Trading Foreign Currencies

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TradingTrading
ForeignForeign
CurrenciesCurrencies

In times of worldwide uncertainty tradingIn times of worldwide uncertainty trading
foreign currencies can be profitable.foreign currencies can be profitable.

Foreign currency, or Forex, traders buy oneForeign currency, or Forex, traders buy one
currency with another.currency with another.

Before We Continue…Before We Continue…
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By far the most commonly traded currencyBy far the most commonly traded currency
is the US dollar.is the US dollar.

Other major currencies are the JapaneseOther major currencies are the Japanese
Yen, Euro, British pound, Swiss franc,Yen, Euro, British pound, Swiss franc,
Canadian dollar, and Australian dollar.Canadian dollar, and Australian dollar.

By far most traders trading foreignBy far most traders trading foreign
currencies will stick with a major currencycurrencies will stick with a major currency
pair.pair.

First of all these currencies trade in highFirst of all these currencies trade in high
volume and with high liquidity.volume and with high liquidity.

This makes technical analysis of currencyThis makes technical analysis of currency
price movement more accurate andprice movement more accurate and
currency trading more profitable.currency trading more profitable.

Also the Forex news regarding theAlso the Forex news regarding the
economies, monetary policies, and politicseconomies, monetary policies, and politics
of these nations is readily availableof these nations is readily available
making fundamental analysis of thesemaking fundamental analysis of these
currencies more accurate.currencies more accurate.

Forex markets are open throughout theForex markets are open throughout the
business day around the world.business day around the world.

The major markets are London, New York,The major markets are London, New York,
and Tokyo.and Tokyo.

Thus trading occurs virtually around theThus trading occurs virtually around the
clock.clock.

Traders use both fundamental and technicalTraders use both fundamental and technical
analysis to profit from trading foreignanalysis to profit from trading foreign
currencies.currencies.

Candlestick pattern formations are asCandlestick pattern formations are as
applicable to trading Forex as they are toapplicable to trading Forex as they are to
stocks and commodities.stocks and commodities.

Individuals and companies engage inIndividuals and companies engage in
trading foreign currencies for two reasons.trading foreign currencies for two reasons.

The first is international trade.The first is international trade.

By trading foreign currencies the buyer in anBy trading foreign currencies the buyer in an
international contract is able to convert hisinternational contract is able to convert his
currency for that of the seller and pay hiscurrency for that of the seller and pay his
bill.bill.

Those whose business requires dealing inThose whose business requires dealing in
foreign currencies are exposed toforeign currencies are exposed to
currency risk.currency risk.

This is the risk that Forex exchange ratesThis is the risk that Forex exchange rates
will change between signing the contractwill change between signing the contract
and paying for the product or service.and paying for the product or service.

To reduce currency risk companiesTo reduce currency risk companies
commonly buy currency or sell currency incommonly buy currency or sell currency in
anticipation of a change in currency rates.anticipation of a change in currency rates.

Another strategy to contain currency risk isAnother strategy to contain currency risk is
buying calls or buying puts on onebuying calls or buying puts on one
currency with another.currency with another.

The same strategies that internationalThe same strategies that international
businesses use in trading foreignbusinesses use in trading foreign
currencies are used for the second reasoncurrencies are used for the second reason
for trading, speculation in Forex market.for trading, speculation in Forex market.

Looking at the example of a company whichLooking at the example of a company which
contracts to buy foreign products orcontracts to buy foreign products or
services we see there are two basicservices we see there are two basic
choices in managing currency risk.choices in managing currency risk.

One is to seek to anticipate changes inOne is to seek to anticipate changes in
currency rates and trade Forexcurrency rates and trade Forex
accordingly.accordingly.

The other is to use the options market as aThe other is to use the options market as a
form of insurance against an adverseform of insurance against an adverse
movement in currency rates.movement in currency rates.

An example might be a Japanese companyAn example might be a Japanese company
that buys US agricultural products.that buys US agricultural products.

The company agrees to a price for soybeanThe company agrees to a price for soybean
oil.oil.

They expect to pay in US dollars when theThey expect to pay in US dollars when the
shipment arrives in Japan.shipment arrives in Japan.

In the time it takes to package the shipmentIn the time it takes to package the shipment
and send it to Japan the dollar ralliesand send it to Japan the dollar rallies
versus the Yen and now the Japaneseversus the Yen and now the Japanese
company owes more in Yen than itcompany owes more in Yen than it
expected.expected.

It could have avoided this situation byIt could have avoided this situation by
purchasing dollars with Yen as soon aspurchasing dollars with Yen as soon as
the contract was signed.the contract was signed.

However, if the Yen had rallied, they wouldHowever, if the Yen had rallied, they would
have missed out on an opportunity to payhave missed out on an opportunity to pay
less in Yen than expected by the contract.less in Yen than expected by the contract.

Here is where options trading enters theHere is where options trading enters the
picture in trading foreign currencies.picture in trading foreign currencies.

The Japanese company, in this situation,The Japanese company, in this situation,
can buy calls on the US dollar with Yen.can buy calls on the US dollar with Yen.

The options contract price for dollars will beThe options contract price for dollars will be
the same as the contract price for thethe same as the contract price for the
product they are buying.product they are buying.

If the dollar rallies significantly the companyIf the dollar rallies significantly the company
will execute the options contracts involvedwill execute the options contracts involved
and buy dollars at the old, now lower,and buy dollars at the old, now lower,
price to pay their bill.price to pay their bill.

However, if the Yen rallies they will let theHowever, if the Yen rallies they will let the
contracts expire and simply buy dollarscontracts expire and simply buy dollars
with the now stronger Yen and pocketwith the now stronger Yen and pocket
their currency trading profits.their currency trading profits.

Using Forex exchange trading trader canUsing Forex exchange trading trader can
profitably speculate in Forex trading byprofitably speculate in Forex trading by
astute fundamental analysis and use ofastute fundamental analysis and use of
Candlestick patterns to predict relativeCandlestick patterns to predict relative
currency price movements.currency price movements.

Trading Foreign Currencies

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