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CURRENCY SPREAD TRADING
The foreign exchange (currency, or fx markets) are among the most heavily traded public markets in the world. For a spread trader, they offer 24-hour action - and a veritable gold-mine!
There are almost 200 different currencies today – none of which is backed by anything other than a promise from the relevant authorities to exchange a note – for another one on demand! This is called ‘fiat’ money, as opposed to asset-backed (traditionally gold and silver) money. In a sense, we are trading thin air! But that doesn’t stop banks, financial institutions, international conglomerates, private individuals from seeking to exploit them. That is what we are doing as currency spread traders.
If you are interested in the fascinating history of currency, you could do worse than start at wikipedia! The history of the Sterling is particularly long and dramatic.
But as financial spreadbet traders, we seek to profit from the movements in the exchange rates. Any currency is measured against another currency in what we call “currency pairs”. So what factors go in to discovering the value of one currency against another?
That is a very big question! Whole sections of the economics ‘profession’ is devoted to understanding how currencies are valued. In the end, the market is the final arbiter of value, which is constantly changing. And luckily for us, technical indicators such as Fibonacci Retracements and Projections, and Elliott Wave Analysis tend to work beautifully in the major markets. As youknow, I use these useful tools a great deal.
Of course, some currencies are artificially ‘pegged’ by the authorities to the one currency considered for many years to be the basic standard of value – the US Dollar.
The currency pairs we are interested in as traders are the free currencies of the major trading nations/blocs. These exchange rates exhibit huge swings and offer traders the opportunity to make serious profits. Here is a list of the pairs of majors I trade, in order of importance:
Euro/Dollar
British Pound/Dollar (known as Cable, for historical reasons)
JapaneseYen/Dollar
Swiss Franc/Dollar
And the minor pairs: Aussie/US. Canadian/US
Because the Euro and Sterling offer plenty of action, I confine myself most of the time to these two. It certainly beats trading stocks, where you not only have to follow a whole raft of them, but worry about unforeseen developments within each company. I like to keep things very simple!
The other great advantage in currency spread trading the majors is that spreads between buy and sell prices are very tight. Wide spreads work to reduce our profits and increase our losses!
During times of economic stress, there is generally a flight to the Swiss Franc, as that nation is considered as is Gold – a store of value, since the country generally keeps a surplus. Nations with huge debts (such as the USA, UK) are considered risky, and their currencies generally weaken.
But as I write this in 2010, despite the parlous state of the US economy, the Dollar has rallied against most currencies! How could that happen?
That is where good technical analysis comes into play. I became bullish on the dollar late 2009 when there wasn’t a dollar bull in sight. Now, six months later, there isn’t a dollar bear to be found, and guess what? The dollar is falling! The market exists to confound the majority! To be successful, you need to trade against the herd, at least in the early stages of a move.
I have methods that can help line you up with the correct trading stance – that mostly goes against consensus opinion. This is what makes currency spread trading so exciting!