll relate to as a fellow trader who is trying to make  a buck in the currency market. Within this reliable resource you’ll learn:

• How you can successfully trade around the demands of your job and personal lifestyle.
• How to read price action, what drives changes in price, and how to identify low risk, high probability trades using price action alone.
• How to become a bargain hunter, learning where to place orders that reduce risk and maximize profits.
• How to structure your trading routine to minimize stress, and build confidence.
• How common trade-management techniques may negatively impact overall performance.

Making Money In Forex contains actual trading tactics I use to trade my personal account, and blog regularly about at www.ryanokeefe.com. Whether you want to trade your own retirement accounts, or trade for a living; my goal for Making Money in Forex is to help you become a professional grade trader. You can pre-order the book today, by clicking on the link below.

Enjoy!

Ryan O’Keefe

CLICK HERE TO PRE-ORDER TODAY!

This evening I wrote my letter of opposition to the CFTC’s proposed limits on leverage in the off-exchange retail foreign currency market. Regulation 5.9 is a proposed rule, and I’m encouraged by the number of comments already posted on the CFTC’s website. Traders are letting the CFTC know where they stand, and we don’t want our leverage choices to be limited at 10:1. If you haven’t commented on the proposed rule, you have until Monday the 22nd of March to do so. Enclosed in this post is my entire letter to the CFTC. You’re welcome to use it as a template for your own letter if you need some help getting started. Together we can get our voice heard by the CFTC, and I’m starting to get the impression we may actually defeat this proposed rule. Every comment will help so get your emails sent by Monday! Here are some helpful links:

CFTC Regulation:
http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-456a.pdf

Comments on Proposed Regulation:
http://www.cftc.gov/lawandregulation/federalregister/federalregistercomments/2010/10-001.html

Forex Dealers Coalition
http://www.fxdc.org/

IB Coalition
http://www.ib-coalition.org/

How Can You Comment?

Email secretary@cftc.gov and include “Regulation of Retail Forex” in the subject line of your email.

Ensure you identify your comments with the regulation number RIN 3038-AC61.

Below is my letter to the CFTC:

David Stawick
Secretary, Commodity Futures Trading Commission
1155 21^st Street, NW
Washington, DC 20581

Regarding: RIN 3038-AC61

Dear Mr. Stawick,

I am writing to voice my position on the CFTC’s proposed regulations for off-exchange retail foreign exchange transactions. The proposed regulations offer many consumer protections, and represent a well intentioned plan to regulate what has long been considered the “wild west” of financial markets. Unfortunately I believe some of the proposed regulations will have drastic consequences on the market, and ultimately unravel every consumer protection the CFTC is trying to achieve. Enclosed are my comments on each proposed regulation I believe should not be adopted, or should be modified within Federal Register RIN 3038-AC61.

Regulation 5.8 – Aggregate Retail Forex Assets

The proposal to require RFEDs and FCMs to segregate the net credit balance deposited by retail forex customers is well intentioned, but falls short of truly protecting clients funds in a bankruptcy scenario. Segregated accounts offer the only true protection for client funds, as the CFTC points out in this proposed rule. I believe the bankruptcy code should be modified to protect segregated accounts off-exchange as they are on-exchange. Achieving a change in the bankruptcy code would allow the CFTC to enforce real deposit protections by requiring RFEDs and FCMs to segregate client funds. I believe the CFTC should adopt this proposed rule as something is better than nothing, but I’m confident some off-exchange retail clients will misinterpret disclosures related to these capital balances as some form of guaranteed deposit protection.

Regulation 5.9 – Security Deposits for Retail Forex Transactions

I am strongly opposed to the maximum 10:1 leverage limit. I understand the CFTC’s concern regarding the negative effects of high leverage however; leverage is an essential tool for off-exchange retail currency traders. Traders who understand how to manage the risks of leverage through sound money management should not be limited to 10:1. Limiting leverage will reduce the professional trader’s ability to maximize the use of risk capital. On a matter of principal, I do not believe it is the role of government to mandate which tool a professional should be able to use.

The National Futures Association has set leverage limits at 100:1, which had already been adopted as standard operating leverage by most off-exchange currency traders. I believe the 10:1 leverage limit is unnecessary as the congressional record through the Farm Bill never intended for the CFTC to regulate leverage. The intent of the Farm Bill was to bring transparency and oversight to a traditionally unregulated financial market, not to crush the future of the industry limiting its leverage ability. Furthermore, the maximum loss in off-exchange currency trading regardless of leverage is drastically less than the currency futures market. I see little or no benefit to leverage restrictions from a maximum loss perspective. I encourage the CFTC to address its concerns about leverage through trader educational programs, or enhanced disclosure documentation for off-exchange currency traders.

I also believe the adoption of this rule will invalidate every consumer protection proposed by the CFTC. Many traders have already moved their accounts offshore in response to the NFA’s leverage and hedging actions. If the CFTC adopts a 10:1 leverage restriction the majority of U.S. based retail currency accounts will move overseas. Some overseas dealers currently offer leverage higher than 100:1, and operate outside the CFTC’s jurisdiction which renders useless any consumer protections offered in the proposed regulations. I believe the adoption of Regulation 5.9 will dramatically affect U.S. based currency dealers by driving many out of business as clients move their accounts overseas. What we are really talking about with Regulation 5.9 is crushing a $1 billion dollar industry that provides high paying jobs, and tax revenue, for the sake of protecting some traders from their own ignorance. Traders are already properly disclosed on the risks related to trading on high margin. I stand alongside the Forex Dealers Coalition, the IB Coalition and thousands of retail currency traders in staunch opposition to Regulation 5.9.

I appreciate the opportunity to comment on these proposed regulations. I sincerely hope the CFTC considers my comments, and the comments it has already received from currency traders around the world opposing Regulation 5.9

Kind Regards,

Ryan O’Keefe
Carnation, WA
March 20, 2010

I hope you had a great week of trading! I booked a couple of decent trades early in the week, then took the rest of the week off. In this week’s video I cover both trades, the progress of our example option trade on FXC, and some upcoming events I’ll be speaking at if your interested. I’ll be speaking at a Vancouver British Columbia currency trading group in May. The date is tentatively set for May 26th, and if you would like information on attending please email me. This trading group is organized by my buddy, and founder of TradingMetro.com Samual Araki. Also, I have an free seminar planned for an upcoming Sunday. I’ll post information on how to register for this webinar on Monday, look to the blog for more information. Finally, if you haven’t submitted your comments to the CFTC I highly encourage you do so this weekend. The deadline for public comment is Monday the 22nd, and we do have a chance to stop the leverage limits. If you haven’t seen Rob Bookers in depth presentation on the proposed regulations, I’d recommend you take a look. The recorded webinar with all his notes are available a this link: http://www.robbooker.com/special/.

Have a great weekend!

Ryan

Howdy Folks,

Tonight I’m pondering whether or not EUR/USD has truly broken out of consolidation now that we have a bargain day opportunity. This currency has been trending higher since February’s lows, and broke out sharply higher on Friday. Today, the currency pair appears to have completed a pull back on the breakout. I think if the trend holds together EUR/USD is probably on it’s way to test $1.3850ish, which is the support level that broke down in early February. Perhaps the Fed statement tomorrow will give this currency the volatility it needs to break higher. We’ll see how it plays out, best of luck.

Ryan

Historically I’ve focused on trading the spot currency market, but I’ve begun playing around with options on currency exchange trade funds. The ETFs I’m practicing with are offered by Rydex Investments under the brand CurrencyShares. These ETFs hold the underlying spot currency, and derive their value from the spot price. For example, today the CurrencyShares Euro ETF (FXE) closed at $136 per share, while the spot price closed around $1.3618 on my daily candle. Notice the decimal shift to derive the share price. I thought I’d walk through an example trade for today’s post.

As usual, my trade plan begins with a support or resistance trading opportunity. In this example I’m using the CurrencyShares Canadian Dollar ETF (FXC) shown in the chart above. You can click the chart for a larger image. The ETF holds a spot position in the named currency, therefore you can translate spot strategies to an exchange based strategy through these ETFs. You could also use support and resistance on the FXC chart alone, but I like to correlate the ETFs to the spot market. Since FXC holds a trust of Canadian dollars, a trader who is bullish USD/CAD would take a bearish bias against FXC because they are betting against the Canadian dollar. Using the charts, a trader might decide USD/CAD is trading within support. If they decide to commit themselves to a bullish USD position, the trade could be expressed by going long USD/CAD, short FXC, or executing an option strategy on FXC. Let’s look at the pros and cons of each trade strategy.

Going Long USD/CAD

If the trader buys USD/CAD they are committed to the market until either they take profit, or they are stopped out. In this example, the appropriate stop loss is below $1.02. If the trader bought USD/CAD right now, a stop loss of at least 100 pips would be appropriate. Assuming they trade one $10,000 mini lot, the total risk would equal $100 using 100:1 leverage. Additionally, the stop loss would offer no protection from volatility. If the USD/CAD moves lower before it moves higher the trader may be stopped out on what ultimately was the correct position. If the trader is stopped out, and enters the trade again the risk has been doubled.

Shorting FXC

Alternatively the trader could short FXC, however it may be tough to find shares to borrow in order to short. The trader would ideally place a stop loss above supply which exposes the same volatility risk as the spot trade suffers from.

Buying a Put Option

When you buy a put option, you are betting the value of the underlying issue will decline. The strike price declared in the option is effectively the price at which you will be able to short when you exercise the option. The trader will pay a premium when the option is written (opened) which effectively is their maximum loss on the position. For example, I can purchase an FXC put option with a strike price of $96 for a premium of $95.00. This premium is equivalent to a 95 pip stop loss in the spot market on one mini contract, but represents the maximum loss the option will suffer. Even if the market moves 100 points against me, my option is still valid until expiration unlike a stop loss. Ideally, the price of FXC will fall giving my option greater value than a break even price of $95.05 when I exercise it. The best part is this option will expire on April 10th giving the market 39 days to work itself out before the option must be exercised. Unlike a stop loss, the risk is paid up front and you have 39 days to make a profit regardless of what price does between now and then.

There are other advantages to the option we can discuss in a future post. I’ll keep you updated on this example trade as we get closer to expiration.

Best of luck,

Ryan