Understand currency, whether as a trader or investor

I didn’t fully appreciate how movements in these markets could affect our daily lives until I started trading currencies full time. The most obvious, of course, is when we go abroad and have to buy foreign currency. Regular travelers are probably more aware of fluctuations in the currency markets and the increase in visitors to the US around Christmas (due to a weaker dollar) showed just how advanced we are. The exchange rate was nearly $2 a pound, which contrasted sharply with Christmas 2005 when I was lucky to get $1.7 a pound. This may not seem like much when exchanging a few hundred pounds but the difference is extraordinary if you are hoping to buy real estate or other dollar assets (including US stocks). For example, a $200,000 house in December 2005 would have cost £117,647 while the same house a year later would have cost £101,010, a difference of about £16,000. The same principle applies to any other currency whether in Europe or internationally.

When buying an asset abroad, there are of course specialized forex brokers with whom it is possible to either buy or sell a forward currency, thus removing uncertainty and volatility in the value of the asset, by securing a suitable rate. Basically, a price is agreed upon and then set for any period, sometimes up to two years, and the price is usually confirmed with a 10% deposit. The balance is generally required only on the date of delivery of the contract. Remember that this is a contract and there are severe penalties for anyone who fails to deliver the funds on the required date. In this way exposure to fluctuations in the markets can be removed and is a technique commonly used by those who buy real estate, boats and other major assets in foreign currencies. In addition to these futures contracts, it is also possible to hedge against market volatility using currency options. You may already own a foreign currency asset that you are trying to sell, but it takes time. You consider that currency movements may be unfavorable to you in the next few months, so you hedge (or take out some insurance) with a currency option.

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Access to the foreign exchange market by ordinary investors and consumers has been possible, in part, due to deregulation, but mainly due to massive changes in technology. When I started trading futures 15 years ago, I had a monitor and satellite data feed, but I had to call my broker to get a quote. By the time he spoke to the broker on the floor of the exchange, the trading opportunity had usually disappeared. Today all that is required is a laptop and a broadband connection. The data arrives in real time and trading is done with a click of the mouse. The disadvantage of this speed is that I can make mistakes, as I did when closing a wrong contract!

Currencies are a great market to trade in as they are available 24 hours a day, wherever you are in the world, and are only closed from Friday night to Sunday evening. Even if you have no intention of trading, or if you own an offshore asset or are considering or buying one, you should at least have an idea of ​​which way a particular currency is heading from a currency pair chart. These charts are widely available on the internet and with a little time and effort it should be clear which direction the market is likely to move. The currency markets are some of the most trending in any financial market. Once a trend is identified, the movement tends to continue for some time, and it will only change direction with some major news announcement or a fundamental shift in the world’s economies.

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