Currency Trading - Dabbler.com

Currency Trading

There are many investment opportunities available to the public. Stocks, bonds and mutual funds all flood the investment market and draw the eye of potential investors. Currency trading is a very valid option when considering your financial future.

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Oftentimes rather than investing in a single company you’re investing in the economy of an entire country to succeed and provide you with trading options later. Currency trading requires foresight and belief.

Currency Trading:

Currency trading works like any other trading. Using a market (The FOREX, which is explained later) buyers will purchase a different currency based on the current exchange rates offered. Those exchange rates and the value of currencies will then fluctuate based on varying factors within the country. Most countries no longer use the “gold” system requiring them to have a requisite amount of gold to support their currency. This allows economies to have a bigger impact on currencies. Currency trades work as a standard trade as an inherent short. The goal in currency trading is to trade away while the currency is strong, and bring it back when the currency is weak with a tidy profit.  One example of an excellent time for potential currency trading was the British referendum on staying in the european union. During the so-called BREXIT vote, people were betting on the effects the result would have on currency. Many financial exits were predicting a severe fall in the value of the British pound should the vote pass and the Great Britain leave the European Union. When this occurred they were correct. The value of the British pound dropped heavily over the next few months (with huge spikes on the day itself) and has seen about a 15% drop in this short period. Currency trades who traded their pounds before the vote can now trade back their other currency for the pound at a healthy profit. Ideally the trade will trade back when they believe the Economy is about to surge and grow in value once again, thus increasing their investment on both sides of the trade.

Currency Arbitrage:

Currency Arbitrage is a method of exploiting different trading brokers. Brokers list currencies just as they do with stocks. They provide a value they are willing to trade currencies at. Why are these ever different? They can be different based on differing factors for each bank and brokerage. Future projections or bank needs can create gaps. The key to currency arbitrage is exploiting the prices they are willing to buy and selling currencies at. The goal is to sell a currency to the first Bank/Brokerage and then to sell your purchased currency back to the second Bank/Brokerage and come out ahead. For example you sell 100 American dollars to Bank A and receive 75 British pounds. Bank B has a differing rate, and you sell your 75 British pounds to them for 106 American Dollars. Without doing anything but noticing a market inefficiency you have gained a 6% profit. This is an incredibly high return and really just used for an example.

The second type of currency arbitrage is called triangular arbitrage. This system is similar in essentials to two currency arbitrage. The difference here is that you include a third trade and a third currency in order to get back to your initial currency. Instead of trading A for B and then B for a, triangular trades A for B, B for C, and C for A.  It’s more complex because this necessitates more trading costs and more analysis but is still relatively simple in essentials.

FOREX:

Forex is the slang term for the foreign exchange. Forex is responsible for handling currency trading. Forex is a decentralized market. This means it owes no allegiance to a specific location or specific country. That’s important as allegiance to a country would potentially indicate favoritism which isn’t an option when currency trading. Currency Arbitrage in FOREX is all about mathematics and mostly about exploiting rounding in trades. It will generally take at least triangular arbitrage and will take $10000 dollar investments each time. $10000 dollars is considered a “mini-lot” while standard lots are $100000.

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