Foreign currency trading is one of a few sunshine industries currently providing a spark of hope for investors feeling the pinch from a still-ailing global economy.
The FX market has become the world's largest financial market, and it is not uncommon to see more than $3 trillion traded each day. By contrast, the NYSE the world's largest equity market with daily trading volumes in the $60 billion to $80 billion dollar range is positively dwarfed when compared to the FX market. Even when combining the US bond and equity markets, total daily volumes still do not come close to the values traded on the currency market.
At the moment, investors are either aggressively adding foreign currency to their investment portfolios or migrating completely from the stock and property markets, which have yet to recover completely from recession.
The FX fever has apparently caught on in the Middle East, with GCC investors pouring billions of dollars into currency trading. Here at Advanced Currency Markets (ACM), widely considered to be the world's largest online trading platform, we have seen monthly trading volumes surge, reaching a record $45 billion high in March.
Among GCC investors, ACM has seen the most activity from Saudi Arabia and the UAE. This growing appetite for investment in the Middle East is, of course, prompted by the massive liquidity resulting from the growth achieved by economies in the region, especially in the past five years.
Saudi and UAE nationals are our biggest investors, accounting for almost 80 percent of our monthly trading volumes.
And the momentum seems likely to be sustained as both novice and savvy investors get a better grasp of foreign currency trading. The global financial crisis has had a positive impact on the forex and commodity markets, unlike other investment platforms, as investors now find trading in global currencies and commodities an investment option that offers the most opportunities for significant profits. The volatility in currency and commodity prices makes investing in these markets all the more attractive.
FX Market Benefits
The same factors that affect the equity and bond markets also affect the currency market, whether in the form of intervention from central banks, other government measures or any other macroeconomic or geopolitical factors.
With the currency markets, though, such events and their impact are easier to track as information is open and very accessible to all. Because of this, it can be easily analysed, unlike the complex corporate financial statements and other corporate releases which affect stock prices.
Another difference is that while the currency market is influenced by global economic news, equity markets can sometimes move on rumours or internal news that are not accessible to all. For example, OPEC's public announcement of its decision to reduce its oil production will have a direct impact on the dollar price, as the US is a major oil consumer. The response of currency markets to economic news makes the trends easier to predict and track.
The Risks
As in any type of investment, FX also has its own risks. One type is trading risk, which primarily depends on the platform with which the investor opens an account. The most reputable platforms will limit the risk loss to the funds in the investor's account and will not allow anyone to go into a debit balance. The trading platform will automatically close investors' positions when their account is about to fall into negative equity, guaranteeing that they will never owe more than they have in their account.
A rule in investment circles is that more risk equals more return. FX is a risky market for those who do not follow good trading strategy. The trader must examine both fundamental and technical analysis, and understand when to enter and exit the market to limit losses. Traders should be aware that if they are too greedy, they are gambling, not trading!
FX Opportunities
However, those who invest with diligence can benefit tremendously from the FX market. The current climate offers a fantastic opportunity to make money in an otherwise bearish market. Local stock markets are in decline with upturns extremely rare (short selling is prohibited in local stock markets) and property markets are faring a similar fate.
In this environment, investors will look for a market that can be profitable in both directions, and there is profit potential in FX regardless of whether the market is up or down.
Obviously, if you buy a currency and the value of the currency goes up, you can sell it at the higher price and make a profit. However, you can also make money if you believe the value of a currency will drop. In FX, you can "go short", that is, sell a currency without actually owning it. You would then physically buy the currency when the value had dropped, thus making a profit.
Whilst equity markets are struggling with liquidity issues, FX is seeing unprecedented volume. Due to rapidly changing market conditions, grave uncertainty, coupled with extraordinarily fast-falling interest rates in all the major markets, volatility has increased. This allows day traders (in contrast to longterm investors) to make even more money when shorting on the peaks and selling on the lows.
In addition to this, spreads have decreased in recent years. Customers trading FX do not pay commission. Brokers make their money on the spread: the difference between the buy and the sell price. Lately, spreads have shrunk drastically for individual traders with the introduction of retail trading platforms. Until a couple of years ago, the tight spreads in the FX market were accessible only by large banks and corporates. Now anyone with an account can have access to spreads.
The Role of Brokers
Brokers play a very important role in currency trading and have largely been the reason behind the growth and popularity of FX. In the past, it was very expensive and required a substantial investment. Thus, only large institutions or high net worth individuals could participate in the currency
markets through banks. Now, through the increased number of currency brokers offering enhanced online trading systems, more and more participants are able to take part in the currency markets at lower costs.
It is important to analyse the market using the knowledge and expertise of the broker. Investors should put extra care into making sure that they are dealing with credible brokers. In working with a reputable company, investors need not worry about the execution process - the manner in which their buy-and-sell orders are processed especially if there is a guarantee from a broker that there will be no slippage at the market price. Very few brokers offer this guarantee, and it is an important consideration in choosing the broker because money can be made or lost with the slightest change in foreign currency values.
© Capital ME 2009
