Why Trade Foreign Exchange? Key Points Covered in this Podcast:
- Why trade foreign exchange over stocks?
- How to manage trading psychology for maximum profit
- The differences between major and emerging market currencies and how to trade them
In this edition of our podcast Trading Global Markets Decoded, our host Martin Essex is joined by Rupert Osborne, CEO of the US arm of DailyFX parent company IG. The pair talk about why traders choose forex over stocks, the intricacies of trading pyschology, and Sterling predictions. Benefit from our discussion with Rupert Osborne and listen to the podcast by clicking on the link.
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Why Trade Foreign Exchange?
The discussion begins with a simple but important question contemplated by so many new traders: Why trade FX over stocks?
‘We’ve all interacted with the currency market in some form,’ Rupert says, adding that geopolitical events, monetary policy, and trade and industry figures are all the levers that move FX.
‘Rather than getting stuck into the balance sheet of a particular company and its latest earnings, with FX you’re effectively trading the news and the big picture – and that’s what most people are already familiar with.’
Using demo accounts is almost a prerequisite to trading real money, whether with FX or any other asset, Rupert says. ‘You need to know how to do things like enter an order, close a position, add a stop loss. You don’t want to learn these things while trading real money.’
The importance of trading psychology
Having a handle on trading psychology, of course, is also key to the trading puzzle. ‘There’s something deep in human psychology about [the detriment of] losing a profit,’ Rupert says. ‘Let’s say you close your first trade out for a $100 profit, and you open another trade and you’re facing a $100 loss. People don’t feel the same compulsion to close out the losing trade as quickly as the winning one.’
The result is that most trades people made may be profitable, but the amount of profit in winning trades tends to be smaller than the amount of loss in losing ones – and that’s in part down to the psychological effect.
Traders should carefully consider risk-reward ratios. ‘If you’re risking $1,000 to make $100, that’s not a particularly sensible ratio because you’ve given yourself ten times exposure on the downside compared to the profit you would be willing to take,’ Rupert says.
He advises that when you’ve made a decision to enter a trade, you need to be thinking about when to close it. ‘It’s easier to look at a market in advance and say, if the market goes 50 pips in my favour, I want to close out, so you’d set your stop loss 50 pips away.
‘Generally successful traders will have an idea of what their risk-reward is going into a trade, and then they’ll leave the stop-loss alone.
‘If you’ve already made that decision in advance when you opened the trade and you’ve set your stop losses and take profits, its easier to let that play out and see which way it goes.’
How does he balance between fundamental and technical analysis? While Rupert professes to be more driven by the fundamentals side, he also sees technical analysis as useful for analysing the flow of money in the market, how much buying/selling pressure there is and for spotting patterns and trends.
However, he adds, ‘Theres no magic formula to predict where a market will be. Technicals may be useful for short-term trades, and the fundamental side for the longer term, but many people mix the two to find a brand of trading that works for them.’
Currencies to consider trading
Rupert explains briefly the differences between trading major currency pairs and emerging market currencies. ‘With major currencies if you’re new to the asset class you’ll still likely be familiar with the levers that move the prices. For example, with Sterling, we have a new prime minister, upcoming Brexit negotiations to be thrashed out, these things make front page news and will be moving GBP.’
However, with emerging currencies, while a particular interest in the market may make it appropriate to trade it, you will need more expertise to handle the increased volatility, as well as having to be mindful of the currency potentially being more susceptible to government or central bank intervention. ‘Risks in emerging markets are higher than developed world currencies and you see this in historical volatility,’ Rupert adds.
Liquidity in these currencies is also less, leading to wider spreads and costlier trades.
Rupert comments that Sterling has been trading like an emerging market currency in the last few years. ‘By that I mean rather than moving on fundamental economic data like GDP, it moves on factors such as political events like Brexit headlines.’
The amount of political risk in the UK currency used to be minimal, he adds, but now it’s significant in driving GBP. ‘The market has been clear over its expectations over Brexit, whenever positive news, as in there will be a deal, we’ve seen the Pound rally, whenever we’ve seen negative news, no deal, a chaotic exit, you’ve seen the pound sell off.
‘Who know where we’ll be in a year or two’s time, and what the future relationship with the EU looks like, so the value of the pound depends strongly on what’ll happen in the next few months and how that affects the UK economy.’