This Week…

We’re taking a deep dive into the forex (FX) market — aka currency trading. 

While currency trading may seem intimidating at first, the foreign exchange market is the largest investment market in the world and can be a useful tool to add to your repertoire, depending on your trading style and investing framework. 

Our expert for this investor masterclass is Brent Donnelly, president of Spectra Markets. With nearly 30 years in forex markets, Brent has successfully navigated the world of currency trading better than almost anyone. 

In this issue, we’ll cover 2 things: 

• The must-know basics of currency trading. 
• The importance of flexibility and risk management in FX trading.

Let’s get started.

Welcome to the Game

Welcome to The Game of Investing, a bi-weekly newsletter bringing you “aha” moments and actionable lessons from Real Vision experts. No matter your level of expertise, markets are tough — which is why we all have to put in the work. Ultimately, the game of investing is a competition with yourself. Our mission is to help you navigate the path to success. Prepare to level up.

LEVEL 1  — Currency Trading Basics

Unlike equity and bond markets, currency trading is a 24-hour market that is only closed over the weekend. 

The market may be the world’s largest and most liquid asset market, but almost all of the trading volume has historically come from professional investors. 

• Recently, the rise of retail trading has led a new crop of traders to the playing field. 

All currency trading is done in pairs, meaning a trader has to buy one currency and sell another. In other words, every currency pair is an exchange of one currency for another. 

• A currency pair quote looks like this: USD/GBP = $1.15.
• In this example, a trader who wishes to buy British pounds will pay $1.15 USD for each.

The majority of currency trading volume is confined to only 18 currency pairs. With far fewer products available for trading than other asset classes, many traders use one of the highly liquid currencies like the U.S. dollar to anchor a trade expression. 

• The 8 major currencies most often traded are the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY). 

If you’re a macro trader, you may find currency trading to be quite appealing. Many of the macro drivers that move the stock and bond markets directly impact global currencies. 

• Factors like interest rates, U.S. dollar supply and demand, key economic data, and geopolitical tensions are just a few of the leading FX market drivers. 

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LEVEL 2 — Stay Flexible

No matter your investing experience level, keeping an open mind and remaining flexible is pivotal to successfully navigating forex markets. 

With currency markets largely driven by the business cycle, investors will need to adjust their trade ideas and execution based on the ebbs and flows of the global economy. 

• During times of economic expansion, Brent suggests being more aggressive and taking advantage of market opportunities. 
• Conversely, during cycles of contraction, it’s important to be cautious and protect your portfolio. 

Flexibility and open-mindedness will also serve you well when it comes to idea generation. By researching and analyzing various sectors and industries, and companies, Brent says investors can uncover potential opportunities that align with their investment goals and learn to adapt to changing market conditions and evolving trends.

When it comes to risk management, the first step when entering any asset class is to clearly define your risk tolerance. 

• Every investment carries some level of risk, so understanding how much you’re willing to handle will help dictate which type of trades will best suit your portfolio. 

Spreading investments across a number of asset classes and sectors is a good way to ensure diversification, but don’t spread yourself too thin. Brent recommends starting with a simple thesis and just a few trade expressions with relatively simple risk management.

“That way, if something changes, you can close the trade and adapt quickly,” he says. “Adaptation isn’t just a strategy, it’s a survival skill in the world of investing.” 

Next Time

Thanks for reading. In our next issue, we’ll look at where crypto analysis fits into the investment process. 

See you then.

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