Forex Trading And The Us Dollar
The Euro continues to climb as the Dollar continues to weaken
. This market movement is mirrored almost across the board as every other asset class continues to strengthen. Essentially repeating the trend of 2009.
But what will happen to the Dollar? The Chinese administration probably sees little need to change its economic policy just yet. China does not want to see a floating Yuan for the damage this would do to its huge UD Dollar holdings.
In light of this, the continued use of the Euro, Yen and Swiss Franc as a quasi replacement for the Dollar is unlikely to diminish. While the US persists in its quantitative easing policy, and its more general structural deficits, this state of affaires is unlikely to alter.
Having said that, the American economy is definitely coming out of hibernation far faster than many others. There are a certain number of Federal Reserve governors who are less than happy with Ben Bernankes dovish approach.
So the market trend is still very US Dollar negative and this may continue. The US administration may play lip-service to a Strong Dollar but it will not be unhappy with a slowly weakening currency for whatever reason.
The numbers coming out of the various agencies are also indicating renewed strength of the US Economy and, if so, we might be closer than many believe to some form of US Dollar strength.
If this is the case, what are the options for the investor? One option would be to sell the US Dollar and then, when the market has turned, speculate on the US Dollar to increase.
One simple way of doing this is via a
spread betting account. Spread betting gives you access to a wider range of options including international equities, stock market indices, foreign exchange rates and even the price of gold and crude oil.
Also I like the fact that you can close a winning spread bet and therefore take a profit, but also that you can close a losing spread bet and limit your losses.
But how to trade? - EUR/USD Trading Example
Should you decide to trade
currency spreads like EUR/USD then you might see a spread betting price of $1.4847 - $1.4848.
This means you could spread bet on EUR/USD to go higher than $1.4848 or to go lower than $1.4847.
With spread betting, you bet on every unit the market rises or falls. With the EUR/USD market a unit is $0.0001 of the forex pair's price movement.
For this instance, you could decide to spread bet 2 for every $0.0001 EUR/USD rises or falls.
If you bought EUR/USD at $1.4848 and the forex pair rose then the spread could change to $1.4893 - $1.4894. If this were the case, you might choose to close your spread bet for a profit by selling at $1.4893.
Your Profit and Loss = (final value of the market - initial value of the market) x stake per $0.0001
Your Profit and Loss = ($1.4893 - $1.4848) x 2 per $0.0001 stake
Your Profit and Loss = $0.0045 x 2 per $0.0001
Your Profit and Loss = 90 profit
The markets can of course fall, if the market dropped to, for example, $1.4806 - $1.4807, you may decide to close your trade to limit your losses. If so, you would sell the market at $1.4806.
You would do this with the same 2 per $0.0001 stake:
Your Profit and Loss = (final value of the market - initial value of the market) x stake per $0.0001
Your Profit and Loss = ($1.4806 - $1.4848) x 2 per $0.0001 stake
Your Profit and Loss = -$0.0042 x 2 per $0.0001
Your Profit and Loss = -84 loss
In the above case you were speculating on the Euro to increase. You can also bet in the opposite direction and speculate on the Dollar to increase.
Of course with spread betting your stake doesnt have to be 2 per unit or 2 for every $0.0001. If you prefer to trade in Dollars or Yen you could trade 100 Yen per unit or $5 per unit.
So spread trading is convenient but when speculating though you must always remind yourself that the markets can go down as well as up. With spread betting you can lose more than your original stake or investment.
Spread betting carries a high level of risk so you should only speculate with money you can afford to lose. Like the adverts say, before trading, please ensure that spread betting matches your investment needs, make sure you familiarise yourself with the risks involved and, where necessary, seek independent advice.
by: Thomas Bainbridge
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