By Sean Hyman, Editor, Currency Cross Trader
It’s not easy trading in the stock market.
As an investor, you must navigate through a market influenced by CEO greed, fudged books, lawsuits, and even FDA or Congressional rulings that can hurt your best stock plays.
This happens so often that some mainstream investors only trade broad-based ETFs or mutual funds that have 50-100 stocks inside them, rather than take a risk on a single stock.
If that wasn’t bad enough, governments can also throw “extra rules” into the mix.
For instance, right now stocks are slipping and sliding all over the place. So many countries are instituting a ban on “short-selling” some stocks.
Recently France, Spain, Italy, Belgium, Greece, Turkey and South Korea have created some rules against short-selling.
With a short-selling ban in effect, it means that even if you believe a stock will drop in value… you can’t try to profit off that decline by simply shorting stocks. That’s very frustrating.
That’s why some call the stock market an “up-only” market. With these rules, governments make it easier to profit off an “up” market and make it very difficult for you to profit in a “down” market.
That’s a shame. When it’s allowed, short-selling can help protect your overall portfolio when stocks start sliding off the map. Also, you can earn some of the fastest profits from short-selling in “down” markets because markets drop a lot faster than they rise.
We saw that over the last few weeks with the DOW and S&P 500 erasing all their gains for 2011 in a couple days. That’s pretty common. In fact, it usually takes an index all year to gain 10% to 20%. Then it can drop as much as 30% in a week.
So if you were able to short during those times, you would make a decent return for a full year within days or weeks.
Fortunately, you can do the exact same thing in the currency markets, regardless if there is a ban on short-selling or not…
Why Stock Traders Love the
I crossed over from being a stock trader to a currency trader about seven years ago. When I first started trading currencies, I couldn’t believe how refreshing it was.
First of all, there are NEVER any short-selling bans in the foreign exchange market. You can’t ban short-selling in currencies because of how they are traded.
Currencies trade in pairs. So when you buy the first currency listed in the pair, by default you’re also shorting the second currency anyway. And if you short the first currency listed in the pair, you’re automatically still buying the second currency in the pair.
So if I bought the EUR/USD (the euro vs. the dollar), I’m buying euros and shorting dollars at the same time. If I shorted EUR/USD, I’m short the euro and long the dollar.
In other words, you’re always shorting something. That’s why there will never be “short-selling bans” in the spot forex market.
It also means you can just as easily profit in a “down market” in currencies than in an “up” market.
In Currencies, the Trend is Your
Friend…Even in Down Markets
There’s never been a better time to be a short-seller. Just as buying in an uptrend is typically the safest thing to do… so is shorting in a downtrend, especially since downtrends produce quicker profits than uptrends.
We all know stocks are dropping right now. And it looks like this downtrend isn’t going anywhere soon. Check it out below.
But it’s hard to take advantage of it in stocks.
However, what if there was a “stock market sensitive” currency in the Forex market? As stocks dive, this currency would dive. As stocks rise, it would rise.
Thankfully that pair does exist. It’s the AUD/USD (Australian dollar vs. the U.S. dollar). Take a look below.
The AUD/USD has been in an uptrend as long as stocks have. This pair also traded sideways just like stocks did. That caused it to form a chart pattern called a “double-top” at the same time that stocks did.
Now it’s started its downtrend, just like stocks…
Simply shorting this AUD/USD pair is like shorting the Dow or S&P 500 Index. And since it’s a currency pair, it’s much easier to short-sell it in the Forex market.
It’s one of the best hedges you can use to take the sting out of your stock portfolio as stocks drop. If the DOW really starts falling, your AUD/USD short position gains.
Most people don’t realize that such a simple solution is out there but it is. Therefore, take advantage of this time in history. Simply shorting the Aussie dollar in the Forex market is the easiest way to do that.
Have a Nice Day,
Sean Hyman, Editor
Currency Cross Trader