I consider myself a true multi-asset class trader.
Being able to speculate in different markets can be an incredible advantage. That’s because volatility is the lifeblood of a trader.
Without volatility, it’s difficult for a trader to find an edge that’ll outperform the broader market.
Meaning, if volatility is low in one market, then a multi-asset class trader can simply trade somewhere where the volatility is higher.
Think of it like living in an area full of amazing restaurants…
If you’re in the mood for seafood, you can head to the Michelin-starred sushi restaurant.
But when you’re tired of the sushi and you’re craving a steak, there’s a world-class grill next door.
Over the years, I’ve traded around fixed-income products, stocks, options, commodities, cryptocurrencies, and fiat currencies – otherwise known as foreign exchange.
It’s this last asset class that I’m interested in right now… it’s the hot restaurant that everyone’s trying to get a reservation at.
For a long time, foreign exchange trading (also called Forex or FX) has been quiet.
Volatility largely dropped off, and most traders would’ve been better off sticking to other markets like equities.
This has been especially true over the second half of 2020 and most of 2021.
Everyone wanted to cash in on the “Everything Bubble.”
But now that the bubble has popped, it’s a trader’s market once again. And one of the best trading markets right now is in FX.
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In 2018, the U.S. Dollar Currency Index (DXY) had a net gain of just over 4%. Currently, the DXY is up almost 19%.
That’s a huge difference in a short time, and FX traders are loving the increased volatility. Especially because FX is traditionally traded on leverage.
The exchange rate fluctuations between different currencies tends to be quite small relative to the moves you might be used to seeing in growth stocks or cryptocurrencies.
For example, a 2% intra-day move in a currency pair would be an exciting event. On the other hand, a 2% move in a stock like Tesla (TSLA) wouldn’t be an uncommon occurrence.
As a result, FX brokers extend considerable leverage to their clients. In the U.S., many brokers will offer the maximum 50:1 leverage limit.
Meaning that even with a relatively small account of $1,000, you can theoretically control up to $50,000 at a time.
Of course, leverage is a double-edged sword. While it can certainly magnify the gains, it can also make losses even more painful.
Keep in mind, the FX market is the most widely traded marketplace in the world…
The daily volumes that are transacted in FX far outweigh what’s going on in the stock market.
It’s estimated that over $6.6 trillion flows through the global FX market every day. That’s compared to a relatively meager estimated $200 billion a day in the U.S. stock market.
All that liquidity means it’s effortless to get in and out of your positions.
It also means that trading spreads tend to be very tight, making it easy to get a good price from your broker on most trades.
And because FX trading takes place around the world, it’s a true 24-hour market that’s open five and a half days a week.
The FX market opens on Sunday at 5 p.m. ET and closes on Friday at 5 p.m. ET.
This is great for those that feel pressured for time to trade during the regular stock market session.
Over the next few weeks, I’ll be writing more about the features of FX as an asset class and why it would be a big mistake for traders to leave this market off their watchlist.
Happy trading,
Imre Gams
Analyst, Market Minute
Reader Mailbag
Have you ever traded in the FX market before? If so, what was your experience?
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