With an ominous global recession on the horizon, retail investors around the world have been looking for trading opportunities outside of over-inflated shares. Forex markets, the largest financial market in the world in terms of turnover, liquidity and value, have been gaining more and more interest from retail traders since COVID took hold.
The issue with increased forex trading in a COVID world is the heightened volatility that it generates. Recently, forex brokers have been reporting dramatic increases in losses experienced by traders, largely due to traders overexposing themselves with high leverage.
Financial Markets and Covid-19
Many of the pandemics dreaded economic consequences are still to come. Yet, plummeting stock markets and contracting oil prices have already prompted many retail traders to reassess their investments and seek new opportunities.
COVID forced governments and markets into crisis mode, with flow on effects exacerbated by dwindling resources, record high debt levels and Great Depression era unemployment rates. Just weeks after the World Health Organisation declared a global pandemic on 11 March 2020, the OECD estimated global stock markets had declined by over 30% and Moodys had downgraded its rating on US corporate debt from stable to negative.
Despite many financial markets and industries being on the brink of collapse, the forex industry is thriving. Top forex brokers around the world have reported significant increases in monthly trading volumes and new client accounts. Although too soon to tell, the surge in interest could be attributed to the fact investors’ are moving away from traditional stock trading, seeking new income streams or simply because people have more time to actively trade themselves.
The current health crisis may account for the recent burst in interest, however forex trading has been increasing in popularity for some time now. In 2016 the industry was valued at $1.934 quadrillion dollars, with markets turning over $5.1 trillion daily. Just three years later, it was estimated to be worth a staggering $2.409 quadrillion dollars with a daily turnover of $6.6 trillion.
The Risks of Forex Trading
Both beginner traders and seasoned investors are coming to see forex as an attractive opportunity due to the leverage offered. High leverage means large profits can be made, but the same exists with losses, which can end up exceeding the traders initial deposit (depending on the broker).
As traders can use tools to analyse markets and trade from home, forex is seen as an easily accessible trading activity for beginners. Unlike other financial instruments, large amounts of upfront capital are not needed to start trading and most software is user-friendly with tools designed for new traders.
On the other hand, experienced investors who in the past have been infrequent forex traders can benefit from the level of automation that can be achieved. Popular trading platforms such as MetaTrader 4 and MetaTrader 5 offer sophisticated tools that allow investors to implement automated strategies through both trading robots (Expert Advisors) and social-copy trading software. Since forex markets operate 24/7, algorithmic and social trading enable investors to continuously trade, although risks of continual losses do exist.
While forex trading can result in substantial profits, it is important to note that the leverage offered to traders comes with a high risk of losing money. When the top forex brokers were assessed, it was found that 71% of retail traders lose money and 99% fail to make continuous gains over four consecutive quarters.
The combination of volatile forex markets and trading with high leverage is a double edged sword as both gains and losses are magnified. The ongoing and unpredictable shocks effecting markets have compelled traders to adjust their approach to forex trading, with most opting to execute scalping and day trading strategies instead of holding long term positions.
Forex Markets Post COVID
As the COVID crisis continues to wreak havoc and spread unprecedented uncertainty for individuals, corporations and governments, traders are continuing to search for new markets and opportunities. While the volatility is bound to subside at some point, for now exchange rates will continue to react to shocks, increasing both the risks of forex trading as well as the potential opportunities.