Here's how FX trading has evolved

Wild currency swings can wreak havoc on your vacation. More than that, fluctuating currency rates can have profound impacts on the products you buy at home or abroad.

For instance, cross-border shoppers may revel in their purchasing power when their home currency is stronger than the currency of the country they’re shopping in. When the opposite unfolds, cross-border shopping becomes less appealing.

The same goes for travel bugs: large swings in exchange rates can make travelling abroad on vacation either a very affordable or brutally expensive affair.

Foreign exchange (forex or FX) trading can help to serve as a hedge against fluctuating currency rates. In recent years, the FX market has seen a steady rise in individuals trading. To these self-directed investors, online trading is as common as online banking.

People who actively direct their own portfolios are the ones you will find trading FX, equities, commodities, or other instruments through accounts with online brokers.

A Legitimate Asset Class
The FX market is the world’s oldest and most liquid, with an estimated US$5.3 trillion traded daily in 2013, up from $4 trillion in 2010, according to the Bank for International Settlements’ (BIS) preliminary “Triennial Central Bank Survey.”

In 2013, Singapore overtook Japan as Asia’s biggest FX centre for the first time, as the average daily FX volume increased by 44% to $383 billion.

In general, Asia has enjoyed tremendous FX growth at all levels. As the BIS survey highlights, Asia has gone from being one of the drivers of retail FX expansion, to having the Chinese Yuan as one of the top traded currencies. 

Regulation in Asia has adapted to that growth and regional governments are more involved with the industry as a result.

Less than two decades ago, speculation in the FX market was strictly the domain of institutions and high net-worth individuals where the professional trader reigned. Individual retail investors had no market entry point: real-time streaming currency rates were tough to find, orders less than $1million were uncommon, and transaction costs prohibitive.

Self-directed online FX trading became well established in the early 2000s with the advent of onlinebrokers. Real-time rates, online trading platforms, leverage, risk management tools, and vastly reduced transaction costs were introduced.

Global interest in retail FX rocketed upward with high-speed Internet access becoming commonplace, the lightning-fast speed of transactions borne of automation, and the rise of mobile computing. As a result, retail trading volumes increased from $6 billion in 2001 to $313 billion in 2010, an Aite Group 2011 study found.

Retail FX is considered an alternative investment along with real estate, private equities, hedge funds, precious metals, and other assets, which can be used as a tool to reduce overall investment risk through portfolio diversification.

It’s been said alternative investing is not for everyone but there is an entry point for almost anyone, and in terms of FX, this holds true.

FX is a Long-Term Journey
To be clear, FX trading is not a get-rich-quick scheme. But just like any other asset class, it requires education, discipline, a sound trading plan that suits your personality, and partnering with a regulated market-maker that operates in a transparent and accountable way.

Moreover, you need to understand what impacts exchange rates, learn the FX basics, and access the right risk management tools such as a Value at Risk calculator and using stop-loss orders to automatically close an open position and restrict any losses you incur if the exchange rate moves against you.

Another important ingredient for trading FX smartly is money management. One reason why many people fail at trading FX is that they do not employ sound money management methods.

No matter what aims you may identify when determining what you wish to achieve by trading FX, the first priority must be preserving your capital. To quote Snoop Dogg, “keep your mind on your money, and your money on your mind.”

To that end, copy trading -- where available -- could potentially be a worthwhile venture for investors as it gives them a view of how more experienced traders execute their trades.