Useful Insights on FX Trading

FX: The Level Playing Field

It is essential in the successful trading of currency markets to recognise that no single large transaction, no global investment bank view, no central bank, can be relied upon as a dictator of market direction. Individual traders are no more likely to be hurt by a large order than any of the world’s largest banks and players.

It means that you, the individual trader, are on a level playing field with the big players. Being smaller can even be an advantage. As an individual, you can change your view and position on a whim. Fund managers do not have that luxury. Most major institutional currency positions are decided by committees. They are slow to respond, slower than a nimble individual trader. This does not mean the market cannot be fast, but that you can be just as fast.

Forex has many other advantages over equities and ETDs (Exchange Traded Derivatives) trading, as foreign exchange is a 24-hour market. It is an efficient market, reflecting all news, supply/demand, market weighing and potential resting orders. It is not subject to ‘after hours’ announcements or earnings reports, and has depth and breadth superior to any capital market instrument.

Big and Liquid

Global foreign exchange turnover is over 20 times the combined turnover of all global equity markets. This liquidity is one of the main reasons that FX trading has become more popular with individuals.

The sheer size of the FX markets pressures the spreads between the bid and offer to the smallest of margins, reducing the cost of trading to almost nothing.

Trading in FX markets is driven mainly by broad economic trends such as inflation, interest rates, employment, GDP and more. This information tends to be widely reported, which helps to make the FX playing field level for all participants.

It has not always been this way. There are still some institutional sales people working at the major banks who once walked the streets from business to business, looking to match up foreign exchange transactions between an importer and exporter, simply profiting from the spread of the two prices. For instance, if an importer had to sell £3 million in order to buy US dollars to pay the overseas manufacturer for the goods being imported, the bank sales person would try to find an exporter who needed to do the opposite as they had received US dollars for their products from an overseas purchaser. At one time the banks could charge a spread between the two of 200-300 points.

Competitive Spread

Over the years, the FX markets have improved in terms of making the spread more competitive and advantageous for individual traders. From the enormous spreads of 25 years ago, the spread of today where you can buy and sell any of the major currencies including the British Pound is just a few points (known as ‘pips’).

Technology and its successful application to foreign exchange markets mean that instead of 200-300 points, the art of trading has moved to only 3-10 points or 2 points at a few spreads. The cost of trading, of 200-300 points, moved to just 3-10 points a few years ago, and is now an amazingly small 2 points at a few select online dealing platforms.

Not every broker or bank offers such spreads, but with the strength of volume and technology, the world’s largest margin FX providers now enable their clients to trade at virtually no cost.

Instant Full Information

In the old world of obtaining economic statistics and monetary policy opinions from central banks, one would literally have to wait inside a designated room at the central bank and wait until a clerk physically dumped the documents onto a large table for all to have a look at and quickly decipher, in the hopes of gaining an edge and perhaps taking a winning position in the market ahead of the next person.

Today, all news and data is published electronically globally, which allows for an immediate, equal and ultimately fairer process. This means that you, as an investor, have access to the same knowledge and information available for you to trade and act on as the world’s biggest banks. All countries now have set times for releasing their economic statistics for all to see instantaneously. This includes pre-arranged times as to when interest rate announcements are made and monetary policy statements by central bankers are given.

This is not to say that central bankers do not comment on monetary policy at any time throughout the trading day; but if they do, then that too finds its way onto the news wires and across your computer screen at an eerily incredible speed, courtesy of today’s competitive media environment.

Individual = Biggest Banks

In addition to having instantaneous news and information, an individual is now able to act on that information by trading electronically with the click of a mouse — and often ahead of those banks that are burdened with a committee process or need time to form an ‘official’ or majority position before taking a position in the market. No one is in control.

Open 24 Hours a Day

With FX markets open around the clock, you can trade whenever and wherever it is convenient for you. Regardless of where you live, you can trade during the Asian, European or North American sessions. Orders can be placed electronically and on a 24-hour basis for profit protection, stop loss protection, or instigating a position. The Forex markets move 24 hours a day, which makes this extremely appealing to those who want to participate full- or part-time.

Market Depth Provides Choice

High liquidity means very modest price movements. Where a shock to some markets can trigger illiquid moves of 20 per cent to 30 per cent, in major currency markets the biggest 24-hour move in the last 20 years was just 10 per cent. General movements of 1 per cent to 3 per cent are considered significant to traders. This allows for the prudential use of margin or leverage. The major banks apply a risk factor of 10 per cent or less to their currency positions, and consider a margin or leverage factor of 10 to be conservative. The high liquidity of currency markets means the majority of trading platforms provide margin rates in the low single digits due to the lower swings associated with FX trades.

Constant Opportunity

FX markets are open all day and night with tremendous liquidity and opportunities to trade. There is always something new happening every day. How you take advantage of currency movements is similar to every other market. You have an account with a broker who transacts your orders into the interbank physical market, which is the only FX market that provides full flexibility of decision and action 24 hours a day.

Because FX markets are so liquid and movements are modest, you are able to trade reasonably large amounts of currencies with a small proportion of that face value actually on deposit with your broker. It is now as easy as opening an account with your deposit, and you can begin trading from anywhere over the Internet.

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