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X is for eXchange Rates – The Elite Investor Clubs A – Z of Investing

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OK you’ve made it to the pre-penultimate episode of the A to Z of investing, and it’s the only one where I’ve had to cheat ever so slightly. Because X is for Exchange Rates, in other words, foreign currency the biggest financial market in the world. The trading of foreign currencies is thought to be worth as much as three point five trillion pounds a day. Hardly surprising that our friends the banks decided to manipulate these markets so that small time traders like you and I would lose and the bank would win even bigger than they usually do. In May 2015 a bunch of them were fined more than six billion dollars for their latest crime against their clients. Following on from the Libor fixing and before we learned of the gold price fixing. What a pity we didn’t let them die in two thousand and eight.. There are multiple levels in the forex market, the highest being the interbank market which accounts for about forty per cent of that daily number. They work on extremely tight spreads thanks to the enormous volumes involved. Below that level come the smaller banks and the large multi national companies who need to hedge currency risk across the world. Next you have hedge funds, insurance companies, mutual funds and institutional investors as well as our old friends the Central Banks. What amazes me is that with the scale, resources and expertise of these giants, it’s still possible for individuals like you and I to make serious money trading the foreign exchange markets. By trading, I mean taking a position between two currencies and betting on the direction of one currency against the other. So if you think the pound is going to strengthen against the euro you can trade that idea through say spread betting. You bet so much per point, which can be a movement in the fourth or fifth place after the decimal point – tiny movements can bring significant rewards. Big movements can produce awesome results. Siam Kidd recently made four hundred and twenty thousand pounds in one day when the Chinese Yuan was devalued. One of Marcus de Maria’s forex traders makes two hundred thousand a year and drives a Bentley – and he’s in his early twenties! But of course these trades can go wrong in a big way as well. So, as with warrants in the previous episode, forex trading is definitely not for beginners and only to be done with money you can afford to lose. Go back to the episode on Risk and make sure you are layering your portfolio with different instruments at each level in your pyramid. Get yourself properly trained before you start competing with the big boys. One of the nice things about foreign currencies is that they tend to stay in a trend over quite long periods. We recently saw the US dollar strengthening against other currencies for twelve months or more. Plenty of time to ride that trend with a moving stop loss to protect your gains. Similarly, some movements can be predicted for example when a country starts money printing. If you suddenly produce a lot more of your currency you’re going to weaken it in the international markets. At the same time your stock market will go up as that money gets invested in assets by the institutions holding it. The best recent example of this has been Japan where Mr Abe has put the printing presses on a seven day week with three shifts round the clock to churn out more yen than the world will ever need. Trading the forex markets means keeping an eye on world events that will impact countries and their currencies. As the oil price tanked in twenty fourteen you didn’t have to be Einstein to imagine that the rouble might be hammered given Russia’s high dependency on oil exports. You could have ridden that wave for a very profitable six months or more. You need a certain mindset to succeed as a trader of markets like forex. I confess its not something that I’m good at and not something I do much of. But I’d be failing in my duty to educate if I didn’t cover the biggest financial market on the planet. The first rule of investing is to know yourself. Have you got what it takes to be a successful trader? If so, with the right training and strong discipline to stick to a system, untold riches await.