Getting started in FX

It always difficult to know where to start, when it comes to areas in finance. There is so much to read, so what to start with? Furthermore, the more you read and the more years that pass, it becomes even more obvious that there is less you know. I remember back in 2005, when I started in FX, I had little if any idea of even basic terminology (what does long EUR/USD mean…?). After about 2-3 years I felt I had a good grounding. But in practice, there was a huge amount I didn’t know about FX markets (which is just as true today). I recently read a great article by Rob Carver, entitled So you want to get started as a quant/systematic trader? which is full of great advice, and I thought maybe it might be worth me writing something similar on FX (albeit something far less comprehensive than Rob’s article).


Most retail FX traders lose money
I’ve got to mention this to begin with. When it comes to equity markets, there’s been a lot of talk recently about some retail folks making money during this period on the rally and also things like GameStop (and some being burned on GameStop too). The first thing to stress, is that whichever statistics you look at when it comes to retail FX traders, the vast majority of them lose money, and I don’t think this has changed much over the years. Figures I’ve seen range from 60% to over 90% for the number of retail FX traders losing money. Historically, over longer periods of time, you’d probably find a passive long investment in S&P500 would beat most of these returns.


There are many reasons for this which you can cite, such as the excessive amount of leverage offered by many retail FX brokers. Indeed, this is a reason why many regulators have tried to restrict the amount of leverage. The tendency to take profits too early and let losses run. Spreads can also be pretty wide on most retail FX platforms, which can impact P&L of higher frequency strategies (although some in my experience, some retail brokers like Interactive Brokers do have relatively tight pricing in FX). There’s also likely to be somewhat of an information disadvantage for retail versus professional investors. What all this boils down to, is that for retail FX traders to make money (just like for traders in general) takes a lot of research of the market to hopefully increase the likelihood of being profitable.


What factors drive the market?
Before making a trade in FX, or indeed in any market, whether you are systematic or discretionary, we need to understand the market and importantly what factors can drive the market. If we don’t know what drives the market, it kind of is difficult to know where to start and to come up with trading ideas, or hypotheses for systematic strategies. For one, FX markets are macro in nature, reacting to country events, whereas for example, single stock equities are more micro in how they behave.


In FX, here is a shortlist of a few factors that are important to drive price action below. Obviously, the relative importance of these factors changes over time, and that’s probably the most difficult thing with trading in general, understanding what theme/factor is likely to be driving markets in the near term:


  • Trend – which currency pairs are trending higher/lower
  • Carry – the level of the rate differential
  • Value – over long periods of time, we might expect currencies to mean-revert to their fair value, that can be measured by models such as PPP
  • Relative monetary policy – in developed markets changes in interest rate differentials can be a proxy for relative monetary policy (note: this is different to carry, which purely focuses on the level)
  • Monetary policy – central banks impact the rate differential
  • Positioning/sentiment – how speculators are positioned can be key, in particular when there are washouts
  • Fundamentals – economic data feeds into monetary policy
  • Flows – both of the underlying FX trading, and also investment flows across borders
  • Events – these can range from political events to data events etc.


Some of the these factors you might be able to measure using market data (like trends), others such as fundamentals, requires economic data. In many instances, you might also find it useful to have alternative datasets such as news.


This is only a very short list, and it’s possible to come up with many more. As you start to watch the market more and look at the news, and watch how they impact prices, you can come up with ideas.


Systematic/discretionary/high frequency/low frequency etc.
There are many ways to trade FX, you could trade it at lower frequencies such as monthly. Or alternatively, you can trade it at very high frequencies and get involved in offering liquidity. 


Typically, the higher the frequency, the more likely you will be trading in a fully automated way. You also really need to understand market microstructure at very high frequencies. At lower frequencies, more discretionary ways of trading are likely to be more common, although systematic approaches are also visible too.


Whether you trade in a systematic way or discretionary way (or a mixture of two) is a choice. For me, I prefer a systematic approach to markets, but that’s just personal and for some a discretionary approach works better. One important point though is whatever way you use, I think these days it’s useful to learn to code to help number crunch data, to help with decision making. At very high frequencies, this will mean coding in C++ or Java, whilst for intraday and lower frequencies, you can probably try Python (I wrote this article on learning to code in Python and there’s lots of good tips on learning to code in Rob’s quant article).


Further reading on FX
Obviously, what I’ve wrote above, is pretty short, and definitely not a full introduction into FX! As well as keeping track of the market and news, and seeing how events impact the market, I also recommend reading books about the subject. It can sometimes be difficult to find the right book, but I’ve listed books below, which I hope can help which are focused on FX, to help you come up with your own ideas:



FX markets are often a bit more challenging for newcomers, because it’s not as familiar, as say equity markets. Statistics suggest that most retail FX traders lose money. Hopefully, the brief insight into FX markets above, will at least be a start. I definitely recommend having a look at the books above. I’ve learnt a lot from both.