Forex Market: Unlocking Opportunities for Investors - Visual Capitalist

Posted: 27 Nov 2020 04:20 PM PST

In 2019, the global foreign exchange market (forex) was valued at a jaw-dropping $2.4 quadrillion.

In fact, this is equal to more than 50 times China, Japan, Germany, India and the U.S.'s economic output combined. Institutional investors, such as investment banks, pension funds, and large corporations have typically dominated this space, but there are avenues for individuals to enter the market as well.

This infographic from Compare Forex Brokers breaks down the world's most interconnected financial market, and how individual investors can start trading.

The Forex Market: A Global Landscape

Across the forex market, 170 major, minor, and exotic currency pairs can be traded as contracts for difference (CFDs). A CFD enables you to speculate on whether the price of an asset will rise or fall.

Here, trades are conducted on over the counter (OTC) markets—non-centralized markets made up of a network of participants. This is different from traditional markets, such as the S&P 500 and the Nasdaq, which operate on formal, centralized exchanges.

While the forex market is by nature, decentralized, these core regions show where forex transactions are most concentrated by market participants including banks, commercial businesses, or individual investors.

Globally, the majority of forex trading takes place within the following hubs.

Forex Trading Centers (2019)	Country	Share of Global Over the Counter (OTC) Forex Turnover
1	UK	43.1%
2	U.S.	16.5%
3	Singapore	7.6%
4	Hong Kong	7.6%
5	Japan	4.5%
6	Switzerland	3.3%
7	France	2.0%
8	China	1.6%
9	Germany	1.5%
10	Australia	1.4%

Source: BIS

The UK accounts for over 43% of global forex trading, averaging $2.7 trillion daily according to the 2019 Triennial Central Bank Survey by the Bank for International Settlements. London's geographic location between the U.S. and Asia makes it an optimal forex trading centre—a trend that has held strong over the last 50 years.

With forex trading in the U.S. jumping over 50% in the last decade, the U.S. is the next most active forex market. Meanwhile, averaging $633 billion in trading volumes in 2019, Singapore is Asia's largest forex trading center, with Hong Kong following close behind.

The Top Seven Currency Pairs

What are the most highly-traded currency pairs?

Overall, 68% of global forex trading falls into seven major currency pairs.

	Top Seven Currency Pairs	Percentage of Total
1	United States Dollar vs Euro	24.0%
2	United States Dollar vs Japanese Yen	17.8%
3	United States Dollar vs Great British Pound	9.3%
4	United States Dollar vs Australian Dollar	5.2%
5	United States Dollar vs Canadian Dollar	4.3%
6	United States Dollar vs Chinese Yuan	3.8%
7	United States Dollar vs Swiss Franc	3.6%

Source: BIS

Currency prices are impacted by factors including inflation, international trade, political stability, among other macroeconomic factors.

Breaking Down Institutional and Retail Trading

While commercial and central banks, hedge funds, and investment managers make up most of the forex market, only 5.5% are individual investors.

Importantly, they differ in a few key ways.

Institutional Forex Trading

Retail Forex Trading

- Buy and sell the physical currency

- Interdealer market: Large institutions trade on an interdealer market, which is a non-centralized network of dealers

- Less formal: Often trades are conducted by phone, email or instant message.

- Non-transparent: Execution prices and buy/sell orders are not visible to the market.

- Buy and sell contracts for difference (CFD)

- Contracts for Difference (CFD): CFDs allow traders to speculate on the price of an underlying asset. Traders do not own the underlying asset.

- Long and Short Trades: Traders can take a long or short position:

- Long position: buying a CFD with the expectation the asset's market price will increase.

- Short position: selling a CFD with the expectation the asset's market price will decrease.

For various reasons, retail forex trading increases in popularity year after year. However, before diving in, it is important to know the stakes involved in this speculative market.

Understanding the High Risk of Forex Trading

Retail forex trading is, at is core, very risky.

In 2019, 71% of all retail forex trades lost money. One explanation is the highly leveraged nature of the market—many investors trade using borrowed money. But while trading with leverage can magnify losses, it also applies to gains.

Key Benefits of the Forex Market

While there is risk inherent in the market, what are some of the advantages in forex trading?

Low transaction costs: No exchange or regulatory fees. Overall trading costs are low with both commission and no commission pricing structures available.
High liquidity: Along with being the largest market globally, it is also the most liquid with $6.6 trillion in daily trading volume.
24-hour market: Trading is not confined to limited hours or time zones.
Leverage: Forex brokers offer retail traders leverage which allows the to increase their exposure

Unlike equities, currency trading is all about relativity. A currency can depreciate overall, but can also appreciate relative to a currency that has depreciated even more.

Connect to New Markets

While big gains are possible, many trades lose money, but regulatory improvements have helped build trust in the market.

Meanwhile, multiple digital platforms provide a link to global currencies, allowing retail forex traders to enter the market and trade from any location. For those comfortable taking more risk, currency markets offer opportunities with outsized potential.

Is it your cup of tea really to trade in currency derivatives? - Economic Times

Posted: 27 Nov 2020 09:53 PM PST

By DK Aggarwal

In this uncertain world, when most of the global central banks have kept their interest rates low for a longer period of time, the most attractive avenue in financial markets is turning out to be forex trading. When major central banks remain on the same page, volatility in tradable forex pairs reduces substantially, making it fruitful for small traders who want to dabble in it.

Admittedly, currency trading requires one to dive deeper into various aspects of monetary and fiscal policies of the economy for the currency one is dealing with. The opportunities in forex trading are immense based on the round-the-clock trading window in various time zones across the world. But can there be a suitable way to build a proper venture in forex trading, or is it really difficult to find an optimum solution?

There is no certain template to achieve success in forex trading, but one's ability to understand various monetary policy tools can provide some edge to implement your trading strategies in the short term. Having said that, price action in the rupee in last four months is showing an upside momentum after the RBI Governor took comfort in the rupee appreciation.

On the contrary, there are challenges of doing forex trading in India, as our currency derivatives market window is open only from 9 am to 5 pm, which hardly captures the liquidity window for mid-London and early New York sessions. Plus, we have only four rupee pairs to trade against numerous direct USD and non-USD pairs traded worldwide.

Finally, the major challenge of getting into currency derivatives is the volume it attracts on a daily basis. The big chunk of it goes to forex hedging and into merchandise trade in forward and spot markets. The volume-based turnover in the spot market can change the daily and weekly trends of the currency futures, notably in the USD-INR pair, which is the most tradable currency pair in India.

Despite these challenges, volumes in the currency segment of Indian exchanges have risen substantially since inception. Additionally, the USD-INR pair contracts provide tremendous opportunities to customise one's currency trades. On top of it, liquidity in near-month contracts is now sufficient to absorb big orders without distorting bid-ask spreads. That creates an attraction option to trade financial instruments, and with timely information and ability to see through the price actions, one can make a great deal of money in currency derivatives in the long term.

(DK Aggarwal is the CMD of SMC Investment and Advisors)

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