Volume Surges as All Eyes Turn to Forex

Everyone has heard the cliche that currency markets are the most viable because there’s no such thing as a bear market; a decline in one currency must necessarily be offset by a rise in at least one other currency. This truism has taken on a new significance in the context of the credit crisis, where sell-offs in virtually every other asset class has sent investors scrambling in search of yield. Despite even the current rally in stocks and commodities, forex volume is surging.

Aggregate forex data is essentially nonexistent, and also unreliable since its based on surveys rather than actual numbers. But anecdotal evidence from the major players in forex suggests that interest has exploded. “Volumes on dbFX, the online retail trading platform from Deutsche Bank, increased 37% in the first quarter of 2009 from the same period a year earlier. ….particularly impressive given sharp volume gains in October, at the height of market fears, when retail investor interest spiked due to intensified volatility.”

Ironically, the increase in retail forex trading has coincided with a relative decline in institutional trading, as banks collectively make an effort to get back to their roots of providing financial services and move away from position-taking. “The crisis has also led many houses to disable algorithmic trading models, which had been big volume drivers.”

Japanese retirees were probably the first, or at least the most famous, mainstream group to trade in the currency markets. They famously used the carry trade to bet against the Yen. When this strategy imploded, it was left to investors from other countries to pick up the slack. “Contracts for Difference (CFD) providers [in Australia] are noticing the shift. Many newcomers to CFDs, they say, are overlooking margin trading over shares for the prospect of trading currencies instead.”

Equity traders are also starting to pay attention to forex. The Dollar’s recent volatility has effected significant changes in corporate profitability. For companies that are export-oriented and/or are net buyers of commodities, the strong Dollar has provided a windfall. One analyst added, “Travel and leisure companies will also benefit from the weak dollar as this means that travel is now more affordable for foreigners.” If and when the Dollar recovers, companies that do business overseas are poised to reap the benefit.

For novice forex traders, the most important decision involves choosing a trading approach; “The type of forex trader you are will determine how frequently you trade, the type of currency pairs you choose to trade, the charts you use, and even the strategies that you employ to make money on the markets.” Generally speaking, day traders churn their portfolios daily, and hence stick to the most volatile currency pairs. Swing traders typically hold positions from one day to several weeks, and rely on a combination of technical and fundamental analysis.

Position traders, in contrast, don’t worry about “short-term market movements like the day trader or swing trader, but about long-term trends spanning weeks or months.” These types of traders, as well as those who aren’t ready to take the plunge directly into forex, should also consider currency ETFs, currency options, and currency CDs. As one instructor summarized, “The upside to these is that you can get started in currencies right through the same stock brokerage account that you would buy IBM, GE or Google.”