Forex peer trading

by Admin
Updated: June 30, 2021

Forex peer trading without slippage can preserve your wealth while protecting your liquidity

Forex peer-to-peer platforms are designed to allow you to exchange real money with other members at the rates you select. Typically, apart from any fees associated with transferring money to or from your account, their fees are built into the exchange rate spread. This means the rates are sub-optimal but should still be better than those offered by the usual consumer services (banks, airport kiosks etc.).

This article recommends CurrencyFair and provides the following mutually beneficial introductory offer:

When you use to open an account at CurrencyFair and go on to make a trade (min equiv €2,000), you’ll receive a €50 cash bonus credited to your CurrencyFair account.

How to use the CurrencyFair offer

  1. Use to open an account at CurrencyFair.
  2. Decide on an amount of money you want to deposit equal to at least €2,000. For example, if the exchange rate is 0.8 EUR per USD then €2,000÷0.8 = $2,500, plus a safety margin of $100 = $2,600.
  3. Follow the instructions provided by CurrencyFair to send in the money, making note of any fees and taking special care that your bank doesn’t convert your currency themselves.
  4. Do not do an instant transfer. Instead use the marketplace feature to select a better rate and transfer your money into a currency you believe will increase in value compared to your original currency. For example, if you start with US dollars and it looks like EURUSD is going up then Euros is a good (and also the simplest) choice.
  5. Be patient and wait for your trade to complete. Note that it might complete in parts and not all at once.
  6. Once the trade is complete, CurrencyFair will credit your account with the €50 bonus.
  7. Monitor the exchange rate back into your original currency with a view to getting back more of it than you started with.

Initial example: $2,600.00 converted at 0.8123 into €2,111.98. Bonus of €50 takes holding to €2,161.98, which is eventually* converted back at 1.2317 to $2,662.91 so you made $62.91 which should more than cover any initial fees such as wire transfer in.

* Whatever rate you use to convert money in one direction, you need that number to go lower so you get back more of your original currency than you started with. This means that the inverse of that number needs to go higher.

For example, the inverse of 0.8 (= 1/0.8) = 1.25 so, if you transfer at 0.8, you want to transfer back when that number drops below 0.8 or when its inverse rises above 1.25.

In practice, any nominal exchange rate is subject to a bid-ask spread, e.g. if the nominal rate is 0.80, the rates available to you might be 0.79 and 0.81 (or 1/0.81 = 1.23) in the opposite direction, i.e. you can never immediately change back without a loss. You must be patient and wait for the currency to move in your preferred direction.

Pros & cons

Peer-to-peer platforms don’t (or shouldn’t) suffer from slippage: The rate you set is the rate you get or the trade is not completed.

Unlike a fully featured forex account, CurrencyFair and similar platforms don’t allow you to trade money you don’t have. So, while you cannot short currencies or make leveraged gains, you also can’t lose more than you have.

Forex or travel money?

The primary role of peer-to-peer forex systems is ostensibly to beat the banks at providing travel money. By offering a better rate somewhere between the normal consumer rate and the rate they can get for themselves, the consumer will get a better deal and they will make a profit.

It’s more complicated than this of course, but by floating money in the system and taking a long position while not being greedy, you can be part of a process that benefits everyone involved.

Moving your funds from a weakening currency into one that is strengthening can preserve your wealth (or increase it) while protecting your liquidity because it’s still cash.

Ideally, we are all international people with the ability to use the currencies we are following and keep our money in the strongest ones (exchanging a few times per month and basing our decisions on a broad range of fundamentals).

More info has a good overview, “Understand Peer-to-Peer Foreign Currency Exchange” talks about how well the P2P is/isn’t working “in a saturated market that has yet to achieve profitability.”

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