Characteristics of Traders Versus Investors in Forex Markets

[RichardCox 10]

It is very common to hear people discuss "trading" and "investing" as if there is no difference between these two activities. It is true that both “traders” and “investors” both actively participate in the same foreign exchange market, the two sides tend to have very different goals and very different strategies for meeting those goals. Both sides, however, are vital for efficient market performance, and here we will look at some of the benefits both sides contribute to the overall function of the Forex markets.

 

Investor Characteristics

 

Investors are market participants that are most commonly associated with financial markets and they tend to buy assets on long term time horizons based on fundamental beliefs that economic factors will cause the price of the asset (currency) will rise in the future. Generally, investors will pay attention to Value and Relative Performance.

 

For example, if the fundamental conditions of two currencies is similar but the price of those two currencies shows a wide variation, the less expensive currency will typically provide the better value as markets are likely to respond to economic growth in favorable ways over the longer term. These valuations will also depend heavily on the stated strategy of the central bank in that country – as well as the market's credibility view of these policy strategies as they are implemented.

 

Value analysis is also done through macroeconomic data that serves as the equivalent of what would be seen in the balance sheet of a company. Growth possibilities over the long term serve as the primary basis for many investment strategies implemented by investment banks and other large financial organizations. Retail investors (individuals that invest in Forex markets using personal accounts) are also gaining in influence as the market gains in popularity.

 

Trader Characteristics

 

Traders, on the other hand, tend to show different characteristics by focusing on the market as a whole, rather than on the values of individual currencies. Traders tend to base their decisions on the idea that economic fundamentals are impossible (or at least very difficult) to understand in their entirety, and to combat this traders tend to focus on pricing patterns and the influence of supply and demand. Traders feel that these pricing levels and behaviors give the best indication of market sentiment as the collective market analysis of all market participants is already contained in the price itself.

 

One of the essential benefits that traders being to markets is in providing liquidity in Forex markets as there are more participants willing to take the other side of a trade. Because of this, traders are an essential section of the marketplace but there are still lessons that can be learned from investors when strategies are being developed.

 

Learning from Investment Strategies

 

While it is true that, in terms of market volume, traders have a much larger and more regular contribution in Forex, there are some lessons that traders can benefit from when refining their own strategies. Two of the most significant lessons can be seen in asset diversification (never focusing on too few assets) and in avoiding the habit of rapid trading exits that can limit gains as larger pricing moves are missed. It is true that both traders and investors are a necessary combination in functioning markets – traders provide investors with liquidity to buy and sell at chosen price levels, and investors give traders a basis for their price history forecasts.

 

Together, these groups form the basis of the Forex markets in operation today. But it is always prudent to have some sense of what the other side is thinking (and how they are approaching their strategies), as this will help to limit significant surprises and positively impact position probabilities.

[ForexTraderX 10]

It is very common to hear people discuss "trading" and "investing" as if there is no difference between these two activities. It is true that both “traders” and “investors” both actively participate in the same foreign exchange market, the two sides tend to have very different goals and very different strategies for meeting those goals. Both sides, however, are vital for efficient market performance, and here we will look at some of the benefits both sides contribute to the overall function of the Forex markets.

 

Investor Characteristics

 

Investors are market participants that are most commonly associated with financial markets and they tend to buy assets on long term time horizons based on fundamental beliefs that economic factors will cause the price of the asset (currency) will rise in the future. Generally, investors will pay attention to Value and Relative Performance.

 

For example, if the fundamental conditions of two currencies is similar but the price of those two currencies shows a wide variation, the less expensive currency will typically provide the better value as markets are likely to respond to economic growth in favorable ways over the longer term. These valuations will also depend heavily on the stated strategy of the central bank in that country – as well as the market's credibility view of these policy strategies as they are implemented.

 

Value analysis is also done through macroeconomic data that serves as the equivalent of what would be seen in the balance sheet of a company. Growth possibilities over the long term serve as the primary basis for many investment strategies implemented by investment banks and other large financial organizations. Retail investors (individuals that invest in Forex markets using personal accounts) are also gaining in influence as the market gains in popularity.

 

Trader Characteristics

 

Traders, on the other hand, tend to show different characteristics by focusing on the market as a whole, rather than on the values of individual currencies. Traders tend to base their decisions on the idea that economic fundamentals are impossible (or at least very difficult) to understand in their entirety, and to combat this traders tend to focus on pricing patterns and the influence of supply and demand. Traders feel that these pricing levels and behaviors give the best indication of market sentiment as the collective market analysis of all market participants is already contained in the price itself.

 

One of the essential benefits that traders being to markets is in providing liquidity in Forex markets as there are more participants willing to take the other side of a trade. Because of this, traders are an essential section of the marketplace but there are still lessons that can be learned from investors when strategies are being developed.

 

Learning from Investment Strategies

 

While it is true that, in terms of market volume, traders have a much larger and more regular contribution in Forex, there are some lessons that traders can benefit from when refining their own strategies. Two of the most significant lessons can be seen in asset diversification (never focusing on too few assets) and in avoiding the habit of rapid trading exits that can limit gains as larger pricing moves are missed. It is true that both traders and investors are a necessary combination in functioning markets – traders provide investors with liquidity to buy and sell at chosen price levels, and investors give traders a basis for their price history forecasts.

 

Together, these groups form the basis of the Forex markets in operation today. But it is always prudent to have some sense of what the other side is thinking (and how they are approaching their strategies), as this will help to limit significant surprises and positively impact position probabilities.

 

Hmmm. I'm not really sure even where to start here... I'm actually kinda wondering why you posted this up.

 

First, The BASIS of the forex markets in operation today is the same as it was since bretton woods and nixon flipping the bird to the french when they requested payment in gold instead of paper dollars. It's for COMMERCIAL and GOVERNMENT interests to hedge their needs against future potential adverse fluctuations of currency values. It's not for trading, or for investing per se...but actually for hedging. And, less than 50% of the market is made up of speculators, retail, commercial, institutional...etc. So... who REALLY forms the basis of the forex market??? Commercial and government interests who hedge in the market. Also... investing? currencies? really? No. Hedging. Trading. But.... investing?? nahhh... I can't honestly say I know of more than just a handful of currency "investors"...because those interested in buying and holding for capital appreciation or for capital preservation and interest derived income go for more lucrative, more steady things, which you can get more of in other markets. Furthermore, when you go long one currency, by definition, you go short another. And an investor would NEVER go short. Ever. That, in fact, is one of the hallmark aspects of what really makes the difference between an investor and a trader.... because one cannot "invest" in something that is going to depreciate in value. Totally off base with that one there....

 

Then you go on to say that traders "tend to base their decisions on the assumption that economic fundamentals are very difficult to understand in their entirety...and that they therefore focus on price action...etc"

 

Where in the world did you get this idea? MOST of the full time traders I know of spend a considerable amount of time doing EXACTLY what you imply that they don't: reading through fundamental and other "OFF CHART" based data and info in order to understand what the driving or influencing forces in the market are today. I know I do. I do it every day. Because it helps. A LOT. For example, did you know the reason the primary driver in the euro being crushed the last month is? it's been the fact that the ECB reduced interest rates, particularly the amount they pay on the overnight carry rate, making it particularly attractive to fund a carry trade with. The carry trade itself is a fundamentally based TRADING principle, and this has been the largest segment from the institutional side of the markets to be plowing money into other currencies and away from the euro over the last month. So, who was the PRIMARY market participants who speicifcally were most responsible for the euro devaluation over the last month? That's right... "carry traders"... the ones who were trading based off of essentially fundamental info.

 

As far as "asset diversification" goes... your gonna first have to prove with a single shred of evidence how that is anything other than a hedge against stupidity, as no less than the investor, warren buffett has said.

 

And when it comes to holding trades...? Jim Rogers and George Soros, both are argueably the greatest traders alive today, are known to hold trades for months, even years. Trades. For years. Not investments, Trades. Soros built up a massive short position in the GBP to the point he broke the bank of england and pocketed a cool billion. He didn't make that trade as a "scalp", and by virtue of the fact that he was short...well, it's tough to argue that he was "investing" in the GBP.

 

So. Hmm. as I started with... I don't actually have any clue why you posted this. Nevermind that it is entirely wrong... i'm just wondering what the motivation was...?

 

Anyway. I'd like to know that at least I suppose...

 

TraderX

[MightyMouse 12]

i suppose it is a question of semantics. When does a trade become an investment? Seems that your argument is that a short can not be an investment.

 

There are US corporations who actively decide to invest in assets of other countries based on the stability of the country's currency relative to the US Dollar. These investments make the most sense when the money can be safely left in that country. Their investment in those assets are a short for the USD.These investments are in factories, buildings, etc. and not short term in nature.

 

For the purposes of these threads, I do not believe that anyone here is a forex investor. At best they are long term traders.

[ForexTraderX 10]

i suppose it is a question of semantics. When does a trade become an investment? Seems that your argument is that a short can not be an investment.

 

There are US corporations who actively decide to invest in assets of other countries based on the stability of the country's currency relative to the US Dollar. These investments make the most sense when the money can be safely left in that country. Their investment in those assets are a short for the USD.These investments are in factories, buildings, etc. and not short term in nature.

 

For the purposes of these threads, I do not believe that anyone here is a forex investor. At best they are long term traders.

 

Well, that's well thought out... and I agree in general with the sementics, but I do see a distinction, even if it is a debatable distinction.

 

When one makes an investment, the common understanding is that they are allocating capital into an entity of some sort that will be intrinsically worth more at a later time. Their "base unit of value" is their capital, ie their money. At a later date their investment will have appreciated, and they will get more of the base unit back when they sell it or use the cashflow or whatever. But, bottom line is, the entity they are devoting capital towards needs to increase or otherwise generate more of the base unit than they put into it initially, otherwise, they will have lost on that investment.

 

Currency trading howeer is a special case, because you have two "base units". So, you have no static frame of reference. If I go long aud/usd, and in 1 year, sell my aud and buy back my USD's.... and if the aud/usd went up, I will have more USD.

 

However, do i have more USD's because the USD itself decreased in value? or because the AUD went up. or both?

 

So, if somehow you could directly specify that in fact, I had more USD due 100% to the fact that the AUD went up in value, but the USD didn't go down, then I would say, OK, THAT'S A CURRENCY INVESTMENT!

 

However, it's impossible to say that, because you have no static frame of reference. Just like it's impossible to tell speed without distance. You can't just say "that car is going 60 fast" you have to say "it's going 60 KPH" IE 60 "static frame of reference"

 

Since all money is equaly considered a "base unit" to every other potential entity that could also be considered a storehouse of value, like real estate, crude oil, gold, stocks, a franchise, an airline company, a dot com start up....etc...

 

 

those things always go up or down in reference to the fixed amount of money paid for them. At least that is how the world looks at it for the most part.

 

But, money against money is a special case. No fixed frame of reference...so, in some view points, it would actually be "impossible" to "invest" in a currency, since you are always betting that one will lose value to the other, and in fact if one goes up, the other went down to it, and visa versa.

 

But other than this somewhat debateable semantical arguement.... the rest of the article is still... well, it could use some "editing"

 

TraderX

[MightyMouse 12]

i will agree when you are discussing currency vs currency. But, when you are investing in another country, you are also investing in that country's base currency and its currency stability is part of the decision to invest in that country. It doesn't seem to me to make sense to say that you are investing in that country and trading in their currency.

 

So, if I purchased a chain of Aussie liquor stores, earnings will come to me in AUD. As the asset appreciates, it will appreciate in AUD and benefit plus or minus with the inherent exchange rate risk, So, there is a possibility that I do end up with more AUD from my investment when all is said and done. When the asset is sold, I can decide to leave it there or bring it back to the USA.

[ForexTraderX 10]

i will agree when you are discussing currency vs currency. But, when you are investing in another country, you are also investing in that country's base currency and its currency stability is part of the decision to invest in that country. It doesn't seem to me to make sense to say that you are investing in that country and trading in their currency.

 

So, if I purchased a chain of Aussie liquor stores, earnings will come to me in AUD. As the asset appreciates, it will appreciate in AUD and benefit plus or minus with the inherent exchange rate risk, So, there is a possibility that I do end up with more AUD from my investment when all is said and done. When the asset is sold, I can decide to leave it there or bring it back to the USA.

 

Well, in this case, you really have two seperate transactions. One is a money to money "trade", and the other is a proper investment, because you have a static base unit to measure the financial success or failure of your Aussie bars in an absolute fixed term "how many AUD's."

 

One is an investment, one is a trade.

 

I'm really taking this from jack schwagger of market wizards fame. He ascertains that an "investor" by virtue of the act of investing is looking to profit via the appreciation of value of some entity that capital is allocated for. A trade or the act of trading does not need capital appreciation or an increase in value, because in a short trade, it is the loss of value that creates the profit. It is, in the most basic sense, a "bet". It needs something to intrinsically lose value for it to work. but an investment requires just the opposite.

 

So, by his inference, a trader is one who can and will go both long and short depending on the particular opportunity, where as an investor will always go long (warren buffett vs. george soros, for example)

 

Anyway. I don't wanna go round and round on this. I'm sure we both get it. i'm more surprised by the misinformation over all than this particular distinction of semantics.

 

What really got me was that the forex market is made up of primarily traders and investors. it was not created for such purposes, nor do they comprise even 50% of the motivation behind currency market transactions.

 

I can't remember ever seeing a mutual fund diversified in currencies of some sort for the sake of captureing exchange rate fluctuations.

 

Hedge funds, yes! but then...these are traders right...? not really investors.

 

Anyway, I see 2 transactions. One is a trade, other other an investment, the are distinct.

 

TraderX

[SIUYA 11]

When does a trade become an investment?

.

 

The answer to this Q for many is - when it starts to loose it becomes an investment.

 

IMHO

if you make an investment or a trade using cash, then aren't you really just substituting one asset class for another (even if its in the same currency).

So regardless of you being an investor or a trader all people are trying to do is offset risk v returns in a relative bet, the rest largely depends on liquidity, access to opportunity, risk appetite, time frame of investment, and probably most importantly the source of returns.

 

For me, an investor is one that uses something such as a machine, land, business etc; and operates and controls it to produce returns - the rest of us - even the long term mutual funds - are just traders.

When it comes to FX, then I would classify the market as speculators/traders and hedgers. They maybe hedging an investment or a trade in another country, otherwise its a trade, as there is no means of control or being able to operate the FX market so to speak.

 

I think about it this way........when you have cash in the bank, when does it become an investment as opposed to savings, or is it always a trade?

[Obsidian 10]

The answer to this Q for many is - when it starts to loose it becomes an investment.

...

I think about it this way........when you have cash in the bank, when does it become an investment as opposed to savings, or is it always a trade?

 

I would hear this often amongst stock traders :rofl:

 

Your money in bank (the currency you choose to keep) is also a trade, just without leverage

[SIUYA 11]

I would hear this often amongst stock traders :rofl:

 

Your money in bank (the currency you choose to keep) is also a trade, just without leverage

 

You dont need to use leverage to trade -

[zdo 20]

When I skimmed this article, I saw no actual instances of ‘investing’ - everything described was all trades. The differentiations were not between investments and trades. Instead they were really around perspectives from which trading decisions are made – fundamentals or technicals, etc etc and between planned or typical holding periods, Short time vs longer holding times, etc.

 

The criteria that makes an activity an investment is a pre-determined willingness to materially participate if necessary in a venture to make it work. EVERY other purchase or sale is just a trade. I'm having some difficulty imagining a situation where 'investing' is even possible in the FX mkts. Hedging in fx is a trade, not an investment... so while it may be a trade in support of an investment, by itself it can not be an investment ... Even sovereigns would have extreme difficulty pulling off ‘investing’ in the FX market.

[ForexTraderX 10]

When I skimmed this article, I saw no actual instances of ‘investing’ - everything described was all trades. The differentiations were not between investments and trades. Instead they were really around perspectives from which trading decisions are made – fundamentals or technicals, etc etc and between planned or typical holding periods, Short time vs longer holding times, etc.

 

The criteria that makes an activity an investment is a pre-determined willingness to materially participate if necessary in a venture to make it work. EVERY other purchase or sale is just a trade. I'm having some difficulty imagining a situation where 'investing' is even possible in the FX mkts. Hedging in fx is a trade, not an investment... so while it may be a trade in support of an investment, by itself it can not be an investment ... Even sovereigns would have extreme difficulty pulling off ‘investing’ in the FX market.

 

Well put. So, I'm just gonna assume the OP actually doesn't even trade the markets, or know much more other than "the forex market exists for something, and different people change money on it in some way"

 

Just so bizarre to me that someone would post up an article like this, as I see no benefit to it in any way, shape or form. I welcome the OP to defend their position however.