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Investing in Currency Markets

Updated on June 6, 2015

Investing in Currency Markets

Investing in Currency Markets

The investment markets have rapidly changed over the last decade, and many investors are looking for new ways to capitalize on the trends that are present in the financial arena. Most of are familiar with stocks and bonds, which have been some of the most commonly traded assets in the history of the financial arena. But over the last few years, a good deal of attention has been placed in other areas, as well. One example can be found in options, which give investors the opportunity to establish positions based on the belief that the price of an asset will rise or fall in the future.

But there are other examples as well, and investors should remain cognizant of all of these strategies so that they can capitalize on emerging changes in the market as they start to unfold. “One such example can be seen in the currency market,” said Michael Carney, markets analyst at Teach Me Trading, “where investors are literally able to trade one currency for another and then capture returns based on changes in the underlying exchange rate for both currencies.” This might seem like an alternative trading strategy that does not have many practitioners. But the reality is that the currency market is the oldest of all financial markets and that there is more daily trading flow here than there is in all other financial markets combined.

Understanding Exchange Rates

But in order to truly capitalize on changes in these areas, you will first need to understand how currencies are quoted and how exchange rates work.

First, let’s take a look at the most commonly traded currency pair, the EUR/USD. In this case, traders can see the value of 1 Euro expressed in Dollar terms. So, if the quoted exchange rate is 1.50, it will essentially suggest that 1 Euro is worth 1.5 US Dollars. If the quote value rises, it shows that the value of the Euro is rising. If the quoted value falls, it shows that the value of the Dollar is rising. There are many other commonly traded currency pairs. Some of the most common examples include assets like the USD/JPY, the AUD/USD, and the GBP/JPY. All of these assets can be used to express a market view, and when that view is correct significant profits can be captured.

With this in mind, it is a good idea for investors to keep these markets in mind when looking to gain exposure in the financial arena. Stocks, bonds, and gold are all great assets to trade. But it should always be remembered that investors are able to trade actual currencies, as well.

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