- 'Black Swan' Shuns Public Life Because of Bernanke
- Look Ahead: Markets Count Down to US Jobs Report
- FHA to Toughen Mortgage Rules in Lenders Crackdown
- Obama to Send More Troops; Seeks Afghanistan Exit
- GM Removes CEO Henderson; Whitacre is Interim Chief
- Who Were the Biggest Winners And Losers This Year?
- GE, Comcast Complete Deal Over NBC Universal: Source
- Case Closed but Woods Scrutiny Continues
- Super Fantasy Christmas Gifts of 2009
- Unemployment to Peak at 10.5%: Moody's Economist
- 8 Stocks to Gain on Obama's Afghan Plan: Analysts
- BofA On Proposed Changes In The Housing Bailout Program
- The Future of The Media Landscape
- November Auto Sales Muddle Along
- Busch: What Obama Won't Say Tonight
- Stick with Equities—Avoid Emerging Markets: Laszlo Birinyi
- Pfizer Chomps On A Carrot
- Predictions 2010: Technology
MOST SHARED
- Keeping America Great
- Kohlberg Kravis Bidding for Morgan Stanley's CICC Stake
- Australia Regulator Opposes Caltex-Exxon Deal
- GE, Comcast Complete Deal Over NBC Universal: Source
- Cisco Has 84% of Tandberg, Won't Extend Bid
- Toyota Takes Lead Position in Canada in November
- Australia Parliament Rejects Carbon Trade Laws
- UK Economy Turned, Inflation to Spike: BoE Economist
Text Size 
If you're one of those who thinks a dollar doesn't go as far as it used to, then you know how currency traders feel.
 |
A dollar might not buy as much gas and food as it did nine months ago, but it also doesn't buy as many euro, yen and pounds either.
In fact, the dollar has become the weak sister in the world currency markets, the playground punching bag that regularly gets pushed off the swingset by other denominations that have been supported by their government's monetary policies.
But such is life in the world of currency trading, where even a weak American dollar can mean a big money-making opportunity for smart investors who know when to get in and when to get out.
The currency trade has become increasingly popular as stock markets continue to move sideways and safe-haven government-backed bonds offer low yields.
"You're starting to see more people move to currency trading to try and increase their returns," says Jack Crooks, editor of two currency trading publications with Weiss Research. "People are just waking to the idea that we're very much in a globalized market right now. They're thinking more international about currencies."
Part of the trade's allure is as a hedge against inflation, while other investors like the exposure it gives them to emerging markets.
There are many ways to play the currency markets, from the safety of an exchange-traded fund to the riskiness of currency options and futures contracts.
The currency trade is done in the generic world market known as the foreign exchange, or forex. But unlike the New York Stock Exchange or any of the other bourses around the world, there is no centralized forex trading center. Forex trading occurs wherever currencies change hands.
Trading occurs at a multitude of locations, from banks to brokerages to online trading centers to the Philadelphia Stock Exchange's world currency options center, one of the more popular locales. One of the main advantages of forex trading is that you can buy and sell currencies 24 hours a day, seven days a week.
Currency trades are done in pairs, swapping one for the other. You can exchange your dollars for euros, then buy the dollars back at a later date in the hopes that you can purchase more than you sold, or trade in the euros on another currency.
And you can work with virtually any of the hundreds of currencies around the globe, though most forex trading centers on the eight major currencies--the dollars of America, Canada, Australia and New Zealand, along with the European Union's euro, Japanese yen, British pound and Swiss franc.
There are three ways you can trade currencies--spot, futures and forward.
Spot trading is done at current market prices. You exchange one currency for another and hope the one you bought goes up in value.
Futures trading involves purchasing a contract to buy or sell a currency at a set price in the future. The contract is basically a bet on which direction the currency is going to go. The difference between the price you buy or sell the currency in the futures contract and what it's worth on the spot market is your profit--or if you bet wrong, your loss.
Investment advisers generally recommend setting conservative limits, or puts, on futures trading so as to limit potential losses.
Forward trading involves private contracts that don't necessarily have to follow spot market prices.
Print
Email
- Will the Fed raise rates? Will the dollar continue its slide? CNBC experts weigh in on the year ahead.
- Goldman Sachs has forbidden employees from gathering in private holiday parties of 12 or more.
- Do you have what it takes to run your own business? Ask yourself these questions.
- Heavily armed pirates in Somalia have set up a sort of stock exhange to fund their hijackings.
- Since its launch in 1998, Google has become a primary force on the Internet. How much do you know about the company?
- A famed author has written all his work on an old typewriter that is now up for auction. The NYT reports.
Data is a real-time snapshot *Data is delayed at least 15 minutes