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Forex
Two secret tips to successfully trading the forex markets
November 6, 2008
Clifford Bennett, Chief Economist, Sonray Capital Markets
Foreign exchange is the fastest growing financial market in the world, and if anything its popularity as an investment medium is accelerating.
While the world has suffered a dramatic loss of wealth in commodity and equity markets over the last year, foreign exchange markets have continued to provide significant opportunities, and perhaps more importantly a reliably high level of liquidity at all times.
FX markets have a unique two-sided aspect, being the buying or selling of one currency against the other. As a result there is less of the inbuilt “long” bias of equity or commodity markets, which can lead to the inevitable market bubbles and their damaging corrections.
Perhaps the most outstanding attraction of FX markets however is that they approach that nirvana state of the level playing field. Many years ago the large players, the banks and institutional fund managers, most certainly had an advantage over the smaller investors, in speed of access to news and even in finer spreads and pricing access in fast moving markets. The advent of the internet has provided all participants, large or small, with immediate news updates and fine pricing for even small trading amounts.
The bigger the market the less likely is any form of market manipulation or insider knowledge playing a part. Even central banks when intervening in regard to their own currency, can and often do fail to get their way. Their own currency market can be bigger than any central banks ability to control it. The FX markets are the largest financial markets in the world, with the daily volume of the Euro/US dollar market alone, exceeding all the world’s stock markets combined. If ever there was a level playing field in a financial market, it is in the major currency pairs.
One could even say that in today’s foreign exchange markets, it is the smaller player that actually has the advantage.
With equal access to news and market events, as well as fine pricing, the ability of the smaller trader to change direction in the market cannot be matched by a large bank or global fund manager attempting to trade many hundreds of millions of dollars at a time. Personally this is what I find most attractive about currency markets. The game is fair, it is the most egalitarian of all the markets that one can trade. This makes it particularly appealing from the point of view of matching one’s own skills and wits against everyone else all around the world at the same time, including competing with the chief dealers of a major investment banks. The score card is as always your bottom line profitability, but I believe there is a greater element of fun involved, when you can trade in the knowledge that you have an equal chance of victory to that of any larger player.
When it comes to the actual trading of FX markets there a great variety of factors that impact a currency. Two slightly unique perspectives I would like to suggest however are:
1. Watch for the “flavour of the month” effect as I call it
Out of the many factors that are considered in valuing a currency there will always be just one or two that are dominating the news and market commentaries flying around the world at any one point in time. The flavour today may be an overly simplistic focus on relative interest rate levels, but will shift after several weeks to a couple of months to perhaps GDP growth expectations.
The trick is to be aware of the current flavour of the month and stand back and watch people paying too much attention to just this one aspect of the market, but then also to be looking ahead over the horizon to try to get a handle on what the next flavour of the month might be.
For instance a recent flavour of the month example is the focus on the slowing of the Chinese economy due to exports slowing. Yet exports only make up 9% of China’s GDP, so perhaps the flavour, a month out from now, might be how well China is weathering the US and European slow down.
2. In trading currencies it is very important to apply “relativity”
In other words a currency can still be strong if its economy is slowing and interest rates are low, if, the other currency’s economy is slowing more severely and interest rates there are headed even lower. In the current global turmoil the relativity of economic performance is likely to be paramount in coming months. Relativity is not something a lot of people who are only use to trading the equity markets always immediately get a handle on when entering the FX market. In trading a particular stock it is about whether that company is going to fare better in the future or not. Whereas in currency markets the game is only about relativity.
Foreign exchange markets represent the ultimate trading and investment arena, where everyone has an equal opportunity. As with the trading of any market, there are inevitable losses, but I believe any lessons to be learnt about one’s own particular trading approach, are most honestly learnt in foreign exchange markets. Which in the end just makes the profits to be had, all the more enjoyable.
Clifford Bennett, Chief Economist, Sonray Capital Markets.
Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.
More articles from this edition of CompareShares:
Trading: Crisis meetings at CMC Markets
Financial Crisis: How Australia's wealthiest investors are navigating the financial crisis
Forex: Two secret tips to successfully trading the forex markets
Expert Panel: How do currencies move in relation to each other?
Companies: ABC Learning in receivership
Rates: All four big banks cut home loan rates
US Crisis: US stocks fall, economy worries heighten
Companies: News Corp Q1 net profit falls 29.6%
US Crisis: Goldman begins to cut 10% of staff
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