Currencies are never boring

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Yogi Berra said, “It is hard to make predictions, especially about the future”. In the many years that I have followed the global markets, I have found no one including myself who can accurately predict future prices, the direction of the market, or anything else that has to do with human action. This leads me to the foreign exchange market.

In 1971, President Richard Nixon took the US off the gold standard and the era of floating exchange rates was born. Since then, the foreign exchange market also known as the forex market has become the single largest financial market in the world.

What are forex rates? Foreign currency exchange rates are what it costs to exchange one country’s currency for another country’s currency. For example, if you go to England on vacation, you will have to pay your expenses in British pounds. Since your money is all in Ringgit Malaysia, you will have to use (sell) some of your Ringgits to buy British pounds.

The forex market is an international over-the-counter market (OTC). It means that it is a decentralized, self-regulated market with no central exchange or clearing house, unlike stocks and futures markets. The main players in the forex market with varying needs and interests are governments and central banks, financial institutions, corporations, investors and traders.

Equities and bonds are commonly favored over currencies in the investment world. Traditional investors only have indirect forex exposure through assets denominated in currencies other than their own. However, over the years, sophisticated people have increasingly taken a closer look at the forex market as a potential source of compelling investment opportunities.

In the forex market, there is always a winner on the other side of a loser’s trade. Forex prices are influenced by a multitude of different factors, from international trade or investment flows to economic or political conditions.

Speculators try to take advantage of even small fluctuations in exchange rates. Your neighbor is probably aware that George Soros is one of the most famous currency speculators. The billionaire hedge fund manager is most famous for speculating on the decline of the British pound, a move that earned over £1 billion in 1992.

Forex is a leveraged (margined) product, which means that you are only required to deposit a small percentage of the full value of your position to place a forex trade. This means that the potential for profit, or loss, from an initial capital outlay is significantly higher than in traditional trading.

The fact that you need to go to bed or a fishing trip with your family does not stop the forex markets from operating. Forex markets are open 24-hours a day from Sunday evening through to Friday night. Trading follows the clock, opening on Monday morning in Wellington, New Zealand, progressing to Asian trade spearheaded out of Tokyo and Singapore, before moving to London and closing on Friday evening in New York. Traders can take a position whenever they want regardless of time.

Real trading in forex is like watching a school of fish move. One minute is total harmony, the next, complete chaos. The forex market can be very volatile. Sentiment, and thus money flows, can change rapidly in the forex market.

Real trading is not something that greedy housewives, retirees or street hawkers can do part-time. It is not for someone who believes he or she can do easily as advertised by clever sales people in the Internet or at most seminars in town. Beware of forex ponzi schemes.

Yeah, you have been probably told it is a land of easy money. What else? Trade with 100% accuracy, earn a regular income every hour, the secrets of trading, etc. The reality is much tougher. It is a long learning curve covering areas such as money management techniques, research abilities and level of discipline.

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