While the modern-day forex market has been influenced and shaped by the digital age, it can actually trace its roots back to the Babylonian period.
Back then, people would exchange corporeal currencies and items as tender, including gold and similar precious metals. Today, the forex market is far removed from this rudimentary entity, with international currency trades now largely carried out online and through virtual brokerage platforms.
This betrays the way in which technological advancement and innovation has continued to shape the global forex market. But what precise technologies have taken hold, and how have they created the dynamic marketplace that we see today?
Transitioning Online – The Key Innovations
When forex market trading transitioned online, brokerages evolved into comprehensive online platforms that offered education, insightful analysis and real-time order execution in a single, easily accessible platform.
Almost immediately, this ensured that the most purposeful trading tools were accessible to aspiring and part-time traders, while also allowing for the development of new tools and software that could be used across the board.
By also transitioning from a corporeal order processing system to an online one that was powered by computers, the forex market also delivered far faster transactional speeds. This leveraged increased computer power and capabilities to collate (and analyze) huge swathes of data effectively in real-time.
As a result, today’s traders can also handle quotes for equities, futures and interest rates alongside currency pairs simultaneously, all through a single and customisable online interface.
Algorithms have also evolved and been deployed to deliver accurate, live market prices to traders. Historically, such pricing information tended to be the preserve of corporeal forex brokers, but now anyone with an online forex trading account can access real-time prices as and when required.
What Opportunities Have Such Technologies Unlocked?
Another key innovation revolves around the rise of so-called “forex robots”, which describe automated trading systems that are essentially subsets of algorithmic trading.
Automated and algorithmic trading has become increasingly prevalent as technology has continued to evolve through the digital, with sophisticated computer programs now leveraged to create buy and sell orders and automatically submit a potentially high volume of orders.
This has not only unlocked short-term trading strategies like scalping and day trading for part-time investors (both of these involve executing a relatively high number of orders during a 24-period and ensuring that all positions are closed before the end of the trading day), but studies also show that almost 90% of modern-day forex trades are now done using dedicated robots.
Similar systems have also evolved over time, unlocking additional opportunities like arbitrage trading. By deploying this strategy, traders aim to generate a profit from temporary market inefficiencies or discrepancies, such as live pricing errors and inconsistencies in the pricing information published by brokers.
These create a limited window of opportunity for traders to act, enabling them to secure small but incremental profits from a series of small, real-time orders.
Ultimately, arbitrage software for forex trading has become increasingly popular over time, while helping to drive the marked growth of the sector’s daily trading volumes since 2016.
To provide some context, approximately $5.1 trillion was traded every single day on the global FX market in 2016. This sum now exceeds $6.6 trillion, highlighting precisely how continued advancement and innovation has continued to drive higher levels of forex market participation.
What Role Has Artificial Intelligence (AI) Played?
Clearly, the collation and analysis of even unstructured datasets is playing a key role in the evolution and sophistication of the global forex market, with artificial intelligence (AI) central to such trends.
Certainly, the use of AI and associated subsets like machine learning and predictive analytics offer several advantages in FX trading, especially in terms of informing accurate and profitable traders.
Through the use of predictive analytics, for example, it’s possible to arrive at more accurate market conclusions through the collation of larger quantities of data, which can be analyzed effectively in real-time and with minimal errors.
This ensures that traders are subsequently able to focus their efforts on developing more effective and data-driven strategies, while still allowing for human decision making and the application of determinism.
Japanese company Nikkei has already showcased how predictive analytics can improve results and insights in the forex market.
More specifically, the business leveraged AI to accurately predict the next month’s exchange rate in a dollar-yen derby held every three months. To achieve this, the predictive analytics program accessed various data sources (including company publications, market movements and industry trends drawn from wider and unstructured resources), before measuring this data against commodity prices.
The results were incredibly accurate and close to what ultimately occurred, and similarly sophisticated AI models continued to be developed and deployed globally.
Ultimately, AI represents the next frontier in technological advancement within the forex market, as this space continues a journey that has accelerated rapidly since the beginning of the digital age.