The global currency market is by all estimates the largest liquid financial market dedicated to currency trading. The market is largely unregulated and private with no intermediaries to guarantee compliance with regulations. According to Investopedia, the most popular currencies on the market are the US Dollar, the Euro, Great British Pound and the Japanese Yen.
The US Dollar tops the list as it is considered an intermediary in triangular currency transactions and the unofficial reserve currency of the world. The Euro is a major currency used by many countries in the Eurozone, including Germany, France and Italy. The currency also ranks as the second largest reserve currency and the most traded after the US dollar. The Japanese Yen is easily the most traded currency in the Asian continent, especially in the Pan–Pacific zone.
How to trade in foreign currency
With the advances in technology, foreign currency trading can be conducted from anywhere in the world. The leading currency trading centers of the world include New York, London, Tokyo, Frankfurt and Hong Kong. Because of its vast size, a number of entities have been established to promote the trade. According to the Balance, online brokerages and margin trading accounts have in the recent times grown their market share in an industry dominated by banks and institutional investors. Investors can make the most out of the trade by understanding the underlying risks and benefits of currency trading. Below are key benefits of trading in foreign currency:
• Access to a large and liquid global currency market
• 24-hour operation and diverse trading styles
• Opportunity to diversify the investment portfolio
• Low cost of trading
• No central exchange
In terms of volume, the foreign currency market averages over $5 trillion in daily trading. The two main risks of trading in foreign currency are high leverage and high levels of volatility. High levels of market volatility are often caused by negative economic reports and weakened markets. When volatility becomes an issue, central banks are sometimes forced to intervene in order to stabilize the currency and the market in general. The other downside is that foreign exchange market makes very small increments, which tend to create high leverage. To improve long term returns and mitigate the risks, an analysis of risk-management strategies is crucial.
Foreign currency trading outlook
A number of platforms and instruments have been developed to enhance currency trading. Forex investors can invest in currencies either directly or indirectly using vehicles like Exchange Traded Funds (ETFs). ETF funds usually buy and manages currency portfolios on behalf of investors using effective trading tools like futures contracts and swaps. Investors who do not have a lot of money to put down can benefit from shorting strategies deployed by ETFs. The ETF is highly recommended for Investors who are not versed with the intricacies of foreign currency trading.
For the inquisitive investor, the three leading ETFs for foreign currency trading are CurrencyShares, Wisdom Tree and ProShares. These ETFs trade in a wide range of currencies, including Chinese Yuan, Brazilian Real and Australian Dollar. If you are a seasoned investor, foreign currency trading can be interesting because you can make a side bet against the currency you are holding. Owing to insurance backup, Forex investors also have the opportunity to trade weak currencies without suffering undue negative exposures.
According to a Forbes magazine report published in 2017, investors can make money in a volatile market through currency hedging. The strategy provides protection against losses emanating from negative currency movements, which often lead to uncertainty. For instance, as China moves into the marketplace with its reserve currency, investors worried about the future strength or weakness of the currency against the Euro and the dollar will find solace in hedging strategies. Concerns about China are heightened by prevalent stock bubbles, unpredictable real estate market and lack of transparency about the country’s debt.
For investors in Europe, the prevailing low interest rates offers a perfect opportunity to off load currencies on the futures market at rates higher than the spot prices. The two leading currency hedge funds in the world today are WisdomTree Europe Hedged Equity Fund and iShares Currency Hedged MSCI EAFE ETF. According to the Forbes magazine, there are about 89 exchange traded funds with currency hedges aligned to their portfolios. These exchange funds account for about $40 billion of the $450 billion held in foreign stock ETFs.
If you want to achieve long-term success in foreign currency trading, you need to learn continuously; acquaint yourself with prudent capital management techniques and understand the risks that lay I the way. It is also important to persevere because success may not be achieved overnight. For personalized training and assistance, you get in touch with an investment advisor who understands foreign currency investment and portfolio management.