Published On: Sun, Jul 10th, 2016

The Currency Trade

 

 

In present times when financial markets are in turmoil and the banking system has been plagued by burgeoning bad loans, sound money management skills become inevitable. Even as it’s the most challenging task for those responsible for running the banking and financial system to put the system back on track, common investors too are caught in a precarious situation. They have apprehensions even about the most trusted investment options.

Currency

Currency

For local investors of Jammu & Kashmir, bank deposit schemes have remained their most preferred investment avenues. However, over the past decade, they have widely expanded their investment horizon to stock markets in order to maximise their earnings. They have shown tremendous appetite for trading shares in the market. But, there is one area, investment in currency, which has remained unexplored by most of these investors.

 

Whenever the Indian rupee witnesses a steep fall in value against the US dollar, investors in possession of dollars immediately try to monetise their gains. This currency exchange of making money out of money is an interesting investment field.

Basically the idea that trading money can earn you money seems counter intuitive. Actually there’s a lot of money to be made in this kind of trading. I have observed lots of people engaged in currency trading without even realising it, as a matter of fact. For example, every time a person visits another country and swaps his country’s currency for the local currency, he’s involved in currency trading. From investment point of view, currency trading is known as foreign exchange (forex).

Although forex is the largest financial market in the world, it is relatively unfamiliar terrain for retail investment traders. Just few years ago, foreign exchange business was primarily the domain of large financial institutions, multinational corporations and secretive hedge funds. But with the advent of internet, times have changed. Now individual investors have entered into the market and more and more people are hungry for information on this fascinating trade.

To be a currency trader, you should know that the currency values change from time to time, and the reasons are many. Political and economic activities have a great impact on the value of a country’s currency. Sometimes they are driven by speculators. Sometimes they are driven by international business flows.

For example, if companies in India are importing large quantities of products made in US, they will need to exchange their rupee for US dollars to pay for the products. When this is done in very large quantity over a short period of time, it raises the demand for US dollars and the value of the US dollar versus the Indian rupee increases.

In succinct terms, currency trading is the buying and the selling of currencies. There are almost as many different currencies as there are countries, but the most popular currencies for trading are the US Dollar, the Euro and the British Pound (Sterling). Reports suggest that the currency markets are some of the most popular day trading markets and they, therefore, have some of the highest volume (number of contracts) and liquidity. This high volume and liquidity makes the currency markets attractive to all types of traders, including individual day traders.

Risk element is there in every business. Currency trading has caused heavy losses to many investors for their inexperienced and undisciplined approach to trading. It is very important that you understand your needs, backed by risk tolerance capacity, to avoid disasters and maximise your potential in the currency exchange market. Once you plan your goals, stick to your plans – a timeframe and a working plan for your trading.

For a beginner in currency trading, choosing a broker needs utmost care. Otherwise a fake or unreliable broker will invalidate all your gains acquired through hard work. Just check that your expertise level and trading goals match the details of the offer made by the broker. It would be better to begin with small sums and low leverage, while adding up to your account as it generates profits. Focus on a single currency pair and once you catch hold of the market and better your trading skills, expand your activity. Last but not the least, don’t fall victim to greed, excitement, panic or fear. So, in the backdrop of these tips, try to multiply your investment through currency trading.

 

(The views are of the author & not the institution he works for)

 

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