The foreign exchange currency market (known as Forex) can be rather intimidating. It is a highly speculative nonstop cash market where treaties of nations are simultaneously bought and sold. Unlike stock exchanges, the Forex is an interbank, over-the-counter (OTC) market; therefore, there is no single universal exchange for any specific currency pair.
There are dozens of online forex trading systems being marketed today on the Internet. Some website sales pages claim their forex trading robot will let you automatically make money on a consistent basis. Others want to sell you so-called insight into their method of reading charts and signals that will give you an advantage in capturing gains on your trades.
To understand the complexities of Forex one should have at least cursory knowledge of not only how to read a variety of charts, but also be able to interpret the major currency pairs such as EUR / USD. The ultimate goal of forex trading is to reap as many PIPs as possible … indeed, a most feasible sounding objective.
Actually, a PIP is simply the smallest price change that any given exchange rate can make. Since most major currency pairs are priced to four decimal places (the Japanese yen is calculated only to two decimals), the smallest price change is that of the last decimal point. For most currency pairs this is the equivalent of 1/100 of one percent, which is one basis point.
Only recently has the average investor been allowed to participate in Forex. Historically, the foreign exchange currency market has been the exclusive playground of major institutional banks whose activity has driven the total daily trading volume to well over 3.0 trillions dollars.
Recently, the ability to trade online has caused the retail market to experience explosive growth … sometimes in large part due to the significant losses suffered by millions of investors in other types of securities such as global equities.
Unfortunately, it is estimated that 90 to 95 percent of all individual retail traders lose much, if not all, of their investment capital in the Forex. This is due primarily to their inability or unwilllingness to develop a sound strategy of risk management. The temptation to make elusive, easy money typically results in failure.
An alternative method of forex investing available to the inexperienced retail trader is the currency ETF, which is an Exchanged Traded Fund . In some ways, an ETF is similar to a mutual fund in that it holds a so-called basket of securities. Whereas the mutual fund typically contains stocks and bonds, the currency ETF contains securities that are designed to replicate individual foreign currencies.
It is easy to buy and sell currency ETFs because they are available on the American Stock Exchange and the NYSE-Arca. Today there are three basic groups of funds from which to choose. Rydex CurrencyShares and Wisdom Tree Dreyfus Currency Income Funds are available on NYSE-Arca. Invesco PowerShares are available on the American Stock Exchange. Incidentally, you can put these in your IRA portfolio.
Regrettably, both the US dollar and the British pound are in the beginning stage of severe declines. Both governmental powers have lost control and are in a state of complete confusion with respect to currency stabilization. Their desperation to provide relief is both clumsy and ignorant and will inevitably lead to long-term severe damage to both economies.
You can become proactive and protect your investment plan by learning how to intelligently integrate foreign currency exchange transactions into your asset base. By using sound risk management you can benefit from the inevitable demise of both the dollar and pound.