FX Speculating

Example of Buying
A speculator will buy a particular FOREX currency pair if he expects the exchange rate to rise. For example, a trader who expects the Euro to strengthen against the U.S. dollar has just bought one EUR/USD mini contract at 1.2089. Now, if the Euro strengthens to, say, 1.2150, the trade will profit. Let's say that the trader only wants to risk $75. Since each pip of this mini contract is worth $1, the trader will enter a stop order to sell one EUR/USD mini contract at 1.2014. If the EUR/USD bid ever drops to 1.2014, then this position will be closed and there will be no futher loss. With the stop order in place, the trader is protected in case prices move adversely. His strategy now is to watch and see if the Euro does in fact strengthen and, if it does, decide when to take profit.

Example of Selling
In the FOREX market, since there is no actual delivery of foreign currencies, a trader can sell first and buy back later, hopefully at a lower price. A trader will do this if he expects the exchange rate to fall. For example, a trader who expects the Euro to weaken against the U.S. dollar has just sold one EUR/USD mini contract at 1.2089. Now, if the Euro weakens to, say, 1.2043, the trade will profit. Let's say that the trader only wants to risk $75. Since each pip of this mini contract is worth $1, the trader will enter a stop order to buy one EUR/USD mini contract at 1.2164. If the EUR/USD offer ever rises to 1.2164, then this position will be closed and there will be no futher loss. With the stop order in place, the trader is protected in case prices move adversely. His strategy now is to watch and see if the Euro does in fact weaken and, if it does, decide when to take profit.

In deciding whether to buy or sell, many traders begin by looking at a chart. They attempt to predict the future movement of an exchange rate by studying what has happened in the past. This method is called technical analysis. Trend lines, reversal patterns and moving averages are all part of technical analysis. Other traders rely on economic variables to provide clues to future exchange rate movements, variables such as short-term interest rates and capital and merchandise trade flows. This is called fundamental analysis. (See our on-line bookstore for more information.) Still others rely only on their gut instinct, or on what they read in the newspaper or hear on television. As you practice in the demo account, you will get a feel for which method works best for you.

FX Speculating brought to you compliments of World Link Futures.