Can You Use Currency Trading As Part Of Your Investment Portfolio?

Swipe your credit card in another country, when a organization pays it's business

associate in another country or a ticket in US$ and purchases it with a EUR-based credit, one or more forex transactions transpire. In a few words the Foreign Exchange market is the virtual space where money are transacted.In a globalized world, where annual goods trade for western countries (not counting services) is in the 1,000 Billion range, it means the Forex market commands is the number one over the counter financial markets.

Do people make money in Currency Trading? Many who have had the slightest of exposure to this industry would have asked themselves this question. This is one of the best examples. In 1992 the British Pound exchange rate versus other European currencies was fixed by the bank of England. In order to maintain that value, the Bank set their interest rate pretty high, comparable to the rate in Germany. This was not fit however for the economic conditions prevailing in England. Germany had a growing economy and the interest rates were used to reduce pressure of inflation. Britain was in the opposite situation, with its economy in the doldrums. A Hungarian immigrant spotted this situation, figured out that it was unsustainable and sold short 10 billion pounds. He made 1.1 Billion US$. His name is George Soros.

Situations like the one described before are not a black swan effect of the past. Media is full of incidents of currencies over and under-prices being brought back to its true value; in the recent European crisis currency traders got the value of the Euro down when it was overvalued (from 1.3654 on April 14 2010 to 1.1925 on June 8, 2010, - 12.7%) and back up again when it was oversold (from 1.1925 on June 8, 2010 to 1.3276 on August 6, 2010, + 11.3%). Central bank interference to get to a desired value haven't disappeared either, as the late interventions of the central bank of Japan and the central bank of China indicate.

Estimating a fall or an increase is not a question of chance alone. Techniques and methods based on technical analysis enable you to assess near term variations of a currency, while fair value measures, such as the Big Mac Index, help to find currencies that are away from its underlying value and that will converge to that price within a reasonable period of time.

Can You Use Currency Trading As Part Of Your Investment Portfolio?

By: Jon Jacoba

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