Tuesday, February 19, 2013

Using Currency Rates to Make Money

The most powerful traders in the world have been using currency rates to make money for decades but average joes can as well with a little bit of understanding. While the deep pockets that play in forex markets can tend to push out smaller traders at will there are other markets where foreign exchange knowledge can come in very handy.

Markets Where Currency Rates Impact Trading

If a retail trader can not reasonably expect to make money trading in forex markets, where else might this knowledge be useful? It turns out in fact that the interconnected-ness of global markets has made it such that changes in currency rates impacts trading results in markets everywhere. It does not really matter if you trade futures in Chicago or stocks in New York or Gold in London. Wherever assets are priced in some form of currency, exchange rates will most certainly play a role.

Global Foreign Exchange Creates Rising Tides in Risky Assets

Money is moved so fast between not only assets, but also countries these days - such that literally a ripple effect is observed when foreign exchange markets cool on one currency or heat up in another. Followers of global markets have observed this phenomena for a number of years now with the result being greater correlation amongst risk-based assets. Basically it almost as though as global sentiment becomes more favorable piles of money appear out of mattresses and swell the market - lifting nearly all asset classes at once. Similarly when confidence tanks money leaves the market as though absorbed by a sponge.

So How Does a Retail Trader Take Advantage?

There are a few ways a retail trader can try to capitalize on forex movements. The most obvious way would be to attempt to fast-follow changes in the currency markets themselves - but as previously mentioned this strategy is fraught with peril. Better ways to capitalize on forex movements with limited capital (in order of declining initial stake) can include leveraged ETFs, index options contracts, and binary options (more info). Each of these investments carries their own specific sets of risks - but because they are insulated somewhat from the crashing waves of the foreign exchange markets (and their dreaded margin calls) the risks can be (to a much greater extent) managed. An investor's ability to make money using currency rates then becomes more a story of how well the trader understands and correctly reacts to changes in global markets and less a story of how big a capital stake they start out with.

For a more in depth discussion of the complexity of currency rates and trading forex, visit http://forex-signals-trading.info.

Other day trading resources / tutorials:
On Options Trading: http://optionstradingtutorial.blogspot.com
On Leveraged ETFs: http://leveraged-etf.info