Trading Foreign Currencies

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Trading Foreign Currencies

In times of worldwide uncertainty trading foreign currencies can be profitable. Foreign currency, or Forex, traders buy one currency with another. By far the most commonly traded currency is the US dollar at eighty-five percent of all trades. Other major currencies are the Japanese Yen, Euro, British pound, Swiss franc, Canadian dollar, and Australian dollar. By far most traders trading foreign currencies will trade a major currency pair. These currencies trade in high volume and with high liquidity. This makes technical analysis of currency price movement more accurate and currency trading more profitable. Also the Forex news regarding the economies, monetary policies, and politics of these nations is readily available making fundamental analysis of these currencies more accurate. Forex markets are open throughout the business day around the world. The major markets are London, New York, and Tokyo. Thus trading occurs virtually around the clock. Traders use both fundamental and technical analysis to profit from trading foreign currencies. Candlestick pattern formations are as applicable to trading Forex as they are to stocks and commodities.

The Why of Trading Foreign Currencies

Individuals and companies engage in trading foreign currencies for two reasons. The first is international trade. By trading foreign currencies the buyer in an international contract is able to convert his currency for that of the seller and pay his bill. Those whose business requires dealing in foreign currencies are exposed to currency risk. This is the risk that Forex exchange rates will change between signing the contract and paying for the product or service. To reduce currency risk companies commonly buy currency or sell currency in anticipation of a change in currency rates. Another strategy to contain currency risk is buying calls or buying puts on one currency with another. The same strategies that international businesses use in trading foreign currencies are used for the second reason for trading, speculation in Forex market.

How Trading Foreign Currencies Works

There are two basic choices in managing currency risk. One is to seek to anticipate changes in currency rates and trade Forex accordingly. The other is to use the options market as a form of insurance against an adverse movement in currency rates. An example might be a Japanese company that buys US agricultural products.

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Trading Foreign Currencies

  1. 1. www.CandlestickForums.comwww.CandlestickForums.com TradingTrading ForeignForeign CurrenciesCurrencies
  2. 2. www.CandlestickForums.comwww.CandlestickForums.com In times of worldwide uncertainty tradingIn times of worldwide uncertainty trading foreign currencies can be profitable.foreign currencies can be profitable.
  3. 3. www.CandlestickForums.comwww.CandlestickForums.com Foreign currency, or Forex, traders buy oneForeign currency, or Forex, traders buy one currency with another.currency with another.
  4. 4. Before We Continue…Before We Continue… Click the links below to get yourClick the links below to get your FREE training materials.FREE training materials. Free Weekly Investing WebinarsFree Weekly Investing Webinars Don’t miss these free training events!Don’t miss these free training events! http://www.profitableinvestingtips.com/free-webinarhttp://www.profitableinvestingtips.com/free-webinar Forex Conspiracy ReportForex Conspiracy Report Read every word of this report!Read every word of this report! http://www.forexconspiracyreport.comhttp://www.forexconspiracyreport.com
  5. 5. www.CandlestickForums.comwww.CandlestickForums.com By far the most commonly traded currencyBy far the most commonly traded currency is the US dollar.is the US dollar.
  6. 6. www.CandlestickForums.comwww.CandlestickForums.com Other major currencies are the JapaneseOther major currencies are the Japanese Yen, Euro, British pound, Swiss franc,Yen, Euro, British pound, Swiss franc, Canadian dollar, and Australian dollar.Canadian dollar, and Australian dollar.
  7. 7. www.CandlestickForums.comwww.CandlestickForums.com By far most traders trading foreignBy far most traders trading foreign currencies will stick with a major currencycurrencies will stick with a major currency pair.pair.
  8. 8. www.CandlestickForums.comwww.CandlestickForums.com First of all these currencies trade in highFirst of all these currencies trade in high volume and with high liquidity.volume and with high liquidity.
  9. 9. www.CandlestickForums.comwww.CandlestickForums.com This makes technical analysis of currencyThis makes technical analysis of currency price movement more accurate andprice movement more accurate and currency trading more profitable.currency trading more profitable.
  10. 10. www.CandlestickForums.comwww.CandlestickForums.com Also the Forex news regarding theAlso the Forex news regarding the economies, monetary policies, and politicseconomies, monetary policies, and politics of these nations is readily availableof these nations is readily available making fundamental analysis of thesemaking fundamental analysis of these currencies more accurate.currencies more accurate.
  11. 11. www.CandlestickForums.comwww.CandlestickForums.com Forex markets are open throughout theForex markets are open throughout the business day around the world.business day around the world.
  12. 12. www.CandlestickForums.comwww.CandlestickForums.com The major markets are London, New York,The major markets are London, New York, and Tokyo.and Tokyo.
  13. 13. www.CandlestickForums.comwww.CandlestickForums.com Thus trading occurs virtually around theThus trading occurs virtually around the clock.clock.
  14. 14. www.CandlestickForums.comwww.CandlestickForums.com Traders use both fundamental and technicalTraders use both fundamental and technical analysis to profit from trading foreignanalysis to profit from trading foreign currencies.currencies.
  15. 15. www.CandlestickForums.comwww.CandlestickForums.com Candlestick pattern formations are asCandlestick pattern formations are as applicable to trading Forex as they are toapplicable to trading Forex as they are to stocks and commodities.stocks and commodities.
  16. 16. www.CandlestickForums.comwww.CandlestickForums.com Individuals and companies engage inIndividuals and companies engage in trading foreign currencies for two reasons.trading foreign currencies for two reasons.
  17. 17. www.CandlestickForums.comwww.CandlestickForums.com The first is international trade.The first is international trade.
  18. 18. www.CandlestickForums.comwww.CandlestickForums.com By trading foreign currencies the buyer in anBy trading foreign currencies the buyer in an international contract is able to convert hisinternational contract is able to convert his currency for that of the seller and pay hiscurrency for that of the seller and pay his bill.bill.
  19. 19. www.CandlestickForums.comwww.CandlestickForums.com Those whose business requires dealing inThose whose business requires dealing in foreign currencies are exposed toforeign currencies are exposed to currency risk.currency risk.
  20. 20. www.CandlestickForums.comwww.CandlestickForums.com This is the risk that Forex exchange ratesThis is the risk that Forex exchange rates will change between signing the contractwill change between signing the contract and paying for the product or service.and paying for the product or service.
  21. 21. www.CandlestickForums.comwww.CandlestickForums.com To reduce currency risk companiesTo reduce currency risk companies commonly buy currency or sell currency incommonly buy currency or sell currency in anticipation of a change in currency rates.anticipation of a change in currency rates.
  22. 22. www.CandlestickForums.comwww.CandlestickForums.com Another strategy to contain currency risk isAnother strategy to contain currency risk is buying calls or buying puts on onebuying calls or buying puts on one currency with another.currency with another.
  23. 23. www.CandlestickForums.comwww.CandlestickForums.com The same strategies that internationalThe same strategies that international businesses use in trading foreignbusinesses use in trading foreign currencies are used for the second reasoncurrencies are used for the second reason for trading, speculation in Forex market.for trading, speculation in Forex market.
  24. 24. www.CandlestickForums.comwww.CandlestickForums.com Looking at the example of a company whichLooking at the example of a company which contracts to buy foreign products orcontracts to buy foreign products or services we see there are two basicservices we see there are two basic choices in managing currency risk.choices in managing currency risk.
  25. 25. www.CandlestickForums.comwww.CandlestickForums.com One is to seek to anticipate changes inOne is to seek to anticipate changes in currency rates and trade Forexcurrency rates and trade Forex accordingly.accordingly.
  26. 26. www.CandlestickForums.comwww.CandlestickForums.com The other is to use the options market as aThe other is to use the options market as a form of insurance against an adverseform of insurance against an adverse movement in currency rates.movement in currency rates.
  27. 27. www.CandlestickForums.comwww.CandlestickForums.com An example might be a Japanese companyAn example might be a Japanese company that buys US agricultural products.that buys US agricultural products.
  28. 28. www.CandlestickForums.comwww.CandlestickForums.com The company agrees to a price for soybeanThe company agrees to a price for soybean oil.oil.
  29. 29. www.CandlestickForums.comwww.CandlestickForums.com They expect to pay in US dollars when theThey expect to pay in US dollars when the shipment arrives in Japan.shipment arrives in Japan.
  30. 30. www.CandlestickForums.comwww.CandlestickForums.com In the time it takes to package the shipmentIn the time it takes to package the shipment and send it to Japan the dollar ralliesand send it to Japan the dollar rallies versus the Yen and now the Japaneseversus the Yen and now the Japanese company owes more in Yen than itcompany owes more in Yen than it expected.expected.
  31. 31. www.CandlestickForums.comwww.CandlestickForums.com It could have avoided this situation byIt could have avoided this situation by purchasing dollars with Yen as soon aspurchasing dollars with Yen as soon as the contract was signed.the contract was signed.
  32. 32. www.CandlestickForums.comwww.CandlestickForums.com However, if the Yen had rallied, they wouldHowever, if the Yen had rallied, they would have missed out on an opportunity to payhave missed out on an opportunity to pay less in Yen than expected by the contract.less in Yen than expected by the contract.
  33. 33. www.CandlestickForums.comwww.CandlestickForums.com Here is where options trading enters theHere is where options trading enters the picture in trading foreign currencies.picture in trading foreign currencies.
  34. 34. www.CandlestickForums.comwww.CandlestickForums.com The Japanese company, in this situation,The Japanese company, in this situation, can buy calls on the US dollar with Yen.can buy calls on the US dollar with Yen.
  35. 35. www.CandlestickForums.comwww.CandlestickForums.com The options contract price for dollars will beThe options contract price for dollars will be the same as the contract price for thethe same as the contract price for the product they are buying.product they are buying.
  36. 36. www.CandlestickForums.comwww.CandlestickForums.com If the dollar rallies significantly the companyIf the dollar rallies significantly the company will execute the options contracts involvedwill execute the options contracts involved and buy dollars at the old, now lower,and buy dollars at the old, now lower, price to pay their bill.price to pay their bill.
  37. 37. www.CandlestickForums.comwww.CandlestickForums.com However, if the Yen rallies they will let theHowever, if the Yen rallies they will let the contracts expire and simply buy dollarscontracts expire and simply buy dollars with the now stronger Yen and pocketwith the now stronger Yen and pocket their currency trading profits.their currency trading profits.
  38. 38. www.CandlestickForums.comwww.CandlestickForums.com Using Forex exchange trading trader canUsing Forex exchange trading trader can profitably speculate in Forex trading byprofitably speculate in Forex trading by astute fundamental analysis and use ofastute fundamental analysis and use of Candlestick patterns to predict relativeCandlestick patterns to predict relative currency price movements.currency price movements.

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