TIP: Investors must have confidence in a risk/return relationship
|Speculative currency trading is a high-risk/high-return game. Currency investing diversifies this risk by taking many different positions in many different exchange rates. The risk/return characteristics of currencies are different from other asset classes and among individual exchange rates.
The volatility of major currency pairs, such as EUR/USD, is typically less over the course of a year than the volatility of the S&P 500 Index. The problem is that investors look at short-term volatility and use that as a general measure of risk. That won’t work for currencies as an asset class.
If all forex participants were speculative traders, the story would be different. But they’re not. The majority of forex trades are made not to bid up prices but to cover outstanding positions and otherwise maintain stability.
Positions are taken based on many different perceptions of the market—using strategies that include technical analysis, economic indicators, interest-rate differentials (the “carry tradeâ€), and derivative plays based on emerging as well as major currencies. This multiplicity of “currency views†enhances the natural diversification effect of currency investing.
In the short term, there may be no easily defined relationship between risk and return in forex. Over longer periods, however, valuation trends are slow to change, and it is possible to take advantage of established flows. Read more
Do you want to learn more?
VIDEO: MONTHLY WEBINAR: Exploring the Coast Line of Foreign Exchange Land - Part I - Gonçalo MoreiraVIDEO: MONTHLY WEBINAR: Exploring the Coast Line of Foreign Exchange Land - Part II - Gonçalo Moreira
VIDEO: MONEY MANAGEMENT - Why your money management sucks and what to do about it! - Dirk du Toit
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.