Why Trade Forex Currencies?

Why do people trade Forex currencies? The Forex markets were developed to facilitate world trade. The primary reason to trade Forex currencies is to buy something made in another country. When a Japanese airline wants to buy a Boeing jet it must convert Yen into US dollars. If the company is concerned about hedging currency risk it will commonly purchase Forex options (calls on the USD with the Yen). The Forex markets allow one to trade one currency for another in a specific Forex pair. The rate of exchange within a given currency pair depends on economic, political and monetary conditions and policy in each of the countries concerned. Because exchange rates may be volatile there is the opportunity for profit by speculators. Why would you trade Forex currencies?

Forex Trade and Currency Risk

The Forex world is currently waiting to see when the US Federal Reserve will raise interest rates. When this happens it will drive the value of the dollar up against all other currencies. If our hypothetical Japanese airline has just signed a contract for a new Boeing jet they will need to pay more in Yen. In order to contain their currency risk the company will purchase calls on the dollar with Yen. If the dollar has risen by the time they need to make payment they will execute the contract and purchase dollars at the “old” price. If the dollar falls versus the Yen they will let the contract expire and simply pay a smaller amount in their now-more-valuable Yen and pocket the savings.

Speculation and Market Volatility

Foreign currencies worth trillions of dollars are traded around the clock every business day of the year. Eighty-five percent of all trades include the US dollar. The vast majority of trades include the so-called major currencies which are the US dollar, Yen, Euro, British Pound, Swiss franc, Canadian dollar and Australian dollar. Why trade major Forex currencies? These currencies trade in high volume which makes statistically based technical analysis to spot profitable opportunities in Forex day trading. This approach to the Forex market allows traders to enter and leave over a few minutes to a few hours, scalping profits from the typical ebb and flow of daily trading. Technical trading works because price patterns in the Forex market repeat themselves. A sufficiently accurate trading system will pick up these patterns as they evolve and alert the trader to buy or sell in a timely manner. Why trade Forex currencies with technical tools? Traders do this because it is profitable.

Fundamentals, Minor Currencies, Specific Insights

Technical trading commonly works to generate profits in trading major currencies because liquidity and volume in the majors makes technical tools more accurate. This is not the case in thinly traded minor currencies. Fundamentals drive all currencies but it often takes a while for the fundamentals to evolve. Those who trade minor currencies will do well to stick with those for which they have specific useful insights. An example that we have used before is trading the Colombian peso against the US dollar. The COP essentially tracks the price of crude oil as Colombia derives the majority of its foreign reserves from selling oil. If you know this and can anticipate oil prices you can profit from trading the COP versus the USD.