By Sean Hyman, Editor, Currency Cross Trader
Imagine for a moment you own and race thoroughbred horses.
Your pride and joy thoroughbred has been training for the past two years for the race of a lifetime – and now your horse will soon be racing for a million-dollar prize.
Naturally, in any race, there are winners and there are losers. Typically, you think about betting on the winning horse.
But what if you could place a bet when that losing horse will … well … lose?
This is where it gets interesting. And, in a moment, you’ll see how it’s possible to win on both bets. And even better, fix the horse-race in your favor.
A Stable of Opportunities
Think about it. What if you could choose your opponent for this million-dollar race? The best part: You can assign your opponent any horse you want.
Now, would you give your opponent the second-fastest horse in the world? Or would you instead give him a broken-down old donkey that could hardly run?
Yeah, I’d give him the donkey, too.
It’s kind of common sense that, if you pair the fastest against the slowest, your odds of winning will skyrocket. Or if you pair the healthiest/strongest horse against an old, weak horse that you gain an enormous edge.
After all, who wouldn’t take that bet?
Strangely, the same-exact method can work in your portfolio. It’s the secret to earning 25%…79%…even 100% more on each trade in a matter of weeks. Not months or years.
Position Yourself to Profit from Winners and Losers
When you invest in stocks, for the most part you do so with the hope that they are going up. When stocks are dropping, you can either short them (a risky endeavor) or buy put options (a much better solution).
Anyway you slice it, though, you know that some stocks are rising and falling simultaneously.
The same thing is true of currencies.
Everyone talks about the U.S. dollar and its changing value, especially in comparison to other currencies around the world. And a very savvy way to benefit from moves in the dollar is to play the currencies market.
Just like in our example of the horse race above, you would pit the dollar against another currency in the same race (or trade).
In other words, if you thought the dollar was stronger than another currency, you could buy the dollar and short another currency in the same trade. Or, you could short the dollar against a stronger-performing currency.
This takes place in the foreign-exchange market, also called the Forex or FX market.
Turn a Cracked Currency into a Portfolio Winner
Every Forex trade involves two currencies. You’re always buying one and selling another against it.
For instance, by “buying the GBP/USD,” you’re really betting the British pound will rise against the dollar – or, in effect, you are buying the pound and selling the dollar.
Now, there are about 60 tradable currency pairs worldwide. How do you choose which to trade? Well, it comes down to choosing your opponents wisely…
If you’re trading two currencies from economies that are growing at a similar pace, then you are decreasing your odds of success.
After all, if it’s a close race, and both economies are healthy, who knows which will pull ahead first?
But on the other hand, you could pair the currency from the most-pristine economy in the G-7 with the worst debt-ridden nation that can’t seem to do anything right.
After all, you can pick your opponents. You can choose any currency you want. Why not pick the “more favorable” opponent to help you win the race?
Do that and you’ve essentially got a “fixed” currency position. Just like a rigged horse race.
It’s not a gamble anymore – it’s pairing your most prized thoroughbred against an arthritic donkey.
4 Things You Need to Know to Engineer
Your Own Fixed Race
Now how to do you find the weakest and strongest countries so you can set up your own fixed currency trades?
The first thing to look at is interest rates. Currencies love higher interest rates because Forex traders are always looking for a higher yield on their trades.
As FX traders pour money into a higher-yielding currency, the currency’s price goes up. So if you’re looking for the healthiest “thoroughbred” currency, check out the one with the highest interest rates first.
On the flipside, currency traders tend to dump low-yielding currencies if there’s nothing else to bolster the price. That’s why the U.S. dollar started to sink in 2007 when the Fed first started cutting rates. So if you’re looking for the “loser” currencies, check out the ones with the lowest interest rates.
You also want to look at a country’s unemployment, and GDP growth when you’re evaluating a currency’s strength.
The healthiest currency will come from a country with low unemployment, and solid long-term GDP growth. The weakest currency will have rising unemployment, low or negative GDP growth.
So as a trader, you typically want to pair:
- High interest rate countries with low interest rate countries.
- Countries with low unemployment against those with high unemployment.
- Countries with positive GDP growth against those that have a negative GDP growth (a shrinking economy) or slower GDP growth.
Here’s where it gets interesting, though…
My No. 1 Tip for “Fixed” Currency Trading
Even though there are over 60 tradable currency pairs in the world, 90% of all daily transactions involve trading the G-7 currencies (i.e., the “major currencies”).
And as I’m sure you can guess, a significant chunk of those daily trades involves the U.S. dollar. It makes sense. Traders want to pair the dollar against other currencies because the world’s reserve currency promises to be the most liquid and readily available.
However, if you’re looking to pair the weakest with the strongest, it helps to cut the U.S. dollar out of your trading.
A the most overtraded currency, it can be difficult to see where the dollar lies on any given trading day.
Also, there’s just simply more opportunity to trading non-dollar pairs (also known as “cross rates” or “crosses”).
Some of the most-commonly traded crosses include:
1. EUR/JPY (euro vs. Japanese yen)
2. EUR/CHF (euro vs. Swiss franc)
3. CAD/JPY (Canadian dollar vs. Japanese yen)
4. AUD/JPY (Aussie dollar vs. Japanese yen)
4. NZD/JPY (New Zealand dollar vs. Japanese yen)
5. GBP/JPY (British pound vs. Japanese yen)
And the best part is, any kind of “dollar-moving event” isn’t going to have much impact on these crosses. This is a great way to get portfolio diversity while spreading out your risk.
If you’re not sure whether to bet on or against the dollar, you don’t even have to go near it to participate in the currency market.
Thanks for reading,
Editor, Currency Cross Trader
3 thoughts on “The Quick-Start Guide to Trading Currencies”
This is a very good article i can say,a pleasure to read!
You only talked about Fundamnetal Analysis here, and i think, a trader to be a complete trader must have some knowledge of technical analysis as well! as most of the trades will be day trades! Is very good to know fundamentals, and see the bigger picture, but technical analysis can provide you with very accurate signals of entry and exit into a trade!
I’d agree. Both technical AND fundamental analysis should be used. The two of them go hand and hand and without either one your chances of success are severely diminished.
Thank you Alan for supporting my comment! 🙂
Comments are closed.