Currency Market Offers Opportunity But Only for the Savvy

Citigroup’s Anderson sees the Canadian dollar is No. 1, followed by the Norwegian Krone and Australian dollar.

“They are a secure producer of oil," he says. "It should make their product very attractive with prices up. On top of that, you had a central bank that paused rates because of QE2. Now, the central bank is segueing into a rate hike in the second quarter. It’s a bullish factor in addition to oil.”

That said, there's also a fair amount of psychology involved in the currency markets. That along with momentum often lead to price moves that are overdone, and quickly reversed.

How to Get In

Online platforms like FXCM.com, FOREX.com and CitiFxPro.com offer retail investors the ability to trade the full spectrum of global currencies.

Importantly, these platforms allow investors to create different currency crosses without playing the U.S. dollar.

Englander of Citigroup offers advice: “Only bullish on sterling? Buy one unit of sterling, sell one unit of Euro—and you’ve created a cross rate synthetically. It’s a much cleaner, easier route."

A "cross-rate" refers to a currency trade contract that does not involve the U.S. dollar. If you want to trade Euro/Yen, for example, a U.S. investor would normally need to trade two positions: Euro/USD and Yen/USD. Separate positions are separate transactions, each requiring their own 'margin', industry jargon for deposit. A cross rate allows you to trade currency pairs in one single transaction, and pay one single margin.

Bear in mind, account minimums range widely. CitiFXPro is the Cadillac version, with a minimum of $10,000 or equivalent in a number of other currencies, while Compare FXCM offering "micro” account access for $50.

The fee structure for these online platforms, however, is uniform. While many brokers will charge a markup on the spread in addition to a monthly fee for using their platform, FXCM and CitiFXPro charge fees only on a per-trade basis.

The spread, known as the cost to trade, determines your fee. It is the difference between the bid and the ask, which you are always able to see before you trade.

For example, FXCM's markup on the spread for the "micro lot" ($1,000) trade is 10 cents. For a "mini lot," or standard $10,000 account, the charge is $1.00.

The industry term for this fee is called a PIP, or point in percentage, which is a point system for calculating profits and losses. For CitiFXPro, on a $100,00 Euro/dollar trade, 1 PIP is equal to $10. So the PIP on their 1.6 spread is $16. Spreads are determined by the vendor, so compare them before opening an account.

If you want to avoid account minimums and doing your own trading, try exchange-traded funds, ETFs, and exchange traded notes, ETNs, which offer easy diversification to foreign currencies, and trade just like a stock in your brokerage account.

There are some six dozen currency ETFs. Less than half are U.S. listed

CurrencyShares, for instance, offers almost a dozen, dealing in both major and lesser ones, including the Swiss Franc, Mexican Peso and Russian Ruble. PowerShares, ProShares,  MarketVector, Barclays and WidsomTree are also very active in the field.

Barclays' iPath offers four ETNs linked to three currencies (Pound, Euro, Yen). iPath and Market Vectors also offer ETNs.

Be sure to check with your accountant about taxation differences between ETNs and ETFs.

ETFs and ETNs are the simple way of accessing foreign exchange, but cover a limited—if growing—number of  currencies.

A more dedicated foreign exchange investor will need to open an account with one of the major brokerage firms like FXCM

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[FXCM  Loading...      ()   ]. These firms recommend that you start with a practice account to learn the ins and outs of the foreign exchange markets before you put your investment capital to work.

Currencies trade virtually 24 hours a day and the market moves at lightning speed. Price swings can be swift, large and unexpected.