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ENTERING AN AGE OF ENLIGHTENMENT

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The Evolution of Forex Education and its Effect on Traders and Brokers Alike

By Olga Rybalkina, CEO, Forex Time

There have been a number of factors that have contributed to the exponential expansion of retail forex across the globe over the past two decades, but access to education has been at the centre of them all. Rapid innovation in mobile technology and the development of the internet has led to the creation of the online trading platform, which gives individuals access to the forex market whether they are seated in an office building in London or in a coffee shop in Jakarta. Economic growth in emerging markets, like Asia and Africa, has led to the acquisition of wealth, a growing middle class and a whole new population of investors. New financial centres, like Singapore and Shanghai, are also emerging as the increase in wealth is driving the establishment of new bases for financial operations and making access to the forex markets faster and easier across Asia.

Nonetheless, all of these elements revolve around access to information on a level that has never been seen before. Without the dissemination of knowledge over the internet, these potential investors would likely be looking elsewhere for ways to diversify their portfolio, feeling uncertain of how to approach FX.

This is why it is essential for brokers, online or otherwise, to have a solid understanding of this transformation. The global spread of information has not only spurred the rise of the retail forex investor, but also sparked an evolution in the role of the broker. Traditional service models are obsolete in the new era of the retail investor. Staying ahead of the industry means not only being plugged into the markets at all times, but also remaining in tune with the changing needs of this new type of client.

That was Then, This is Now: The Evolution Of Forex Trading

While it may be equally easy for an executive in Manhattan or a shop owner in Bangkok to attend a webinar on price action methodology or trading psychology, this was not always the case.

Olga Rybalkina

Olga Rybalkina

Recent trends in educational tools and resources, as in all sectors of industry, only came about as the supply answer to a new demand. Up until the 1990s, the goblet of knowledge was held only by the elites of the financial sector, as was control of the forex markets. Between the creation of the ‘free-floating’ foreign exchange market in 1973 and the launch of the first online trading platforms in the 1990s, knowledge of trading was tightly guarded by hedge funds, investment banks and multinational corporations seated in the world’s financial centres.

At that time, particularly for Asian traders, educational seminars or workshops were almost non-existent. If they were being hosted, they were restricted to other financial managers, held in only a few select locations (typically New York, London or Tokyo) and maintained a steep price for admittance. For the investor, the forex market was extremely restricted both geographically and economically. Minimum trades were often as much as USD 1 million and required extensive legal paperwork and credit checks on the part of the investment house or bank. This alienated anyone without the liquid capital to invest or anyone without the resources to operate out of one of the major financial centres. Education of clients in forex trading generally happened over time as experience grew from interactions with their private banker and/or broker.

It’s not difficult to understand the resistance of the financial sector to relinquish control of FX market trading, given its lucrative nature. According to research conducted by Deutsche Bank, returns on forex investments between 1980 and 2006 were 11% per year on an annualised basis with 21 positive and 5 negative return years. However, once the first online platforms were introduced, the democratisation of the forex markets was inevitable.

Once the forex market opened to retail traders, more and more individuals became exposed to the world of online trading. This trend accelerated with the growth in mistrust of major financial institutions during the economic crisis as well as the rapid accumulation of personal wealth in emerging markets. Demand for online FX trading accounts increased and the industry responded with dedicated online retail FX platforms that allowed for initial investments as low as USD 500. Mobile technology took root and opened up the doors to a full range of investors in the emerging middle to high income classes in locations across the world.

Online trading companies quickly realised that with the use of mobile technology and the internet, they could reach a wider audience of current clients, traders and potential investors through sites, social media and web portals dedicated to education. Seminars, webinars, workshops, conferences and forums could be hosted either online or live. The same webinar could host a speaker from London and an audience from Thailand, Indonesia, China and Malaysia.

The Rise of Social Media: A Glimpse into the Future

Looking into the future of the forex industry, massive growth is in the forecast. More and more investors will be taking interest in retail forex in the wake of the financial crisis and as wealth continues to grow in emerging markets. Innovation in mobile technology and trading algorithms will push the capacity for faster, more accurate online trading, allowing individual investors anywhere in the world to compete with the ‘big boys’.

Popularity of social media and networks will continue the rise of social and copy trading as traders of all experience levels mirror the expertise of the ‘best-in-the-business’ from around the globe. New online trading companies will continue to open their virtual doors while existing financial firms incorporate social and online platforms as a larger percentage of their forex service model. Regulators have also set their sights on social trading platforms and accounts, encouraging policy that would designate lead traders as money managers. This requires them to evaluate account holders for their risk appetite and experience level, and restrict access to services accordingly.

Positioned right at the centre of this expansion are the emerging frontiers of the Middle East, Asia and Africa. Developed markets in the US and Europe are considered saturated and hold steep regulatory requirements. Focusing just on Asia, they hold over half of the world’s foreign exchange reserves and have come through the economic crisis relatively unscathed. While some countries are still inaccessible, this is quickly changing as many economies stand poised to deregulate and open their doors to the foreign exchange market. Social media platforms have taken root, spreading like wildfire and consequently driving interest in social trading. As of 2012, there were over 750 million social network users in the region, not only as a fad, but as a value-added method of communication. Meanwhile, the forex market across Asia is speedily approaching saturation. This is leading large and small brokers towards social or copy trading as a way to tap into a new client pool.

Simultaneously, the existing online retail forex industry is going to begin maturing over the course of the next decade. Investors are quickly becoming more sophisticated, thanks in part to the educational resources that have become widely available – locally and through the web. These traders are going to be growing hungry for more comprehensive trading knowledge and insight. They will also be looking at ways to improve their skillset and differentiate themselves from the other classes of traders on online platforms.

Retail forex service providers on all levels are going to have to continue evolving their service model in order to be at the forefront of this growth. This means entry into new markets and innovation in the technology and analysis provided to online traders, but also a proliferation, differentiation and integration of educational tools and resources.

The Ever-Evolving Nature of the Retail FX Trader: What to Expect

The growth of existing traders is creating more demand for advanced and customised educational tools to suit their individual needs in risk and investment management strategy. And as more brokers move into emerging markets where financial education has historically been non-existent, it will continue to be more and more essential to provide the fundamental principles and training necessary to help them responsibly manage their trading account.

Simple seminars on the basics of forex trading or an introduction to market terminology are going to continue to be important, but will not suffice. As investors – from city centres to rural outposts – become more sophisticated, brokerage firms will have to be able to provide more advanced education. Many have already begun supplying a more differentiated palette of training options to supply the widening demand from basic to more specialised trading knowledge.

The trend of social and copy trading, and the implications of its possible regulation, is also going to change the educational playing field. Forcing social trading platforms, and their lead traders, to evaluate their clients and restrict access to services based upon their experience level is going create further differentiation and integration of the educational platform. Dedicated training and certification platforms will become the gateway for investors of varying experience levels to gain access to new services. Meanwhile, new topics will be opened up, to aid investors in selecting the right traders to follow based upon their investment goals, risk aversion and trading personality.

Onwards and Upwards

It has been said that taking a look at your past can give you a glimpse into your future. In the case of the future development of the forex industry, one could definitely say that this is the case. Since its inception, the forex industry has done nothing but evolve, pushing boundaries and exploring new horizons. Current and upcoming developments indicate that this will only continue to happen, in a more rapid pace than ever before.

The role of the internet and technology has played a crucial part in the advancement of the industry, but it is education that lies at the heart of its democratisation and access to knowledge that has led its unprecedented growth into every corner of the world. Service providers understand very well that the market requires the parallel development of online trading platforms, analysis tools and educational resources. And as we move into the future, it is the further integration of this trifecta that will define the industry leaders of tomorrow.

Note: The content in this article comprises personal opinions and ideas and should not be taken or misunderstood as investment advice.

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How has the online trading landscape changed in 2020?

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How has the online trading landscape changed in 2020? 1

By Dáire Ferguson, CEO, AvaTrade 

This year has been all about change following the outbreak of coronavirus and the subsequent global economic downturn which has impacted nearly every aspect of personal and business life. The online trading world has been no exception to this change as volatility in the financial markets has soared.

Although the global markets have been on a rollercoaster for some time with various geopolitical tensions, the market swings that we have witnessed since March have undoubtedly been unlike anything seen before. While these are indeed challenging times, for the online trading community, the increased volatility has proven tempting for those looking to profit handsomely.

However, with the opportunity to make greater profits also comes the possibility to make a loss, so how has 2020 changed the online trading landscape and how can retail investors stay safe?

Lockdown boost

Interest rates offered by banks and other traditional forms of consumer investments have been uninspiring for some time, but with the current economic frailty, the Bank of England cut interest rates to an all-time low. This has left many people in search of more exciting and rewarding ways to grow their savings which is indeed something online trading can provide.

When the pandemic hit earlier this year, it was widely reported that user numbers for online trading rocketed due to disappointing savings rates but also because the enforced lockdown gave more people the time to learn a new skill and educate themselves on online trading.

Dáire Ferguson

Dáire Ferguson

A volatile market certainly offers great scope for profit and new sources of revenue for those that are savvy enough to put their convictions to the test. However, where people stand the chance to profit greatly from market volatility, there is also the possibility to make a loss, particularly for those that are new to online trading or who are still developing their understanding of the market.

The sharp rise in online trading over lockdown paired with this year’s unpredictable global economy has led to some financial losses, but with a number of risk management tools now available this does not necessarily have to be the case.

Protect your assets

Although not yet widely available across the retail market, risk management tools are slowly becoming more prevalent and being offered by online traders as an extra layer of security for those seeking to trade in riskier climates.

There are a range of options available for traders, but amongst the common tools are “take profit” orders in conjunction with “stop loss” orders. A take profit order is a type of limit order that specifies the exact price for traders to close out an open position for a profit, and if the price of the security does not reach the limit price, the take profit order will not be fulfilled. A stop loss order can limit the trader’s loss on a security position by buying or selling a stock when it reaches a certain price.

Take profit and stop loss orders are good for mitigating risk, but for those that are new to the game or who would prefer extra support, there are even some risk management tools, such as AvaProtect, that provide total protection against loss for a defined period. This means that if the market moves in the wrong direction than originally anticipated, traders can recoup their losses, minus the cost of taking out the protection.

Not a day has gone by this year without the news prompting a change in the financial markets. Until a cure for the coronavirus is discovered, we are unlikely to return to ‘normal’ and the global markets will continue to remain highly volatile. In addition, later this year we will witness one of the most critical US presidential elections in history and the UK’s transition period for Brexit will come to an end. The outcome of these events may well trigger further volatility.

Of course, this may also encourage more people to dip their toes into online trading for a chance to profit. As more people take an interest and sign up to online trading platforms, providers will certainly look to increase or improve the risk management tools on offer to try and keep new users on board, and this could spell a new era for the online trading world.

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Trading Strategies

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Trading Strategies 2

By Paddy Osborn, Academic Dean, London Academy of Trading

Whether you’re negotiating a business deal, playing a sport or trading financial markets, it’s vital that you have a plan. Top golfers will have a strategy to get around the course in the fewest number of shots possible, and without this plan, their score will undoubtedly be worse. It’s the same with trading. You can’t just open a trading account and trade off hunches and hopes. You need to create a structured and robust plan of attack. This will not only improve your profitability, but will also significantly reduce your stress levels during the decision-making process.

In my opinion, there are four stages to any trading strategy.

S – Set-up

T – Trigger

E – Execution

M – Management

Good trading performance STEMs from a structured trading process, so you should have one or more specific rules for each stage of this process.

Before executing any trades, you need to decide on your criteria for making your trading decisions. Should you base your trades off fundamental analysis, or maybe political news or macroeconomic data? If so, then you need to understand these subjects and how markets react to specific news events.

Alternatively, of course, there’s technical analysis, whereby you base your decisions off charts and previous price action, but again, you need a set of specific rules to enable you to trade with a consistent strategy. Many traders combine both fundamental and technical analysis to initiate their positions, which, I believe, has merit.

Set-up

What needs to happen for you to say “Ah, this looks interesting! Here’s a potential trade.”? It may be a news event, a major macro data announcement (such as interest rates, employment data or inflation), or a chart level breakout. The key ingredient throughout is to fix specific and measurable rules (not rough guidelines that can be over-ridden on a whim with an emotional decision). For me, I may take a view on the potential direction of an asset (i.e. whether to be long or short) through fundamental analysis, but the actual execution of the trade is always technical, based off a very specific set of rules.

To take a simple example, let’s assume an asset has been trending higher, but has stopped at a certain price, let’s say 150. The chart is telling us that, although buyers are in long-term control, sellers are dominant at 150, willing to sell each time the price touches this level. However, the uptrend may still be in place, since each time the price pulls back from the 150 level, the selling is weaker and the price makes a higher short-term low. This clearly suggests that upward pressure remains, and there’s potential to profit from the uptrend if the price breaks higher.

Trigger

Once you’ve found a potential new trade set-up, the next step is to decide when to pull the trigger on the trade. However, there are two steps to this process… finger on trigger, then pull the trigger to execute.

Paddy Osborn

Paddy Osborn

Continuing the example above, the trigger would be to buy if the price breaks above the resistance level at 150. This would indicate that the sellers at 150 have been exhausted, and the buyers have re-established control of the uptrend.  Also, it is often the case that after pause in a trend such as this, the pent-up buying returns and the price surges higher. So the trigger for this trade is a breakout above 150.

Execution

We have a finger on the trigger, but now we need to decide when to squeeze it. What if the price touches 150.10 for 10 seconds only? Has our resistance level broken sufficiently to execute the trade? I’d say not, so you need to set rules to define exactly how far the price needs to break above 150 – or for how long it needs to stay above 150 – for you to execute the trade. You’re basically looking for sufficient evidence that the uptrend is continuing. Of course, the higher the price goes (or the longer it stays above 150), the more confident you can be that the breakout is valid, but the higher price you will need to pay. There’s no perfect solution to this decision, and it depends on many things, such as the amount of other supporting evidence that you have, your levels of aggression, and so on. The critical point here is to fix a set of specific rules and stick to those rules every time.

Management

Good trade management can save a bad trade, while poor trade management can turn an excellent trade entry into a loser. I could talk for days about in-trade management, since there are many different methods you can use, but the essential ingredient for every trade is a stop loss. This is an order to exit your position for a loss if the market doesn’t perform as expected. By setting a stop loss, you can fix your maximum risk on a trade, which is essential to preserving your capital and managing your overall risk limits. Some traders set their stop loss and target levels and let the trade run to its conclusion, while others manage their trades more actively, trailing stop losses, taking interim profits, or even adding to winning positions. No matter how you decide to manage each trade, it must be the same every time, following a structured and robust process.

Review

The final step in the process is to review every trade to see if you can learn anything, particularly from your losing trades. Are you sticking to your trading rules? Could you have done better? Should you have done the trade in the first place? Only by doing these reviews will you discover any patterns of errors in your trading, and hence be able to put them right. In this way, it’s possible to monitor the success of your strategy. If your trades are random and emotional, with lots of manual intervention, then there’s no fixed process for you to review. You also need to be honest with yourself, and face up to your bad decisions in order to learn from them.

In this way, using a structured and robust trading strategy, you’ll be able to develop your trading skills – and your profits – without the stress of a more random approach.

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Economic recovery likely to prove a ‘stuttering’ affair

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Economic recovery likely to prove a ‘stuttering’ affair 3

By Rupert Thompson, Chief Investment Officer at Kingswood

Equity markets continued their upward trend last week, with global equities gaining 1.2% in local currency terms. Beneath the surface, however, the recovery has been a choppy affair of late. China and the technology sector, the big outperformers year-to-date, retreated last week whereas the UK and Europe, the laggards so far this year, led the gains.

As for US equities, they have re-tested, but so far failed to break above, their post-Covid high in early June and their end-2019 level. The recent choppiness of markets is not that surprising given they are being buffeted by a whole series of conflicting forces.

Developments regarding Covid-19 as ever remain absolutely critical and it is a mixture of bad and good news at the moment. There have been reports of encouraging early trial results for a new treatment and potential vaccine but infection rates continue to climb in the US. Reopening has now been halted or reversed in states accounting for 80% of the population.

We are a long way away from a complete lockdown being re-imposed and these moves are not expected to throw the economy back into reverse. But they do emphasise that the economic recovery, not only in the US but also elsewhere, is likely to prove a ‘stuttering’ affair.

Indeed, the May GDP numbers in the UK undid some of the optimism which had been building recently. Rather than bouncing 5% m/m in May as had been expected, GDP rose a more meagre 1.8% and remains a massive 24.5% below its pre-Covid level in February.

Even in China, where the recovery is now well underway, there is room for some caution. GDP rose a larger than expected 11.5% q/q in the second quarter and regained all of its decline the previous quarter. However, the bounce back is being led by manufacturing and public sector investment, and the recovery in retail sales is proving much more hesitant.

China is not just a focus of attention at the moment because its economy is leading the global upturn but because of the increasing tensions with Hong Kong, the US and UK. UK telecoms companies have now been banned from using Huawei’s 5G equipment in the future and the US is talking of imposing restrictions on Tik Tok, the Chinese social media platform. While this escalation is not as yet a major problem, it is a potential source of market volatility and another, albeit as yet relatively small, unwelcome drag on the global economy.

Government support will be critical over coming months and longer if the global recovery is to be sustained. This week will be crucial in this respect for Europe and the US. The EU, at the time of writing, is still engaged in a marathon four-day summit, trying to reach an agreement on an economic recovery fund.  As is almost always the case, a messy compromise will probably end up being hammered out.

An agreement will be positive but the difficulty in reaching it does highlight the underlying tensions in the EU which have far from gone away with the departure of the UK. Meanwhile in the US, the Democrats and Republicans will this week be engaged in their own battle over extending the government support schemes which would otherwise come to an end this month.

Most of these tensions and uncertainties are not going away any time soon. Markets face a choppy period over the summer and autumn with equities remaining at risk of a correction.

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