Currency Trading and The Forex Capital Markets

Currency trading and the access to the forex capital markets, because of capital requirements and the technology involved, was in the past open only to hedge funds managers, large commodity trading advisors, institutional investors, and banks. It is opinion of who writes that forex markets are not random and the efficient market hypotheses and theories sustained by so many economists are flawed (Warren Buffet, regarding the Efficient Market Hypothesis, once said “I’d be a bum on the street with a tin cup if the markets were always efficient”); for this very reason it is possible to exploit the inefficiencies of the forex capital markets and devise profitable currency trading strategies.

In recent years the development of the web has made possible for many brokerage firms to offer currency trading to small retail traders: the phenomenon has started in the mid-90s with stock market day traders and has rapidly evolved and spread to currency trading. The forex capital markets are highly volatile: it is estimated that more than 80% of currency trading volume is speculative in nature and, as a result, the forex market has frequent corrections, is very unpredictable but can also be very profitable.

However, for long term forecast trends in currency trading, fundamental analysis, analyzing and focusing on the economic, social and political forces that drive supply and demand, can be an invaluable instrument; indeed, the fundamental analysis focuses on (sometimes very complicated) theoretical models of currency exchange rate that are determined and based upon major economic factors and their probability to affect currency trading and the forex capital markets. Fundamental analysis in currency trading is for this reason important and this is even truer as currencies markets, more than other markets tend to develop strong trends.

Nevertheless, most forex traders do not trade positions over long periods, but tend to trade the forex capital market opening and closing positions one (or more) times per day — thus leading, in some cases, to overtrading. This should be no surprise: currency trading and the forex capital markets are well suited to price-based techniques, that is, technical and quantitative analysis. Technical analysis is the prediction of forex capital market movements from the data and information obtained from the past, and it uses different types of charts. However, an approach purely based on technical/quantitative analysis could be too restrictive and not lead to maximum profits: eventually, the most successful currency trading methods are the ones supported by both technical/quantitative and fundamental analysis. In fact, although testing and research in the forex capital markets requires a rigorous approach, there is an element that is a little bit of art: do not believe everything you see but ask yourself why a particular system works and try to verify if the roots of it can be traced back in the behavior of the masses. The speed at which currency rates adjust to news is very high, even shorter than 15 o 30 minutes, and this is linked to the reaction (sometimes panicked and irrational) of people to particular news linked to exchange rates, or interest rates, or any other element affecting directly or indirectly the forex marked and currency trading.

In conclusion, forex capital markets, being still a relatively young and mostly underdeveloped compared to other segments of the financial markets, and given their intrinsic volatility, represents a remarkable opportunity to the educated currency trader. Elements that will help you to succeed are incessant practice, thorough knowledge of the history, science and art of currency trading, ability to deal with trade failures and the perseverance to be a forex trader with discipline: the only people who will not win at currency trading will be the ones who quit.