The forex trading industry has come a long way since its infancy, and today a staggering USD5 trillion in currencies changes hands around the world each day. As such, the FX market remains highly attractive to smart investors, eager to take advantage of price movements and volatility. However, the FX market is also influenced by several key factors, from political and economic events to changes in regulatory requirement and even technological developments. Given this, its essential that retail traders stay abreast of industry trends in order to gain an edge in their trading strategy. I believe three key trends have emerged in the last year.
Brokers are becoming more transparent
In recent years, regulators all over the world have turned their attention towards ensuring greater investor protection in the retail trading industry. For example in the EU, ESMA recently announced a new policy statement for retail clients that bans binary options, implements leverage caps, and requires brokers to introduce margin closeouts that provide negative balance protection, among other things. This statement sends a clear directive that brokers must create a fair and transparent trading arena, and is indicative of the fact that investors want to trade with a broker who has their best interests at heart.
In todays market, traders expect complete transparency, not only in terms of the liquidity pool but also in terms of pricing and commission structures, as well as risk management models. More importantly, they want to know their capital is safe and well protected.
As such, many brokers are working to improve transparency in their organization. It is important to be transparent about all aspects of a business, from pricing models to risk management systems. This level of transparency provides clients with the security they require in order to trade and is a necessary part of being a trusted operator in the forex space.
However, transparency goes way beyond simply being clear about pricing, and traders are also looking for ways to improve their strategy and actively learn the tricks of the trade. They want access to the necessary insights to help them identify opportunities while protecting their portfolio from risk. Thats why its so important that brokers offer an in-depth education program and a suite of tools to help clients better understand the markets.
Real-time data and access to information are critical
In a world where data is king, it comes as no surprise that traders who have access to real-time information are better placed to make informed decisions when it comes to their trading strategy, however for many years this remained the exclusive domain of institutional traders. Now, thanks to technology, a host of advanced charting applications, market indicators, sentiment analysis tools and economic overlays exist, providing clients with greater clarity over the markets often in real time, placing them on a level playing field with the dealing desks, creating a competitive edge.
Just one example, professional traders have long been able to monitor open order clusters in order to identify opportunities in the markets, but retail traders were unable to leverage this approach until recently. Now for the first time, some brokers have started to offer real-time open order indicators that provide access the same critical information, enabling retail traders to capture market sentiment, identify large order clusters and key levels, view existing open orders and positions, identify reversals and trade against the market, all while protecting their portfolio from risk. This access to real-time data effectively helps stack the odds in the traders favour by enabling them to implement the same strategies typically reserved for institutional traders and interbank dealers.
Automation is becoming more popular
The proliferation of online trading platforms has made it easier than ever for people to enter the forex market on their own. In addition, the rise in the number of automated tools available to the average person has helped to lower the barrier to entry even further by bringing algorithmic trading, formerly available only to those working within established banking institutions, to the rest of the population.
The way they work is fairly simple: you give the algorithm a certain set of parameters for placing a trade, which is then executed automatically on your behalf. For example, you could program the algorithm to execute a trade if a currency goes above or below a certain threshold, or if it detects certain trade signals. These trades can be carried out much faster than those made by a human, and they can happen at all hours of the day.
There are several benefits to automated trading strategies. Where manual processes increase the risk of human error, automation can mitigate that risk. At the same time, it makes the entire trading process more efficient and reduces the amount of time that traders need to spend hunched in front of a computer screen. It has also been argued that automation takes the bias out of trading, allowing for decisions that are based entirely on the data rather than human emotion.
Creating an even stronger edge, some brokers now offer clients the ability to code, backtest, and deploy their own automated forex trading strategies right from their web browser, enabling them to leverage historical FX rates to simulate a real trading environment.
While the retail FX industry will continue to change over the coming months and years, we believe these changes represent a positive shift towards levelling the playing field and creating a better-regulated environment in which traders can continue to trade the markets while safe in the knowledge that their capital is being protected. This, in turn, bodes well for the long-term sustainability of the industry.
Mohsin Siddiqui is Managing Director, The Americas, OANDA
