Take a Sip From the Most Liquid Market on Earth: Forex

Article by:

Kai Peterson

EO Germany

Kai Petersen is co-founder and managing director of MediaMate, a localization company offering native speaker translations. He diversified 15 months ago and is now responsible for one of Germany’s leading Forex online brokers, www.finexo.de.

If someone asked you, “What’s the most liquid market on earth?” you might think it a trick question and respond with, “Beer sales at the World Cup in Germany!” But it’s not a trick question, and the actual answer is the Foreign Exchange. “Forex,” as it is commonly known, has a daily turnover of approximately US$1.9 trillion and is the largest single trading market in the world. In fact, it is larger than all the other trading markets combined.

Traveling to another country that uses a different currency means getting your hands on some of that currency. What you are actually doing is “buying” an amount of foreign currency by “selling” your own currency. When you return, you “sell” what you have left of the foreign currency to the bank. But the bank will then pay a lower price for the foreign currency than you paid for it! This price difference is called “the spread,” and it is hugely profitable for banks.

International companies have to deal with another aspect of forex: As changes in exchange rates can drastically influence their profits, it becomes necessary to hedge this risk. One way to do this is through currency options that allow you to buy (or sell) a certain currency in the future at a rate that is fixed today— the option price you pay today is like an insurance against the currency risk.

Who else is active in the forex market? Governments, all major banks, insurance companies, hedge and mutual funds, investment houses and, of course, individual investors who either trade their own forex accounts online or have professional forex money managers who do it for them.

While the stock exchange (actually a company) is responsible for quoting the prices of the stocks and derivatives traded, there is no central forex authority. Instead, there is only the inter-bank market, which is a cooperation of international banks that constantly quote bid prices to other banks.

The lack of a central forex organization has some interesting implications. It’s not only one of the least regulated markets, it’s also constantly open from Monday morning in Australia until Friday afternoon in New York. Additionally, it’s a highly transparent market— no CEO can “cook the books” of the US dollar, and even drastic changes between the major currencies rarely exceed 1 to 2 percent, elimi­nating the threat of a “Black Friday” in forex. Last, but not least, the forex market is never “bullish” or “bear­ish” because a declining US dollar against the euro means a rising euro against the US dollar. This is true for multiple currency pairs and offers forex traders plenty of opportunities to take profits from the markets day after day.

All these facts make forex highly attractive to private investors. And, with the Internet, there’s excellent online trading software that provides direct access to the market. The small percentage of change that usually occurs between the major currencies allows banks and brokers to offer a highly leveraged invest­ment strategy. The industry standard is a leverage of 1:100, which allows you to electronically buy euro worth US$100,000 with a margin payment of only US$1,000 and to sell just as easily with another click.

If you are interested in this profitable market, you can consult a professional forex trader. These profes­sionals can help you create a managed account that is similar to classic investment funds and allows investors to further diversify their portfolios. With much lower leverages (usually between 1:2 and 1:5), annual compounded returns of more than 15% are not unreasonable while still implementing low risk money management strategies.

Managed accounts are now available with a capital guarantee provided by the largest private banking group in Switzerland, showing that forex is coming of age. It is expected to take a leading position among other investment opportunities during the coming years. To get started now, here’s what you do:

• Decide whether you feel comfortable speculating in forex yourself or leaving it to a professional
• If you want to give it a shot yourself, read a book and download a demo platform to get a feeling for trading.
• Otherwise, speak to someone offering a forex managed account, and ask the same questions you would ask anyone offering you an investment opportunity.