Forex Trading and How Your Portfolio Can Benefit
Forex trading can be done in so many different forms and for so many different reasons that is often a daunting task just to figure out where to start. After all, should you open up an account at a brokerage that specializes in FX trading, or should you open an account at a brokerage that allows you to trade stocks, options, exchange traded funds, and futures? As if this decision isn’t sufficiently overwhelming on its own, you then need to decide whether to use your FX trading as a speculative tool or a hedging tool, long term or short term, aggressive or conservative, etc. There are, needless to say, many things that one must consider before starting out.
While the questions posed in the paragraph above are enough to illicit a multi-volume response, we’ll focus on the basics for the sake of clarity and simplicity in this article. The easiest way to get comfortable within this world of FX trading is probably to just take the plunge and open up an account at a brokerage that specializes in this field. What broker should you choose? Well, that is an entirely different subject altogether and well beyond the scope of what I’m prepared to go into here. Just make sure you do your research and due diligence before depositing money anywhere!
Now that your Forex Trading is up and operational and you’re off and running, you need to get a firm handle on what exactly it is you’re participating in. In this example, we’re suggesting that because you started with a brokerage account at a broker who specializes in this area, you are going to be starting out by trading spot contracts or cash contracts. Without getting too complicated, all this means is that you are trading the current price as it sits in the open, global market at that very second. If the Eur/Usd pair is trading at 1.3200 on your brokerage screen that means that you can sell Euros against US Dollars at that rate or you can buy US Dollars and sell Euros at that rate. Of course there will be a small spread built into the price you see and this is your cost of entry for taking the trade. Be sure to choose a broker that has a spread of between 2-3 pips on Eur/Usd and not more than that.
Since speculating can be quite challenging at times, even for professionals such as myself, let’s say that you are starting out with the goal of hedging your stock portfolio in the United States. Since your stock portfolio is denominated in US Dollars you may make money if your stocks go up in value in US Dollar terms but that gain could be cancelled out by a weakening US Dollar. So, you want to hedge that aspect of your portfolio and have decided to buy Euros against US Dollars in your brokerage account. This way as the US Dollar gets weaker against the Euro and your stock portfolio is suffering as a result of the generally weaker Dollar, your forex gains that you are experiencing as a result of buying Euros are serving to hedge your downside risk.
The above is probably one of the easiest and most basic ways of adding a forex trading component to your portfolio. There will be several other articles in the future that talk about more advanced ways to speculate in this global market, but this should serve as a good starting place.
Andy Owings is experienced with Forex Trading and is the Master Drummond Analyst and Author of the Drummond Geometry Daily Forecast – Click Here to get the Free Forex Daily Forecast.
