institutional setting in which a given currency trades,” says Werner Bonadurer, clinical professor of finance at Arizona State University’s W.P. Carey School of Business. It still doesn’t makeDIY TRADING a great idea, but it could tip the knowledge base in your favor. Central banks take center stage. The monetary policies central banks set have a direct correlation to how currencies perform. “Central banks make the rules, and we are all cooking in their kitchen,” says Lennon Sweeting, corporate dealer with USForex, an international currency payments provider, based in Toronto. He cites this real-time example of central banks in action: “The U.S. Federal Reserve is close to tightening monetary policy, while other central banks are loosening policy and creating an easy-money environment. This divergence should see global major [currencies] lose value, while tightening policy in the U.S. should see the greenback gain.” One banking superstar can make a difference. Do you remember how much Democrats and Republicans loved former U.S. Federal Reserve Chairman Alan Greenspan? You could compare him to RaghuramRajan, governor of the Reserve Bank of India. He already had a stellar track record as a chief economist for the International Monetary Fund and a University of Chicago finance professor. “After taking office, Rajan’s strategy was straightforward: Reduce current account deficits, lower inflation and implement monetary reforms,” Gaffney says. “He’s a year and a half into his appointment, and the numbers are clearly headed in his favor.” Those numbers include an over 30 percent drop in the inflation rate over the past 16 months and huge increases in foreign investment in the first weeks of 2015, which are both robust signs of an economy and currency on the move.
Try foreign exchange through exchange-traded funds. As securities that track a commodity or asset group, ETFs often prove a profitable favorite for self-directed investors. “For those looking to get into the [forex] market but don’t have time to get trained, I’d encourage using the low leverage of currency ETFs,” says John O’Donnell, chief knowledge officer of the Online Trading Academy, based in Irvine, California. “These can invest in either a single currency or a basket of currencies.” He adds that currency ETFs can help new traders capitalize on the potential benefits of foreign exchange, as they hedge risk through diversification. Treat currencies like small change. Although an upswing in a currency can reap handsome profits, the sector remains volatile because unpredictable market forces can act like gale-force winds. “They should be a small part of every portfolio, due to the fact that they’re almost entirely none correlated to the stock, bond and commodity market,” says Jeffrey Sica, president, CEO and chief investment officer of Circle Squared Alternative Investments in Morristown, New Jersey. How much is the wisest percentage? “No more than 10 percent,” he says. The long haul may prove better than average.
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