An Intro to Forex Trading - FinSMEs

Foreign currencies are traded on the global decentralized forex market – the largest and most liquid financial market of them all. During the weekdays, it is active around the clock, and currency equal to 6.6. trillion USD is traded during an average trading day.

The most traded currencies on the global forex market are the United States dollar (USD), the Euro (EUR) and the Japanese yen (JPY). All three represent huge economies.

Examples of major players in the forex market are central banks, private banks, hedge funds, institutional investors, financial companies, and large corporations that need certain currencies to pay their foreign purchases or receive payments in foreign currency when they sell their products.

In the 21st century, the advent of the internet and electronic trading has made it possible to be active in the forex market even as a small-scale hobby trader with a tiny bankroll. Thanks to retail forex brokers who cater to micro and nano traders, you can get started with as little as $10.

Currency pairs

To understand the forex market, it is important to understand the concept of currency pairs.

Example: The currency pair EUR/CAD consists of the base currency Euro and the quote currency Canadian dollars.

On the forex market, you purchase one currency and pay with another currency.

Which are the most highly valued currencies right now?

Even though the United States dollar and the Euro are the two most traded currencies by volume and total value, it does not mean that they are the currencies with the highest price in relation to other currencies.

At the time of writing, 1 Kuwaiti dinar (KWD) does, for instance, trade for 3,24 USD, and if you want to purchase 1 Bahraini dinar (BHD) you have to pay 2,65 USD.

Below, we will take a look at a few currencies that (in 2022) all have a market price exceeding 1 USD.

The Kuwaiti dinar (KWD)

This is the official currency of Kuwait and is currently the strongest currency in the world. It was introduced in 1961 when it replaced the Gulf rupee. Upon its launch, 1 Kuwaiti dinar was equivalent to 1 sterling.

Due to the country´s rich oil reserves, the export economy of Kuwait is very strong. Kuwait is highly dependent on its oil exports, which account for over 80% of the GDP. Kuwait has one of the lowest unemployment rates in the world, and there is no income tax.

The Kuwaiti dinar has been pegged to different foreign currencies in the past and is today pegged to an undisclosed basket of currencies.

The Bahraini dinar (BHD)

Just like Kuwait, Bahrain is located in the Middle East, and its economy is heavily dependent on the extraction and export of its oil. Bahrain’s oil and gas industry accounts for around 85% of the country´s revenues.

The Bahraini dinar became the official currency of Bahrain in 1965 when it replaced the Gulf rupee at 1 BHD = 10 Gulf rupees. With that said, Saudi Arabian riyals are also considered legal tender in Bahrain, and the exchange rate is fixed at 1 BHD = 10 riyals.

Since 1980, the BHD has been pegged to the SDR, an international reserve asset (not a currency) created by the International Monetary Fund (IMF).

The Omani rial (OMR)

Located on the Arabian Peninsula, the Sultanate of Oman has a fairly diversified economy compared to many other nations in the region, but the oil and gas sector still represents around 30% of the nominal GDP.

The Omani rial replaced the Gulf rupee in 1970 but was then called the Saidi Rial, a name that remained until 1972.

The Omani rial is pegged to the USD at $2.60.

The Jordanian dinar (JOD)

The Jordanian dinar is the official currency of Jordan and is also a legal tender in the West Bank region.

The Jordanian dinar was introduced in 1950, replacing the Palestinian pound. It is currently pegged to the IMF´s SDRs.

Unlike the situation in Kuwait, Bahrain and Oman, Jordan does not derive most of its GDP from oil. Notably, it was also the first Arab country to establish a free trade agreement with the United States. Jordan joined the World Trade Organization in 2000 and signed the Jordan-United States Free Trade Agreement that same year. The country enjoys advanced status with the European Union.

Sterling (GBP)

The sterling is the official currency of the United Kingdom and its associated territories. The pound is the main unit of sterling, and one pound is subdivided into 100 pence. The term “British pound” is popular in colloquial use but is not the currency’s official name.

Sterling is the fourth most-traded currency in the world, after USD, EUR and JPY. It is one of the five currencies that forms the basket of currencies used to calculate the value of the IMF´s SDR.

Algorithmic forex trading

A notable difference between 20th-century forex trading and 21st-century forex trading is the proliferation of algorithmic trading in our century.

Algorithmic trading relies on specialized software to open and close positions when certain market conditions are met. The software is programmed with a set of very specific rules in accordance with the wishes of the trader. Examples of points included in the programming are asset, price, quantity and timing.

One of the reasons why algorithmic trading has become so popular is that it reduces the human work hours required to analyse the market and manually put in orders. This translates into lower costs in terms of salaries and similar.

Algorithmic trading software can rapidly analyse huge amounts of market data, spot opportunities, and place orders. Among other things, this makes it possible to efficiently exploit arbitrage opportunities even when they arise from minute price deviations. Trading software can also be used to quickly identify and exploit opportunities for so-called triangular arbitrage, where one currency is converted back into itself through multiple different currencies.

Market fragmentation

Algorithmic trading has been criticized for augmenting existing power differences between the various market participants. When only certain traders have the resources to obtain and use the most sophisticated trading software solutions, it can result in fragmentation within the market and impact liquidity.

Examples of different types of algorithmic trading on the forex market

Statistical algorithmic trading, also known as algorithmic strategy trading. The software identifies suitable trading opportunities based on the statistical analysis of historical time series data.
Algorithmic execution strategies aim to execute a pre-defined objective, e.g. to rapidly carry out a trade or decrease market impact.
Auto-hedging. Trading rules are generated by the software to reduce a trader´s exposure to risk.

What is high-frequency trading (HTF)?

High-frequency algorithmic trading is much faster than other forms of algorithmic trading. It is characterized by trade orders being executed at an extremely high rate and pace. Successful HTF traders typically utilize specialized software to make trades within milliseconds of a new price movement.

High-frequency trading is known to exacerbate market flash crashes, with one early and notable example being the stock market crash of May 6, 2010. Many experts have warned that HTF can have a similar impact on the forex market under similar conditions, even though there are certain fundamental differences between the forex market and the stock markets.

To prevent HFT software from exacerbating market crashes, they can be monitored by humans or programmed to suspend trading automatically during market turbulence. Of course, simultaneous suspension of trading by numerous large market participants could in itself result in problems for the market, as liquidity would drop sharply.

Can retail traders do algorithmic trading?

Yes, algorithmic trading is within reach even for small-scale retail traders on the forex market. Several different retail platforms offer it, either as a built-in service or by permitting and supporting third-party software solutions.

Before you risk any real money, we suggest you try it out using a free demo account filled with play money. Many brokers will allow you to open such an account with them, and it is a great way to learn more about algorithmic trading without losing your hard-earned cash while figuring things out.

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