Forex Trading As A Tactical Vehicle Of Investment

Every time somebody makes a credit card purchase in a foreign country

, when a company pays it's outsource provider overseas or a ticket in US$ and gets it with a EUR-based credit, one or more currency exchange transactions take place. In its rudimentary form the Forex market is the virtual space where currencies are bought, sold and their prices set.In a globalized world, where fiscal goods trade for developed countries (not including services) is in the 1,000 Billion range, it means the Forex market commands one of the most liquid over the counter financial markets.

Is the foreign exchange trade lucrative? This is one question that many of us have been asking ourselves recently. Here is one of the largest forex hauls in history. 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 fixed their interest rate at a high level, 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. Englands economy on the other had was in trouble. A Hungarian immigrant identified this situation, figured out that it was not going to last for long and sold short 10 billion pounds. He made 1.1 Billion US$. His name is George Soros.

These are not one off incidents and have repeated itself over time. Media is filled with incidents of currencies over and under-prices being brought back to fair value; in the more recent crisis in Europe 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 acceptable value have not disappeared either, as the late decisions of the central bank of Japan and the central bank of China show.

Estimating currency movements is not a question of chance alone. Techniques and methods such as technical analysis enable you to assess immediate variations of a currency, while global indicators, such as the Big Mac Index, assist to identify currencies that are further away from its intrinsic value and that will merge to that price within a reasonable period of time.

Forex Trading As A Tactical Vehicle Of Investment

By: Jon Jacoba

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