WITH BOTH STOCK AND BOND MARKETS TANKING THIS YEAR, SHOULD YOU DIVERSIFY AND INVEST IN FOREIGN CURRENCIES, OR EVEN TRADE THEM?

Which fundamentals or variables affect the FX market? The GDP, interest rates and trade balance are some of the obvious ones. What’s not so clear is which ones are more important at a certain point of time and how they affect a currency’s value. The fundamentals that FX traders focus on are a moving target. There are times when traders pay attention to interest rates; there are times when they watch trade balances closely; there are times when they focus on political developments. No one knows when the focus will switch, and it’s often not immediately obvious that a switch is happening. Sometimes there’s no clear focus on fundamentals at all. Instead, the market concentrates on other issues, such as technical support or resistance, or where the big stop-loss orders are.

To complicate things further, a currency’s value isn’t determined purely by its country’s fundamentals. It has to be measured against another country’s fundamentals. It’s all relative.

If the FX market is too complicated to make a calculated and intelligent investment, how about trading it? Maybe there are some short-term opportunities?

Fx Trading

Many FX experts and trading platforms would like retail investors to believe that FX trading can be profitable. They highlight its 24-hour market, deep liquidity, narrow spread and easily available leverage. Let’s take a look at each of these advantages to see if they stand up to scrutiny.

How does the 24-hour market benefit FX traders? It allows them to react to real-time news. The assumption is the faster we can react, the better. However, as a professional FX trader, who spent two decades staring at FX prices for many hours a day and got the latest news faster than most retail traders, I have concluded that this is a fallacy. It’s really hard to know how the FX market will react to news. Sometimes the market reaction can be violent to start with and then reverse just as quickly. Other times the market hardly moves, even though you think it should. The possibilities are numerous but you get the picture.

The main FX players, like banks and funds, trade in millions and even billions and benefit from the most liquid financial market in the world. However, this deep liquidity is pretty irrelevant to retail investors who trade in thousands to hundreds of thousands of dollars. A small fish doesn’t do well in a big pond. Another so-called ‘advantage’ for FX traders is how the thin spreads between the buying and selling prices of currencies lower transaction costs. This is true but the savings are very tiny unless you make many trades daily.

In the FX market, a move of 20% in a year is considered big but that’s nothing compared to stocks which can move hundreds of percent. To beef up the returns, retailers and institutions alike are encouraged to use leverage, up to 100 times the account balance. With US$10,000 in your FX margin account, you can buy and sell US$1 million worth of currency, which is extremely dangerous. While a 1% move in your favour doubles your money, a 1% move against you will wipe you out.

The so-called advantages of FX trading tend to encourage overtrading. The key question isn’t about these advantages, it’s about whether the FX market offers a good chance to make money. Truth is, funds that exclusively trade FX regularly perform worse than stock and bond funds – and this is despite their using leverage. It is very rare to find a top investor who trades FX exclusively. The top investors, like Warren Buffett and George Soros, know that good opportunities are rare in the FX market. It’s too complicated to trade actively and profitably.

Wiser Options

While you may decide against investing in foreign currencies or trading the FX market, you will still need to buy foreign currencies to send overseas. Many people continue to go through banks where transaction costs, like fees and spreads, can be more than 1%. Nowadays, however, there is a cheaper way – working with low-cost FX intermediaries.

Consider that Interactive Brokers, a popular financial products trading platform, enables its clients to buy and sell foreign currencies for a small fee and with the narrowest of spreads. You can even leave an order to buy or sell currencies at your desired price. Wise, one of the biggest online FX-transfer companies in the world and listed on the London Stock Exchange, offers an average transaction cost of 0.6% and a fast transfer to an overseas account. Going into 2023, whatever you need from foreign currency – whether you want to travel more, invest in property overseas or pay tuition fees in foreign universities – there are two things you need to know. FX investing and trading are likely to lose you money. Buying and selling foreign currencies through a low-cost intermediary is surely going to save you money.