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How To Make “Free” Money Through Currency Speculation

Updated on August 13, 2018
Brandon Yudkoff profile image

Brandon is a commodity trader working in South Africa. He has a BSc in Economics and an MSc in Economics (Banking & Finance).

Learning The Markets
Learning The Markets

Basis Of The Assertion

It’s currently August 13th 2018, 11am GMT and emerging markets currencies are being decimated by the news of the Turkish Lira collapsing. The Dollar(US) and the Yen(Japan) have become the most sought-after currencies overnight and fortunes have been lost in the matter of hours.

The reason for the demand for USD and Yen is from an economic principle known as flight-to-quality. Which at a basic level means people will sell assets seen as “risky” in place of assets seen as “safe”. It’s a shock factor which means it’s time for budding currency traders to make their mark on the markets. It has nothing to do with the actual profitability of the asset, it just is a knee-jerk reaction.

So it’s time for you to downloading a trading app that doesn’t charge brokerage or transaction fees.

Safe Assets Vs Risky Assets

Arbitrary terms used to distinguish established returns from newer markets. Although it doesn’t always hold true, a way to think about it is safe= first world countries (safest is almost always the US) risky= third world countries (calling them emerging markets is a kinder term).

How To Speculate

Currency speculation is essentially taking a bet on what will happen to the currency levels of a country. You either think the currency is worth more than it’s currently listed as, or it’s worth less than it’s currently listed as.

During a collapse of one emerging markets currency, other emerging markets currency will also fall. This means the latter country has a currency valuation lower than what it should be during the former countries collapse. So as a savvy investor, it’s time to invest in the seemingly weak currency to profit off its comeback.

Applicability

The market fluctuates like this on a daily level and using financial instruments such as orders and stop losses you can make a living just day trading currencies.

Applying Speculation

Looking at the markets today there is a great example of how to speculate currency. We’ll use the South Africa Rand vs USD.

The Rand yesterday was valued 14.0990 at the close. So, one USD would buy you that many Rands. Overnight the Rand value jumped to 15.7000 to one USD. If you bought Rands at that level, you’d be cashing in a small fortune right now. This is because the rand currently is trading at 14.4716 as I write this.

You might be wondering well how would this make me a small fortune? Well let’s look at the mathematics of this.

Say you bought $100K worth of Rands last night at the high, you’d have gotten R1.57million. A considerable amount to receive. Now if you were to convert that back to USD right now it would be at 14.4716 you’d get $108,488.3495 meaning you made a profit of about $8.5K in a couple hours.

Expressed in one line

$100,000 x 15.7000= R1,570,000 / 14.4716 = $108,488.3495

Dangers

Now there are of course dangers in speculation, like the value of market you think is being undervalued could be overvalued or at par value (equal to what it’s worth). However, this is rarely the case and it only ever holds true when both countries have a heavily intertwined economy. This can be quickly searched. For example, Turkey’s biggest trading partners are Russia, German, China, and the United States. So one can say that these countries might lose export ability to Turkey, but all are established markets (although technically speaking China and Russia are considered emerging markets). This means other emerging markets shouldn’t be heavily affected.

If their biggest trading partners had included South Africa than there would be a concern as it would most likely affect all the African countries.

Low ability to invest to start

If you’re concerned about the values used above remember all things are scalable. With 100k there was a profit of ~8.5k, if you had 1million the profit would be ~85k, now if you had 10k your profit would be 850. But remember $850 dollars over a few hours is $850 you didn’t have before.

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