Countercyclical Investments: Foreign Exchange (FOREX or FX)

Posted under Finance, Investing by Roman

Is a dollar today worth the same as tomorrow when you take inflation out of the picture? It’s value in the US is still a dollar but the power that it has against other currencies may have fluctuated. The trading of currencies is a very interesting method of investing. It is very similar to investing in a stock exchange, but the currency exchange is called a foreign exchange (FOREX or FX). There are market makers and brokers also that create a spread but that is where the similarity ends. This is because when an investor buys a currency that currency still has the ability to buy other currencies.  These currencies are put into pairs that are traded against each other. For example 1 US dollar = .7333 Euros meaning that one US dollar will only be traded for .7333 Euros. The value of each currency against one another is measured in far less increments then just hundreds. They are measure in peeps which is .0001 of that currency.   This amount is so small that FOREX allows for the use of leverage of up to 400. Leveraging is when your position gets weighted based on the ratio that the investment company gives (etc. 400 to 1 ratio). With this ratio when you invest 1 dollar it is viewed as being 400 dollars. Leverage of this amount (although not recommend) allows for a very large profit for investor that did their homework. FOREX also allows you to change from one pair to another to take advantage of possible difference in exchange rates. This means that if there is a difference between the values of two pairs against each other that is in your favor you can make a profit from it.  To find these differences takes a great deal of homework.  FOREX is a great way of protecting your money as it is being devalued against other currencies by investing in them.  Leverage in this case allows the investor to also take gain from the devaluation.

It is very important to remember a few things. Just like in the stock market you should not put all your money into one basket. This is not the stock market and trading in foreign currency will take some time start small and trade small until you feel comfortable.  MOST important is that leverage also counts against your losses; make sure that your account has enough to cover the losses.  AS ALWAYS DO YOUR HOMEWORK BEFORE INVESTING!!

Enjoy the experience my friends.