Concepts for trading currencies are simple when the are broken down, and the addition of currency-focused exchange traded funds (ETFs) has made investing in currencies and their futures even easier.
Foreign exchange currency trading is commonly called forex trading. In 2007, the forex market garnered $3.2 trillion dollars worth of transactions each day. This makes the forex market the quiet giant of finance, dwarfing over all other capital markets in its world, explains Kathy Lien and Boris Schlossberg for Investopedia.
When entering the currency market, there are eight major currencies worth trading, which give you the best over- or under-valued opportunities. The eight countries that make up the currency trading market are the United States, the Eurozone (Germany, France, Italy and Spain), Japan, United Kingdom, Switzerland, Australia, Canada and New Zealand.
Some of the key points to currency trading are:
- When trading currencies, yield drives return.
- The forex allows huge leverage; often as high as 100:1 – which means that you can control $10,000 worth of assets with as little as $100 of capital. Remember, leverage works both ways, though.
- Since currency values never stay the same, the carry trade became a popular theory. Carry traders hope to earn not only the interest rate differential between the two currencies, but also look for their positions to appreciate in value.
- Interest rates matter – a lot. Becoming familiar with the economics of the country in which the currency you are trading holds will help you understand when inflation is looming and when opportunity is knocking.
Currency trading is an area of the market that was once inaccessible to most investors. With the advent of electronic trading and the ETF, it has become easy for individual investors to gain access and diversity of this area of the market, the forex.
- PowerShares DB G10 Currency Harvest (DBV): down 2.9% year-to-date; holds a mix of long and short futures positions among 10 currencies: U.S. dollar, euro, Japanese yen, Canadian dollar, Swiss franc, British pound, Australian dollar, New Zealand dollar, Norwegian krone and the Swedish krona.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.