One of the striking themes of 2021, from a retail FX perspective, was the jump in the number of people trading currency for the first time. Almost one in four of the 139,000 individuals who placed at least one FX trade in the preceding 12 months were newcomers, according to the Investment Trends UK leverage trading report, and social media was teeming with influencers and brokers offering advice and paid-for services.
Fast forward to May 2022, however, and the latest Investment Trends data showed that the number of traders had fallen by 31% – even through a market period characterized by big themes such as the strengthening of the dollar, currency interventions and multi-year extremes in key currency pairs.
Part of the explanation for the change is the pandemic and its lockdowns. During the worst of Covid-19, many people were looking for extra income while they were on government support; some took the plunge into the world of trading.
Naeem Aslam, chief market analyst at AvaTrade, says that governments withdrawing their support resulted in a large number of retail traders leaving the market. Some will also have been scared away by the losses that can quickly mount in choppy markets.
Adam Button, chief currency analyst at ForexLive, says: “There is nothing new under the sun – many new investors are dazzled by hopes of outlandish returns and have to learn a few hard lessons before they find a level of risk and return that works for them.
“Some never get there, but the pattern is for investors to shift from higher risk to lower risk, particularly in a bear market.”
Crypto connection
What is less clear is to what extent FX traders have migrated to cryptocurrencies – or whether there is scope for the opposite to happen.
The latter is not the case at Swissquote, says Muamar Behnam, head of global retail sales. He says it is difficult for crypto traders to shift to FX contracts for difference (CFDs) as many of them are holding positions from 2021 and waiting for the end of the ‘crypto winter’.
While falling crypto prices generally lead to a drop in interest in these instruments, the decline in crypto CFDs has been less severe since traders tend to have a more mature margin trading system that allows them to bet on both growth and decline. As such, if they were expecting further falls, they could take an active position by selling without coverage.
Bear markets in equities tend to draw in retail FX markets because there is opportunity to trade on both sides
Adam Button, ForexLive
“You would think FX traders would be attracted to crypto, but in my experience, it is the opposite,” says Button. “Sophisticated macro traders – along with currency traders – are some of the most anti-crypto people on the planet. I can’t imagine the events of 2022 have improved that perception.”
The cryptocurrency market has had a shocking year, with a range of coins and tokens losing 70% or more of their value, notes Nicholas Cawley, strategist at DailyFX.
“The tightening of [US] Fed[eral Reserve] monetary policy started the ball rolling before a range of crypto company crashes, defaults and frauds sent values spinning sharply lower,” he says. “These sell-offs may have drawn traders back into the market at lower levels, but as prices continued to fall, trader losses would have accumulated.”
As a consequence, there are a large number of traders still holding crypto at much higher prices. The recent collapse of the FTX crypto exchange will have done nothing to improve confidence in the crypto ecosystem among undecided retail traders.
However, Aslam says such events do little to dissuade the hard core who have displayed a willingness to continue trading Bitcoin, Ethereum and other cryptos irrespective of what is happening in the markets.
Volatility attracts
Looking ahead, Button thinks the conditions are in place for more people to try their hand at FX trading over the coming months.
“Bear markets in equities tend to draw in retail FX markets because there is opportunity to trade on both sides,” he says. “Secondly, retail comes to FX when there are volatility and long-term trends. We have had all those things in 2022, and that is a great recipe for a retail renaissance.”
Alex Kuptsikevich, senior market analyst at FXPro, agrees that volatility can be a driver for more investors.
“If the currency market remains volatile, people will try their luck to capitalize on their view of the macroeconomic outlook and interest-rate movements,” he says. “Only then will interest outweigh caution. The worst thing for the retail market is a prolonged economic slowdown, corroding purchasing power and thus reducing savings.”
Cawley at DailyFX goes further, arguing that inflation and a rising cost of living are unlikely to drive a new cohort to try their hand at FX trading on the basis that those under pressure to make regular money to boost or stabilise their income are more likely to make the kinds of bad decisions that will cost them money.
