By Peter Freeman,
, September 2007
Currency trading is set to become the next big thing among financial risk takers. That, at least, is the view of Robert Francis, head of Easy-Forex, Australia's leading online currency trading group. And while Francis obviously has a strong bottom-line motivation for making this prediction, he cites a number of developments that give weight to his forecast.
The main new factor, he says, is the imminent arrival of the Australian Stock Exchange as a major player in the market for Contracts for Difference (CFDs). "I suspect this new competition will mean quite a few of the existing CFD issuers will look for new business opportunities, and currency trading is likely to be high on their list," says Francis.
While many issuers already offer facilities to speculate on exchange rate movements, in most cases these are structured as CFDs rather than direct currency trading accounts.
He also expects the big retail banks to start taking an interest in offering currency trading to their customers, taking on Easy-Forex and its existing offshore rivals such as Mgforex (www.mgforex.com) and Oanda (www.oanda.com). There is the possibility of Macquarie Bank doing the same, with its recent acquisition of online foreign exchange firm OzForex a sign that such a move is being considered.
All or any of these developments would almost certainly unleash a significant marketing push, in the process raising the profile of currency trading. That this could result in a surge of new participants is suggested by the fact that currency trading is both readily accessible and, while high risk, allows participants to cap their potential losses.
Perhaps the most important issue of all is that it is possible to start trading in currencies with as little as $25 yes, $25.
What's more, the way trading with firms such as Easy-Forex is arranged, you can't lose more than you invest even if the currency you bet on does a sudden about face. This is because your position that is, your bet on the direction of a particular exchange rate is closed out automatically if you get it wrong. This is not just to protect you, but also the currency trading firm. "Our system does it automatically," says Francis, who stresses that clients don't stand to lose any more than they invest even if his firm can't close the position before a loss is registered. This means it is possible to set aside a few thousand dollars in speculative funds, knowing that you aren't putting the rest of your savings at risk. The third factor is the way in which currency trading is, in effect, heavily geared since, in most cases, you only put up one percent of the value of the currency position you take.
This means you stand to make big gains if you get the direction of the exchange rate change correct. Of course, if you get it wrong your position will be closed out very quickly, leaving you to start all over again, but with less to play with (ie. minus that one percent).
"Currency trading is high return but high risk," says Francis. Traders who have both discipline and do their homework can substantially improve the odds of success.
It's important to know just what you're doing. "Some make the mistake of thinking they need to trade a lot to be successful, but often the opposite is the case," he says.
Given you are merely betting on the direction of an exchange rate "pair" eg. the $AU/$US it's a matter of waiting for the moment when you assess the likely direction to be more certain than usual. "A successful currency trader may only make one or two trades a month," says Francis.
For the complete story see Money Magazine's September 2007 issue. Subscribe now.
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