The foreign exchange market is among the oldest financial markets in history. Although the approach has changed over time, moving from trading raw materials and livestock to digital currencies, the concept remains the same. Technological advancement is one of the main drivers that has transformed the forex world into what it is today. These fintech additions aim to reduce human involvement while boosting productivity. This article will look at the top fintech innovations shaping the forex world.
The Limitations of Pre-Fintech Forex Trading
Before fintech innovations, forex trading was slow and available only to the banks and the wealthy, so there was very little room for retail traders. Knowing these limitations shows how far the forex industry has progressed with the adoption of advanced financial technologies.
Manual Trading
Prior to fintech, traders relied purely on personal instincts and limited data. Researching and analyzing historical trends and charts required major expertise, relied on more human resources, and was more time-consuming, making the analysis liable to human error.
Reliance on Brokers
As a trader in a traditional forex setting, you often have to work with physical brokers to place or execute trades. The drawback here is that the execution of your trade may suffer delay, your market insight is limited to the expertise of your broker, and the fees may be exorbitant. With such fees, your profit margin may not be encouraging.
Uneven Market Access
Unlike today’s world, where almost anyone can get into forex, traditional forex settings in the past had barriers that prevented laypersons from trading. Only financial institutions and banks could access trading exposures, meaning that interested individuals had to be wealthy or possess substantially large investment capital to trade.
Slow Transactions and Static Trading Schedules
Time is an important aspect of your economic activities, and with traditional trading, the use of manual procedures and intermediaries impedes trading speed. Forex activities also had to be carried out during business hours, unlike the round-the-clock access traders enjoy today.
Fintech Innovations
Let’s take a look at a number of fintech innovations shaping the forex world.
Artificial Intelligence
In recent years, developments in machine learning and prompt engineering have seen artificial intelligence transition from professional use to everyday use. AI is now accessible to anyone with an internet connection, offering a much bigger data set for machine learning. In forex, artificial intelligence has been used to extrapolate relevant data from a wide variety of sources, such as price patterns, correlations, and economic indicators. These indicators, gathered over months or even years, can be readily assessed and analyzed by AI in a matter of seconds.
Trading bots are another application of artificial intelligence in forex. Here, predetermined criteria are used to identify profitable market signals and execute trades with minimal supervision. This means you can set up a bot to recognize indicators and rules you’ve set up, and it will make the trade for you when your criteria are met, which is perfect for ensuring a better work-life balance.
Thanks to fintech innovations via artificial intelligence, you can get unbiased advice devoid of human emotion. AI analysis can show you the potential risk of every trade so you are prepared ahead of time should things not go according to plan.
Mobile Trading Apps
Traders had to utilize brick-and-mortar institutions to execute trades (think “Wolf of Wall Street” or any scene set on a trading floor in New York or London). Now, however, you can execute trades virtually anywhere, thanks to mobile trading apps. All you need is a mobile device, a strong internet connection, and a trading platform to experience seamless trading executions. The mobile trading app innovation brought accessibility, convenience, and technological advancement. Research proves that the rise in the number of forex traders is correlated with the development of trading platforms for mobile app users.
Cryptocurrency and Blockchain Technology
Incorporating blockchain technology into forex trading transactions adds security, transparency, and efficiency, especially for international transactions. This innovation birthed the rise of decentralized trading platforms that reduce the need for intermediaries, offering lower-cost trading opportunities. Also, it is not strange to see crypto-fiat trading pairs, as cryptocurrencies are often deployed as alternative trading exposures on forex trading platforms.
Social Trading Opportunities
Social trading platforms are a fintech innovation that allows traders to interact with other traders. These platforms aim to build a community of traders across various expertise levels where market insight can be shared for profitable trades. Social trading platforms also provide opportunities for copy trading, where less experienced traders copy the trades for experienced and successful traders.
The Use of Robo-Advisors
We could say robo-advisors are your virtual financial consultants only as bots, but they go beyond that. Robo-advisors assess your risk tolerance and the objective of your investments to help you rebalance your portfolio. They do this by automating the process of investing and financial planning and can help reduce the cost of frequent transactions by balancing risk with reward.
Benefits of Fintech Innovation in Forex
- Increased access to forex trading opportunities because you can live and trade from anywhere in the world.
- Better efficiency in time, financial resources, and effort because AI and machine learning mean you have bots and robo-advisors to help analyze your data quickly.
- Improved security for users’ personal details and funds. Online trading platforms take data privacy and cyber security very seriously, often hiring large teams of experts to ensure user safety.
- Trading services customized to your risk level. Online trading means you get to decide how much money you want to put in and where to place it.
Possible Drawbacks of Fintech Innovations in Forex
1. Regulatory and Compliance Issues: The forex industry has regulations that differ across jurisdictions. Doing business despite these regulations (which may also change over time) can be daunting for fintech in the forex industry, as it can incur costs and waste time.
2. Cyber Security Risks: Fintech innovations rely heavily on the internet to operate, and due to the collection of user details and funds, they are usually targets for cyber crimes. Successful cyber-attacks can lead to loss of funds for users and the company, as well as taint the fintech company’s reputation.
3. Digital Adoption: Technology is great only if you know how to deploy the right tool correctly and at the right time. Although every trader may not initially understand how fintech innovations in forex work, they can develop this skill over time through social interactions with experienced traders, reading, and staying updated about new inventions. Fintech platforms also develop customer trust through transparency and great customer service, which means they help bring new traders to the digital space.
4. Unpredictability: Fintech innovations in forex often use machine language and preset algorithms to produce outcomes. However, the forex market is highly volatile and may result in losses if an algorithm fails to read a market situation accurately.
How Fintech Affects Forex Trading
Fintech innovations in forex positively shape our trade by offering unbiased analysis, more secure transactions, and automated trades, improving financial and time efficiency. However, these advantages come with certain drawbacks, like differing regulations across several jurisdictions, cyber security threats, technical challenges, market unpredictability, and the issue of adoption.
Spencer Hulse is the Editorial Director at Grit Daily. He is responsible for overseeing other editors and writers, day-to-day operations, and covering breaking news.
