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Currency Trading - Weighing the Pros and Cons



Currency trading is the largest financial market in the world, and it involves nearly every currency on the planet. Currency trading, also called foreign exchange or forex, has a number of advantages and disadvantages. Let’s look at the pros and cons of currency trading.


The Pros of Currency Trading


Currency exchanges allow you to benefit from strong foreign economies even as your own is in the doldrums. You could profit off someone else’s good policies leading to deflation of the currency or slow inflation relative to your own currency. And, unlike the foreign currency loans that nearly destroyed Iceland’s economy, you don’t have to worry about losing your car or house if the foreign interest rates increase or devalue your own currency.

Currency exchanges are a safer way to invest or bet on foreign countries’ performances than putting money in a foreign bank and being paid their high interest rate. Ask anyone who put money in Cyprus for its high interest rates before capital controls prevented withdrawals and then accounts were given a “haircut”. In these haircuts, a percentage of the account value was taken as a type of bail-in. If you trade on the foreign exchange market, you can make investments based on the likely market reactions if events like this occur but without the same risk to the capital.

Unlike buying and selling precious metals, the forex market is incredibly liquid. You can get out of a forex market faster than you could most stock market holdings. It is also a market where it is easy to short sell if you need the money fast though the value is down. You may not even lose money if you can sell the currency declining in value and buy a different currency paired with it. A side benefit of this liquidity is the ease of setting up automated trading strategies. However, you need to have a validated strategy from a source like the Stern Options blog to avoid making mistakes.

Currency trading does not require any advanced technical knowledge as you’d need to buy, trade or sell Bitcoin. Forex trading has a low entry point. You can start currency trading with less than a hundred dollars. You’d be hard pressed to find a brokerage firm willing to open an account for less than a thousand dollars.

Currency trading by international businesses allows them to avoid sudden spikes in the price of items they buy abroad. If you own a business that buys items from overseas, foreign currency trading could be an investment in your venture. There are businesses that engage in foreign currency exchanges to buy and sell foreign securities with fewer limitations or fees, since they can trade currency when the rates look favorable, let the money sit in a bank account, and then pay for goods and services in the supplier’s own currency. This is usually cheaper than buying items in your own currency and being charged the spot market forex rate and currency conversion fees the business charges you.

Currency trading offers many options (literally) that allow you to profit whether the currency goes up or down. If you own a stock or piece of real estate, you cannot profit by it going down in value.

You don’t need a license to be a forex trader as is necessary to be a stock trader or real estate agent in many jurisdictions.

Price manipulations are harder to achieve short of a national official pegging the official currency exchange rate. You don’t see private entities manipulating the forex market as happens when companies engage in shady tactics to boost their stock price.

Tax rules for forex trading are generally simpler than that for day trading stocks.


The Cons of Currency Trading


If you’re buying currency based on predicted economic trends, you’ll likely lose out to traders at banks and other institutions that are much more knowledgeable than you. If you’re buying in response to the latest headlines, you’re already behind pre-programmed algorithms that dumped currencies as it started to fall or snapped it up as the value rose, depending on what the buyer wanted.

Too many people step into Forex and act like it is a high-low gambling game. They end up losing a lot of money betting based on a trend line going up and expecting it to keep going up, buying based on emotion instead of reasoned analysis of the market, the trends, the influencing factors, and the normal range in which something is valued.

There is less regulatory protection for small traders than big financial institutions. If a foreign government destroys its currency and you didn’t get out, you have no recourse.


Considerations Regarding Currency Trading


There is the potential to get very wealthy from foreign exchange as George Soros did, (the man who broke the Bank of England). However, his repeated success involving massive currency bets may have also included government officials he cultivated over the years by paying for their schooling and training in non-governmental organizations that influenced public policy. In short, he had, at a minimum, inside knowledge from people who owed him their education and position. And possibly he had the levers in place to force political change in favor of him financially. So, don’t expect to repeat Mr. Soros’ example.

Currency exchange doesn’t pay dividends or interest like bonds or some stocks. You have to trade to make money.


How to Minimize Your Risk with Currency Trading


Instead of buying up the currency itself, trade in binary options. Then you aren’t left with a pile of paper currency that is legally worth nothing, as many United States soldiers who brought home pounds of Iraqi dinars learned. You can learn more about this option on the Stern Options Blog.

By trading in currency options, you can bet on a currency’s rise or fall relative to other currencies without owning it or dealing with international financial regulations like capital controls. The last thing you want to do is buy a foreign currency and end up with both the IRS and a foreign financial government agency breathing down your neck.

Leverage is an option when engaging in currency trading. However, it multiplies the risk. Don’t borrow on your house to invest in the stock market, since you risk losing your home if the stock market returns aren’t as high as expected. Don’t borrow money to invest in currency trading, since it raises the margin you have to secure to break even and raises the price you pay if you lose.


Conclusion


The currency trading market is easy to access for beginners due to its lack of licensing and low minimum investment. While you don’t receive dividends or interest, it is very liquid and you can invest in almost any currency in the world. Your money is safer than if sitting in a foreign bank account for a long period of time, and whether through monitoring or automation, you prevent being left with a volume of currency that is worthless. You don’t have to be a technical whiz to trade in currencies, though you need to know what you’re doing and not borrow money for forex transactions to minimize the risk.