I didn't fully understand how these movements in the market could affect our daily lives until I started trading currencies full time. The most obvious thing is of course when we go abroad and have to buy foreign currency. Regular travelers may be more aware of currency market fluctuations and the increase in visitors to the US around Christmas (due to the weakening dollar) shows how advanced our country is. The exchange rate was almost $2 a pound, a stark contrast to Christmas 2005 when I was lucky to get $1.7 a pound. This may not be a huge amount if exchanging a few hundred pounds, but the difference is huge if you want to buy real estate or other dollar assets (including US shares). For example, a house worth $200,000 in December 2005 would be worth £117,647 whereas the same house a year later would be worth £101,010, a difference of around £16,000. The same principle applies to other currencies both in Europe and internationally.
When buying assets abroad, there are of course special forex brokers who can buy or sell forward currencies, thereby eliminating uncertainty and volatility in the value of the asset, by securing an appropriate exchange rate. Basically, the price is agreed and then fixed for a certain period of time, sometimes up to two years, and the price is usually confirmed with a 10% deposit. The balance is generally required only on the contract award date. Remember that this is a contract and there are heavy penalties for anyone who fails to send funds by the specified date. This way exposure to market fluctuations can be eliminated and is a technique commonly used by those who purchase real estate, ships and other major assets in foreign currency. In addition to these futures contracts, hedging against market volatility can also be done using currency options. You may already have foreign currency assets that you want to sell, but that takes time. You consider that currency movements may be unfavorable for you in the next few months, so you hedge (or take out insurance) with currency options.
Access to foreign exchange markets by ordinary investors and consumers was possible, partly due to deregulation, but largely due to massive changes in technology. When I started trading futures 15 years ago, I had monitors and satellite data, but I had to contact my broker to get a quote. By the time he talks to the broker on the trading floor, the trading opportunity is usually gone. Nowadays all you need is a laptop and a broadband connection. Data arrives in real-time and trading is done with just a click of the mouse. The downside to this speed is that I can make mistakes, like I did when I closed the wrong contract!
Currency is a great market to trade because it is available 24 hours a day, wherever you are, and is only closed from Friday night to Sunday night. Even if you have no intention of trading, or if you own foreign assets or are considering or purchasing them, you should at least have an idea of which way a particular currency is headed from the currency pair chart. These charts are widely available on the internet and with a little time and effort, it will be clear which way the market will move. The currency market is one of the most trending in any financial market. Once a trend is identified, the movement tends to continue for some time, only changing direction with major news announcements or fundamental changes in the world economy.
That's why it's so important to understand a currency and its potential direction before investing abroad – if you get it wrong, you could be stuck on the wrong side for months or even years!
