Posts Tagged "Individual Investors"

Buying and Selling Currencies

Posted by Admin on Aug 17, 2010 in Articles | 0 comments

Trading opportunities in the forex market deserve serious consideration as a diversification strategy for your portfolio.

While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.

Until recently, large international banks dominated the foreign exchange market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.

In this market you may buy or sell currencies. The objective is to earn a profit from your position. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are virtually identical to those found in other markets, so the transition for many traders is often seamless.

Here are an example of how forex trading works. Say, a trader purchases 10,000 euros in the beginning of 2004 at the EUR/USD rate was .9600. In May of 2006 the trader exchanges his 10,000 euro back into US dollar at the market rate of 1.1800. In this example, the trader earned a gross profit of $2,200.

Currencies are quoted in pairs, such as EUR/USD or USD/JPY. The first listed currency is known as the base currency, while the second is called the counter or quote currency. The base currency is the ‘basis’ for the buy or the sell. For example, if you BUY EUR/USD you have bought euros (simultaneously sold dollars). You would do so in expectation that the euro will appreciate (go up) relative to the US dollar.

EUR/USD

In this example euro is the base currency and thus the ‘basis’ for the buy/sell. If you believe that the US economy will continue to weaken and this will hurt the US dollar, you would execute a BUY EUR/USD order. By doing so you have bought euros in the expectation that they will appreciate versus the US dollar. If you believe that the US economy is strong and the euro will weaken against the US dollar you would execute a SELL EUR/USD order. By doing so you have sold euros in the expectation that they will depreciate versus the US dollar.

GBP/USD

In this example the GBP is the base currency and thus the ‘basis’ for the buy/sell. By doing so you have bought pounds in the expectation that they will appreciate versus the US dollar. If you believe the British are going to adopt the euro and this will weaken pounds as they devalue their currency in anticipation of the merge, you would execute a SELL GBP/USD order. By doing so you have sold pounds in the expectation that they will depreciate against the US dollar.

USD/JPY

In this example the US dollar is the base currency and thus the ‘basis’ for the buy/sell. If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order. By doing so you have bought U.S dollars in the expectation that they will appreciate versus the Japanese yen. If you believe that Japanese investors are pulling money out of U.S. financial markets and repatriating funds back to Japan, and this will hurt the US dollar, you would execute a SELL USD/JPY order. By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.

USD/CHF

In this example the CHF is the base currency and thus the ‘basis’ for the buy/sell. If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order. By doing so you have bought US dollars in the expectation that they will appreciate versus the Swiss Franc. If you believe that due to instability in the Middle East and in U.S. financial markets the dollar will continue to weaken, you would execute a SELL USD/CHF order. By doing so you have sold US dollars in the expectation that they will depreciate against the Swiss franc.

Defining Currency Trading!

Posted by Admin on Jul 17, 2010 in Articles | 0 comments

The currency of a nation is of great importance to the financial growth of that country. Every currency has a value relative to the other currencies on the planet. Thus currency trading can be described as the trade that uses the purchase and sale of large quantities of currency to leverage the shifts in relative value into profit.

Also it can be stated that currency trading provides really good opportunities and percentage returns, which is virtually impossible in a low leverage market.

Until recently, the currency trading market was quiet closed to the small investors. Banking conglomerates and large multinationals were the main movers of this market place. But in the recent years, however, new technologies have opened the doors to investors of all stripes to participation in the currency trading.

Thus making it difficult to miss the enormous benefit of this ‘new’ market for the individual investors. Higher returns with lower risk, given the same amount of market knowledge have a very small downside.

Why Currency Trading:

There are two reasons the relative value of a currency fluctuates. The first is because of a real market. The outside investors or visitors, who wish to buy things within a country, are forced to convert their domestic currency into the currency of the country they are buying within.

In similar terms, as money leaves the country, people must sell their currency for the foreign currency they will need to spend or invest abroad. Thus currency trading comes into picture.

The second force for currency fluctuation is speculation for currency trading. As investors feel a given currency will act strongly or weakly, they will buy or sell accordingly. This speculation can have drastic consequences on a national currency and consequently on a country’s economy.

To understand better we can take the help of an example. During the East Asia Crisis in 1997, as nations in Asia began facing economic downturns, speculators used currency trading to realize enormous profits and in the view of many analysts, it helped to exacerbate the problem.

Currency Trading, in many aspects, has many real benefits over equity trading like the stock exchange. The spreads for currency trading are extremely low, making the cost to a trader very low as well.

The volatility of the currency market is extremely high, which means that a trader dealing with currency trading can generate enormous return on a given exchange. The ratio of volatility to spread can be said to be approximately 500:1 for the Currency Trading market, as compared to 100:1 for even the most ideal of stocks.

The Internet has made currency trading possible for ordinary people to trade currencies right from the comfort of their home. Initially the banks and financial brokers performed currency trading only. Online currency trading enjoys the best liquidity in the world and the trades are worth more than that on several stock exchanges of the world put together.

Actually, the orders for currency trading on the online source surpass that of the bond and stock markets put together.
The main reason for currency trading by the means of the Internet is hedging for speculative purposes where people make profits worth billions of dollars in a matter of a few minutes or hours. Moreover, the currency trading market operates continuously throughout the world except on holidays.

Always keep in mind that as a currency trader, you must buy a currency whose value can rise and sell the currency, which can depreciate. You must keep purchasing for long intervals, that is buy at a low price and then sell the same at a higher price.

Having a short position implies selling a currency that can fall and then purchasing it at a lower price. Most trading is speculative bases on events that can happen.

However, political developments also influence the trend of the currency markets. As a wise trader in currency trading, you must study the macro and micro economic factors that influence currency markets across the world.

This includes a detailed study and analysis of the inflation rate, the rather fiscal and monetary policies, and the interest rates of that particular country.

Thus currency trading is an important aspect of the nations financial growth.