The Small Exchange is an exciting new marketplace that offers traders a collection of innovative derivatives products. No matter whether you trade stocks, energies, metals, bonds, or currencies, there is a Small market ideal for your needs. One contract in particular, the Small US Dollar (SFX), provides forex traders many speculative and risk management opportunities.
Let’s take a look at the Small US Dollar and how it can help you diversify your approach to the forex.
What Is the Small US Dollar (SFX)?
If you’ve ever traded currencies, then you know just how challenging the forex can be. Base currencies, counter currencies, majors, minors, pips, and carry trades—there has to be a better way, right?
Well, now there is. The Small Exchange currently offers the Small US Dollar (SFX) contract to anyone interested in trading the world’s reserve currency. The Small US Dollar combines futures and forex functionalities, giving participants a streamlined, efficient way of trading the US dollar (USD). The result is a unique product that has several benefits over traditional forex pairs:
- Uniformity: The SFX consists of real-time USD pricing against seven of the most prominent global currencies. As a result, currency conversions are unnecessary. For ease of trade, the SFX is priced in terms of dollars and cents, with the minimum tick size being $0.01.
- Reduced margins: When compared to currency ETFs, FX futures, or forex pairs, the Small US Dollar features vastly reduced margin requirements. To buy or sell the SFX, the only capital needed is a modest margin requirement: 1 percent or $160.
- Customizable risk: The manageable contract size ($16,000), reduced margins (1 percent, $160), and minimal tick value ($1.00) enable traders to buy or sell as many SFX contracts as deemed necessary.
- Direct exposure: The Small US Dollar typically maintains a +0.90 correlation to the USD itself. That means you don’t need to buy or sell a basket of forex pairs to secure comprehensive USD bullish or bearish exposure. All you have to do is buy or sell the SFX; the rest is done for you.
Perhaps the single greatest benefit of trading the SFX is flexibility. Featuring vastly reduced capital requirements and a streamlined construction, the Small US Dollar gives active traders the chance to secure unfettered exposure to the USD.
Using the SFX to Diversify Your Forex Trading
In finance, diversification refers to the act of spreading your capital across multiple products, markets, or asset classes. With respect to the forex, diversification involves trading the USD against multiple foreign currencies simultaneously. There are advantages to these types of strategies, such as mitigating isolated risks or trading an opinion on a related market.
For example, let’s assume that Trader A wants to short crude oil but is hesitant of the exposure to systemic risk. To make this trade on the forex, Trader A takes a long position in the USD/CAD while shorting the USD/CHF. If crude oil tanks, the USD/CAD is likely to rise because of the correlation between the Canadian dollar and oil. However, if a broad market meltdown overshadows the downtick in oil, the position is protected via being long the safe-haven Swiss franc.
In reality, most forex strategies are riddled with complexities. Market behavior frequently changes, making correlation coefficients and historical trends at least periodically obsolete. This is where the Small Exchange SFX contract excels: It diversifies the USD against the world’s seven largest economies at the same time. Here are the seven currency valuations that make up the Small US Dollar:
- Euro (EUR)
- Chinese Renminbi (RMB)
- Japanese Yen (JPY)
- British Pound (GBP)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- Mexican Peso (MXN)
The bottom line is this: When you buy or sell the SFX contract on the Small Exchange, you are securing direct exposure to the performance of the USD.
Ultimately, you’re long or short the greenback against the top currencies on the planet―no conversions, mental gymnastics, or intricate strategies needed.
Trade the USD on The Small Exchange
Although the forex boasts enormous market depth and unparalleled liquidity, it does have a few considerable downsides. If you’re looking to trade the greenback in a sleek, efficient fashion, the Small US Dollar may be just what you’re searching for.
To get started with the SFX, as well as the other listings on the Small Exchange, contact a member of the Daniels Trading team today!
Credit: Daniels Trading