Over the past 25 years or so, foreign exchange (FX) investments have been one of the best performing asset classes, outperforming both equities and bonds over the same period.
But for the individual investor (even high net worth individuals), the FX market had been effectively off-limits: minimum trades were as much as $1m, and there were myriad complex legal documents to review and sign.
In a decade this has all changed. Thanks to the advent and growth of the internet, online trading systems which give individual investors direct access to the currency markets – it is now possible for the retail investment community to easily and quickly trade on the international FX markets from any internet capable PC.
Crucially, high net worth (HNW) investors can also now obtain all the data they need to trade FX at negligible cost and are able to trade at the same speed as banks and hedge funds using this platform. They are able to get streaming real-time executable prices and access to up-to-the-minute research to help ensure they have sufficient information they need to make an educated and sound investment decision.
In addition, FX markets are highly liquid and channel massive volumes – open to traders 24/7 from when they open in New Zealand on a Monday morning until they close in the US on a Friday night. They are ideal for investors who like to trade at all hours of the day, open and close positions instantly and not have to wait for windows in the market to appear.
There are a number of ways to trade in FX but doing so through automated trading systems has become increasingly popular with HNW investors particularly with those who are experienced active traders.
These systems, which use complex algorithms to produce automated trading signals, can be bought and uploaded over the internet by HNW investors and plugged into a trading platform.
Currency trades generated by automated systems have grown in popularity since the start of the year, and now represent about 25%of DBFX’s customer flow in October – a which is expected to continue.
In an environment where HNW investors are continuing to re-evaluate their behaviour as a result of the financial crisis, there is increasing interest in a do-it-yourself approach. Using an algorithmic system combines the benefits of technologically advanced trading strategies, with hands on management that is time efficient – there is no need to place individual trades.
For HNW investors considering investing in FX through an automated system, there are a number of key points they should bear in mind.
Most importantly you should ask yourself does the overall trading strategy provided by that system match your investment objectives; for someone with a low risk investment strategy their automated trading system should be less aggressive and allow lower levels of leverage and consistently use stop loss orders, limiting the down side risk. Whereas a trader who is looking for more aggressive trading objectives may choose a system that uses higher leverage levels and trades more frequently.
Then you should ask, is the system logical to me. A trader just starting with automated trading systems, may look for a straightforward system that uses stock standard procedures, such as having two moving averages with trades executing when they cross. A more advanced trader may look at a system with complex algorithms, e.g. how different currency pairs trade in relation to each other and might prefer a system that involves sophisticated time series for complementary currency pairs.
Many sophisticated traders will develop their own automated trading systems using independent charting packages.
Once you have found a trading system that you feel is appropriate for your investment objectives and trading style you will need to thoroughly evaluate the system. To do this you should find out who developed the system and research their background and experience before completing a thorough back testing.
The back testing should include: an evaluation of the leverage used, the swings in profits and losses, consideration of the max drawdowns and the profitably of the trading system after all costs including any commissions have been paid.
Once you are underway you should continually monitor your performance to ensure that using one of these algorithmic systems delivers the results you are looking for. Whether you are trading on your own or using an automated trading system to augment your trading, remember to keep within your investment objectives and risk tolerances.
Betsy Waters is global director of DBFX
