Foreign currency trading attracted billions of dollars from institutions and investors in the late '70s when world economies began to float their currencies. Since then, foreign currency trading has only increased, now totaling over a trillion dollars a day, as more and more investors begin to realize the opportunities available in the currency markets. In 1992, one of the most well-known investors of our time, George Soros, was able to make one billion dollars in just two days of currency trading!
The foreign exchange trading markets are rarely highlighted in the five o'clock news. This is partially due to the scarce regulation of currency markets. Before participating in foreign exchange trading, it's important that investors take the time to really understand the currency markets. Knowing the history of the market, what factors influence currency changes, and the tools available to retail and institutional clients can help investors make informed and smart decisions.Participating in currency trading can help accomplish a variety of financial objectives. There are two main reasons that investors will make currency investments--to speculate and to hedge. Although the currency markets aren't as highly publicized as the stock and bond markets, there is an abundance of profitable opportunities in foreign currency trading. Since there are so many influencing factors on the currency markets, investments tend to be very speculative.Hedging against currency movement is a more conservative investment route. Almost all of the world's largest corporations participate in currency hedging. For institutions, currency hedging helps protect against large devaluation losses. For retail investors, hedging can help protect against positions already established in a portfolio.Tools Available to Currency Traders
There are many news tools available to currency traders. Several online financial firms now specialize in providing technical analysis trading programs to consumers. In addition to the physical tools available, new investment vehicles are also helping retail investors gain exposure to the currency markets.Hedge funds were developed in the '90s and provide investors with the ability to pool money together. Unlike a mutual fund, however, hedge funds are permitted to take both long and short positions in a portfolio. In addition, the use of leverage also helps hedge fund managers earn sizable profits for their investors. Currency futures, options, and contracts for differences, are also helping retail investors get involved in currency transactions. For decades, institutional investors have been playing the foreign exchange markets while leaving smaller investors out of the game. Retail investors, however, now have the ability to realize profits that are generated by trading foreign currencies.Diversifying Your Portfolio with Currency Investments
Retail and institutional investors are increasingly adding currency investments to their portfolios. Currency investments are considered derivatives, an important asset class usually forgotten by most investors. When there is a lack of opportunities in other markets, such as the stock and bond markets, the currency market is an excellent place for investors to seek profitable returns.Retail investors typically bear most of the burden during stock market crashes. Institutions do run losses, but they still remain profitable because of their hedging techniques. In other words, during falling markets institutions are making money off their shorting strategies. Some retail investors are picking up similar strategies in the currency market to insure against equity market downturns.
