Dubai: Easy access to the internet allowing individuals to start trading foreign exchange with relatively little capital and lacklustre regional stock markets have led to the Middle East becoming a fertile ground for retail investment.
The estimated count of retail FX traders in the Middle East exceeds 400,000, with the biggest numbers coming from Saudi Arabia and and the UAE, according to Boston-based Aite Group's May 2011 research report. The group expects that the majority of future growth in retail FX will originate in Asia, the Middle East and Latin America.
"Growth in these regions corresponds to the presence of large adult populations in those regions that are rapidly gaining access to the internet," says Javier Paz, senior analyst at Aite Group. "The 10-year growth rate of the adult population in the Middle East approaches 40 per cent (19 per cent in Asia and 30 per cent in Latin America) and this means that there are many more adults searching for ways to produce wealth while chasing fewer jobs."
For the likes of Oanda, which is among the world's top five online brokers, the entry level is as low as $1, but there are others like FXCM Mena where to open an account the investor should have a minimum balance of $2,000. When referring to trading with low capital, Paz says it could be anywhere between $50 and $250.
However, as Aite research points out, the profitability of US traders who were active in the past four quarters ranged between 27 per cent and 33 per cent. The US is the only country that requires brokers to disclose trader profitability. To put this value in perspective, back in 2005 the chief executive of FXCM, one of the world's leading online broker, was quoted as saying that he would be surprised if 15 per cent were profitable. With rules in place to protect investors, falling trading costs, and traders getting better educated have increased the US profitability to a respectable 30 per cent, says Paz.
Dan Dowding, managing director, Middle East and Africa of Killik and Co says it is important for investors — the neophyte and the experienced — to realise that forex markets can and do move unpredictably and irrationally "in the blink of an eye."
On online trading, Dowding is of the opinion that individual investors should have zero exposure, especially when research shows low level of profitable trades in retail investing.
"Trading short-term forex and thinking you are doing anything more than gambling is very foolish," says Dowding. "Leverage is easy to come by in currency markets, which means gains can be magnified up to 100 times," says Dowding. "This also means if you are on the wrong side of a trade that losses are equally magnified."
The market is extremely liquid, with about about $4 trillion traded per day, and that's a good reason for a "seasoned" investor to trade in spot forex, says Henri J. Chaoul, general manager, Master Capital Group, the representative of FXCM in the MENA region.
At the same time Chaoul acknowledges it as a high risk venture, with rewards not always high.
"An investor without the proper trading skills and education can easily misuse some of the trading tools they have on hand. Leverage is one example," he says.
Forex market is like any other market in that it has the ability to provide you with good returns or lose money, says Mark Watts, head of fixed income at National Bank of Abu Dhabi.
However he encourages caution when using FX markets. "Flow and price drivers are dominated by professional players with a huge depth of resources and both intellectual and IT capital invested," says Watts. "To uncover drivers of the market and exploit opportunities, it is difficult for an individual to match this."
Dowding agrees. "Rather than trying to trade forex themselves, private investors can profit by leaving it to the professional," he says. "This can yield impressive results without the stress involved in trading personally. The Breven Howard Macro FX Fund is certainly worth looking at," he says.
Forex markets often move independently of equity markets, so as part of a diversified investment strategy, there is an argument for a small exposure in portfolios.
Omar Al Shaye'e, a 32-year-old UAE-based Kuwaiti investor forayed into online spot trading a couple of years ago after he found the performance of the local stock markets lacklustre. Self educated and taking some training in online trading in currencies, Al Shaye'e sees it as a diversification into one more asset class, though he acknowledges that it can be stressful and fraught with risk.
"The high liquidity makes it harder to manipulate," says Al Shaye'e. "It's not for the faint-hearted especially in a highly volatile market. Recent months have seen currency markets extremely volatile. Of course I do have losses, but they are manageable."
While trading, he calculates how much he is risking on each trade. That way if there's a loss it's controlled. The maximum loss that he is willing to take on each trade is 2 per cent of the FX portfolio. "This is money management and it's crucial part of the trade. I don't take a trade if it doesn't meet certain criteria, especially reward to risk ratio of 3 to 1," Al Shaye'e says.
Oanda's Middle East managing director Paul Hayward believes "it is possible — certainly not easy" — to make money from FX trading in the same way as it is with other day traded-type market like equities. "You just have to do your homework, you have to keep a very close eye on your risk, you have to know what is your investment, what you are looking to make."
Some investors use forex for what it was originally introduced for — to hedge against investments in other currencies. "This is particularly relevant for UAE residents who more often than not will have assets and responsibilities in other countries," says Dowding. "We would fully endorse its use for hedging purposes."
Anytime an investor is diluting the risk a little bit is going to be good, says Hayward. "But you have to make sure that you are in fact diversifying but you are not giving yourself too much of a hedge. You could find yourself effectively exposed to the same thing — it might be having two different currencies but exposed to the same problem."
Looking at the current market, the Swiss franc soaring as far as it has provided a hedge against the problems in Europe and US. However to bet against the euro and dollar using other currency pairs takes a little more understanding, says Hayward. "The retail investor needs to know how those currencies are interrelated."
What spot forex investing means:
With spot currency trading you are buying one currency and selling another.
When trading euro-dollar, your first currency is your base currency. For example in the euro-dollar equation, when we say it is trading at 1.4520, it is the amount of dollars to the euro, or that one euro will buy you $1 and 45 cents (20 is four decimal points). Now if you think the current spot price of euro-dollar 1.4520 is going up to 1.50, what you would do is buy the amount of euros (say ¤100) at 1.4520 which is equal to the amount of dollars of 145.2. If it goes up to 1.50, you would sell them and you make your profit of 5. Basically, you are betting on the price of one currency going up or down against the other.
Spreads: The typical spreads on the most popular currency pairs are: EURUSD (1.0 to 3.0 pips), GBPUSD (1.5 to 4 pips), USDJPY: (1.2 to 3 pips). Some companies insist on offering very low (but variable) spreads, while others justify slightly higher (fixed) spreads. On a typical $10,000 trade size, 1 pip would be approximately $1.00 ($10 per pip on a $100,000 trade). The ¤ $ tends to move about 120 pips per day, from high to low, giving traders ample chance to recover in minutes or hours the trading cost and realise a profit (if they know what they are doing J). The number of currency pairs offered is usually about 20 and as high as 170. A growing number of FX brokers worldwide are offering contracts for difference (CFDs), in addition to spot FX. CFDs are another type of over-the-counter (OTC) instruments, and derive their value from various markets, including: FX, stock indices, and commodity futures.
Leverage: Leverage is trading with someone else's money, raising the stakes. You can have a position in the market 10 times or 50 times greater (that is leverage at a ratio of 10 is to 1 or 50 is to 1). If you buy ¤1,000 at 1.45, you get 1,450. So that's your position. If you buy ¤10,000 at 10 times leverage you have 14,500.
The difference is if you look at the effect that has on your profit and loss, it basically amplifies 10 times or 50 times. If you take that position there and you buy 1.45 and sell it 10 points later, you make $10. If you leveraged your ¤1,000 to 50,000 you did the same position, but instead of making $10 you have made $500. Equally you could have lost $500. And that's why it is dangerous. So when you use leverage in a situation where the market becomes very volatile or you use it to average against the losing position, you run the risk of taking on much higher levels of risk than you would like to. It simply amplifies the ability to make money or lose money.
—Sources: Paul Hayward, Oanda and Javier Paz: Aite Group
Ten points of advice for those bent on trading:
1. Trial or paper trade first. Don't jump into it. If you think you will make a successful currency trader, use a trial account first or trade on paper for a number of months while you are on the costly learning curve. Keeping track of all gains and losses will also help you to identify if you are successful or not over the longer term.
2. Make sure you avail yourself all the education tools and read as much as you can on the subject; you need to learn about position management and risk management.
3. When you do open a live trading account, you keep your leverage extremely low. Only open an account with funds you can afford to lose so that you don't want to be trading with funds that you need for something else;
4. Use stop-losses to limit losses. A stop-loss will automatically close the trade if it exceeds the determined loss level. Be sure to identify how much you are happy to loose on each trade and use a stop-loss contain it. Make sure that you put your stop-loss at a realistic level however as often the price will go just beyond your stop-loss and then turn back leaving you with crystallised loss in a trade which could shortly turn profitable.
5. Keep careful notes of all trading. It is too easy to forget about your losses and just remember the gains. Be sure to keep a spread sheet of all performance and review regularly whether you are actually making money overall, and if it is worth the intensive time required.
6. Focus on one or two "pairs" first. Rather than trying to do everything at once, try to focus and learn the characteristics of one or two pairs (e.g. £/$ or $/¤). You will soon discover how news affects the pricing of these pairs as well as learning their typical trading ranges.
7. Have a strong strategy of when to deposit more money into forex and when to withdraw profits. If you have lost the money you put in, it is tempting to put more money in to try and win it back but ask yourself if you really want to throw good money after bad. Similarly, if you have built up a good profit, ensure that you withdraw it on a regular basis rather than getting too confident and losing it through larger trade sizes.
8. Allow time to trade. If you are going to trade you need to allocate some time during the day to do that. Those who are very diligent and allow a time frame during the day when they sit with the platform and figure out some trading strategy, they tend to be the most successful.
9. Choosing a time zone is very important. If you are going to trade in the European time zone, you are going to be up at a certain time of the day and look at the time zone in its entirety and decide how you are going to attack it; In Asia some currency pairs will be less liquid than others. You have to be acutely aware of what moves markets during certain time zones and keep your eye on major news events as to how they will affect volatility.
10. View forex as part of your overall investment exposure — not all of it.
Sources: Dan Dowding, Killik and Co.; Paul Hayward, Oanda; and Mark Watts, NBAD.
Disclaimer: Information provided here are for general purposes only and in no way constitute financial or investment advice. Investments in currencies carries risk and anyone planning to invest should seek professional advice. Gulf News carries no liability on losses made by prospective investors.
