Why Forex is still the perfect market to focus on…
(Even if you’ve just heard about it for the very first time!)
I was at a Christmas lunch one day last week – sitting in the very restaurant where I heard about trading proper for the first time.
Yes, that fateful day, some 15 years ago: Nick Leeson was the guest speaker at a breakfast meeting I attended. Remember him? The guy that broke Barings Bank? I would never have guessed the hair-raising stories he told that day would have such a bearing on my own life. (I think he intended them to be cautionary tales, but they seemed to have the reverse effect on me – I just felt more and more excited by what I was hearing!)
Anyway, last week’s lunch was attended by some very wealthy and successful people, but whenever I mentioned trading they’d automatically assume I was talking about shares. They’d ask what I thought of upcoming floatation of company X, or the long-term outlook for company Y.
When I described how most of the trading activity we undertake here at Traders Nest is typically contained within a timeframe of days rather than weeks or months, and that the freewheeling currency markets tend to be our vehicle of choice, they held their hands up and admitted they were out of their depth.
Now this surprised me a bit. I suppose when you’re so very familiar with a subject it’s easy to forget that not everyone is on the same page as you.
Yes, believe it or not, there are people out there who would be ready and eager to trade Forex, but have never even heard of it!
I found myself having the same conversation time and time again that day. And not only that, I’ve received emails recently from people who are interested in trading, but who also don’t know which markets to start with.
So I thought I’d do a quick refresher on the advantages of trading Forex this week, just to help steer any new trading converts in the right direction. (And maybe reinforce the perks of Forex for you old-hands too!)
Why I think you should keep a firm focus on Forex
Now I’m not saying completely blinker yourself from every other market. There may well be times when markets like precious metals, commodities, or share indices are worth a look too.
But above all, to be able to make money from any market you need it to do one thing: you need it to move!
That’s one of the reasons the currencies are such a great proposition for traders. There’s almost always something on the go. Once they’ve got the bit between their teeth, these markets can break out into very strong trending moves. When you spot one, it means you can jump on board and just hang on for the ride!
They also respond very reliably to economic data announcement, which means you’ll have a very good idea of exactly when the next wave of activity is likely to hit the market. You can even look up the exact times of the data releases on free online calendars.
Here are four other big advantages Forex has over other markets…
Things have come such a long way in the space of a decade. Go back ten years or so and there were only a handful of brokers offering trading platforms to retail Forex traders. Yes, this all used to be the exclusive preserve of the City big-hitters, but there are now literally thousands of online brokers for us to choose from.
Advances in technology are to thank, of course. But this is great news for us because it means there is now fierce competition between the brokers to win your business!
Today, any online broker worth his salt will have no trouble offering you service the professionals themselves enjoy.
The Forex markets are the most heavily traded in the world: $5 trillion traded every day is the latest estimated figure being bandied about – those kinds of numbers make the stock market look like a child’s toy box.
But not all Forex trade is speculative activity. An active and highly ‘liquid’ market (meaning it’s possible to buy and sell the currency to a greater degree without affecting the price) is actually essential for worldwide commerce.
At the top of the pile are the big commercial banks. They’ll deal directly with other, shifting tranches of currency around the world. And they’ll also do business directly with the large commercial operators who are next in the food chain.
Governments and their central banks will also stick their oar in from time to time. Although they are not explicitly active in the markets on a day-to-day basis, they have been known to intervene in the markets to protect the value of their currency against others, all in an effort to ensure imports and exports keep flowing at the required rates! Refer to the Swiss National Bank’s intervention in January 2015 as a prime example of this kind of activity.
And finally, we come to the speculators – big and small.
Big speculators include the likes of the hedge funds. They can compete with some of the smaller commercials in terms of volume traded, but their interest is purely to make money from the movements in price. They have no underlying need to exchange dollars for pounds sterling; they just want to profit by doing so!
Lastly we have the small speculators. That includes the smaller funds, the proprietary trading firms, and the likes of you and me sitting at home in front of our trading computers.
Because the Forex markets are so huge and widely traded, it limits the risk of market manipulation that is the scourge of the equity and commodities markets. No one can ‘corner’ the currency market and we don’t see the flash-crashes that are becoming commonplace in other markets because it takes such a serious amount of buying and selling at an institutional level to move the currency prices.
With Forex you get almost instant trade execution. That means you get to buy or sell the currencies at the price you see on your screen.
There’s no anxious wait for the confirmation of your trade like there used to be. (And surprise, surprise, it was often at a worse price than you were expecting!)
Gone are the days when the broker had license to skew the price in his favour: competition is too fierce now. Brokers know if they don’t offer the best service possible you’re going to walk straight out of the door and take your trades elsewhere.
Brokers still take their piece of the pie of course, that’s just a cost of doing business, but stick with one of the reputable firms and you can’t go far wrong these days.
4) Low transaction cost
This is another essential when it comes to trading: you don’t want to be working away with your strategy, making the right calls at the right times, only to see a big chunk of your profit fly straight into the broker’s pocket in fees and commissions.
The bid/ask spread (the difference between the price he’ll sell to you at and the price he’ll buy from you at) has been tightened significantly in Forex, as the brokerages compete to out-perform each other. That’s how the brokers make their little bit of money on each trade – they take a little piece out of the middle on each trade they facilitate.
Now this does need to be factored in: many people mistakenly claim there are no costs involved at all when trading Forex – but the transaction cost does pale into insignificance when you compare it to the potential profit you can make on a day-to-day Forex trade!
Be Prepared: Market Moving Data Coming This Week (London Time)
Wednesday 23rd December
09:30 GBP Gross Domestic Product
13:30 USD Core Durable Goods
15:00 USD New Home Sales
Thursday 24th December
– Christmas Eve (early close for most brokers!)
Friday 25th December
– Christmas Day holiday
Monday 28th December
– Bank holiday in UK (expect quiet markets)
Tuesday 29th December
15:00 USD CB Consumer Confidence
So it just remains for me to wish you a very Merry Christmas and a happy and prosperous 2016!
The Traders Nest eletter takes a seasonal break next week while the markets are quiet, but please do look out for your next issue on Tuesday 5 January.
Until then, happy trading!