Trading of Foreign Currencies

In times of worldwide uncertainty trading foreign currencies can be profitable. Foreign currency, or Forex, traders buy one currency with another. By far the most commonly traded currency is the US dollar at eighty-five percent of all trades. Other major currencies are the Japanese Yen, Euro, British pound, Swiss franc, Canadian dollar, and Australian dollar. By far most traders trading foreign currencies will trade a major currency pair. These currencies trade in high volume and with high liquidity. This makes technical analysis of currency price movement more accurate and currency trading more profitable. Also the Forex news regarding the economies, monetary policies, and politics of these nations is readily available making fundamental analysis of these currencies more accurate. Forex markets are open throughout the business day around the world. The major markets are London, New York, and Tokyo. Thus trading occurs virtually around the clock. Traders use both fundamental and technical analysis to profit from trading foreign currencies. Candlestick pattern formations are as applicable to trading Forex as they are to stocks and commodities.

The Why of Trading Foreign Currencies

Individuals and companies engage in trading foreign currencies for two reasons. The first is international trade. By trading foreign currencies the buyer in an international contract is able to convert his currency for that of the seller and pay his bill. Those whose business requires dealing in foreign currencies are exposed to currency risk. This is the risk that Forex exchange rates will change between signing the contract and paying for the product or service. To reduce currency risk companies commonly buy currency or sell currency in anticipation of a change in currency rates. Another strategy to contain currency risk is buying calls or buying puts on one currency with another. The same strategies that international businesses use in trading foreign currencies are used for the second reason for trading, speculation in Forex market.

How Trading Foreign Currencies Works

There are two basic choices in managing currency risk. One is to seek to anticipate changes in currency rates and trade Forex accordingly. The other is to use the options market as a form of insurance against an adverse movement in currency rates. An example might be a Japanese company that buys US agricultural products. The company agrees to a price for soybean oil. They expect to pay in US dollars when the shipment arrives in Japan. In the time it takes to package the shipment and send it to Japan the dollar rallies versus the Yen and now the Japanese company owes more in Yen than it expected. It could have avoided this situation by purchasing dollars with Yen as soon as the contract was signed. However, if the Yen had rallied, they would have missed out on an opportunity to pay less in Yen than expected by the contract. Here is where options trading comes into the picture in trading foreign currencies. The Japanese company, in this situation, can buy calls on the US dollar with Yen. The options contract price for dollars will be the same as the contract price for the product they are buying. If the dollar rallies significantly the company will execute the options contracts involved and buy dollars at the old, now lower, price to pay their bill. However, if the Yen rallies they will let the contracts expire and simply buy dollars with the now stronger Yen and pocket their currency trading profits. Using a Forex trading system, traders can profitably speculate in Forex.