How It Works Before Investing: Foreign Exchange Currency Speculation (Case Study Sample)

FOREIGN EXCHANGE CURRENCY SPECULATION By: Course: Professor’s Name: University: City: Date: Foreign Exchange Currency Speculation Table of Contents Cover Page……………………………………………………………………………………….1 Table of Contents………………………………………………………………………..……….2 Executive Summary………………………………………………………………………...…….3 Introduction……………………………………………………………………………..………..3 The Trading Strategy……………………………………………………………………………..4 The Trade and Risk Management Tools…………………………………………………………..6 Forward Trading………………………………………………………………..………..………..7 Conclusion………………………………………………………………………..……..………..7 Reference List…………………………………………………………………………..………..9 Executive Summary Investors need to take the time to study the foreign exchange market in order to understand how it works before investing. Because it is tricky to understand the movement of the various currencies, it is essential to use the Demo trading account especially when the investor is entering the market for the first time in order to learn the market fully. Traders should also research well about the forex market by reading articles from the numerous websites and eBooks. The major currencies that a trader can invest in order to make profits include the U.S Dollar, Swiss Franc, European Euro, Great Britain Pound, New Zealand Dollar, Australian Dollar, and Japanese Yen. A trader can use the strategy of allocating much of his or her money on either buying or selling the currencies and buy a few commodities when the probability of the commodities to yield good returns seems minimal after studying the market closely. An investor can also engage in forward trading for the purposes of hedging or speculating. Hedging helps to protect an investor's position from the hostile currency pair movements. Introduction There are numerous traders in the forex market all over the globe because the market allows trading in the currencies of several nations. Investors all over the world sell and buy the currencies over the internet and individuals trade in the comfort of their homes. According to Katusiime, Shamsuddin, and Agbola (2015), the turnover at the forex market is about US$6 trillion each day. The foreign exchange market comprises the commercial corporations, banks, hedge funds, and brokers. The participants can either sell or buy through speculating on the currencies. The foreign exchange market is open Monday to Friday for 24 hours each day and closes on weekends making it 5 days of trading for every week. Chaboud, Chiquoine, Hjalmarsson, and Vega (2014) assert that the huge volumes of trading that happen in the forex market attracts many investors, hence, the market is highly liquid as there is always enough cash. A good investor who trades in the foreign exchange ought to understand the concepts of both hedging and speculation. Evans (2018) defines hedging as the buying or selling at the same time in two different markets while speculation involves the trading in transactions, which are too risky and can lead to the loss of the investor's capital while expecting large profits. This reason made me to use hedging instead of speculation in order to protect my position from the hostile currency pair movements. It is dangerous for an investor to trade in the forex market if he or she does not have the market's information. The Trading Strategy I took much of my time to study the foreign exchange market and comprehend how to trade in a risk-free manner on the easy markets.com. Since, it is tricky to understand the movement of the various currencies, I took about 3 weeks looking at the figures on the easy markets.com. I realized that the profitable currencies do up and down within minutes and even seconds. This unpredictable movement made it even trickier for me to comprehend and decide on which currencies to invest. When I finally decided to trade, I traded in 9 transactions, 2 of which were forward deals and 2 commodities (copper and cotton) both in U.S dollars. I traded 7 currencies which are the U.S Dollar, Swiss Franc, European Euro, Great Britain Pound, New Zealand Dollar, Australian Dollar, and Japanese Yen. My strategy included the allocation of much of my money on either buying or selling the currencies but bought a few commodities because their probability of yielding returns was minimal according to my study over the same period. Since, the New Zealand Dollar seemed to perform better than the rest, I invested the highest amount of my money in it by buying 120,000 NZD using the U.S Dollars. Even the probability of the commodities yielding returns was minimal, I invested in copper and cotton both in U.S dollars because they were a bit profitable than the rest of the commodities. Most of the other commodities' prices could change within seconds. I traded severally, setting my take profit (TP) levels too close to the buy or sell price and stop loss (SL) levels far from the buy or sell prices in order to play safe. Some of the currencies that seemed profitable could drop as soon as I invested resulting in huge losses but in most cases, I made profits because of the TP and SL levels strategy. I invested in the strong foreign markets which is the reason I invested mostly in European Euros and the US Dollars. According to Hong, Wang, and Kafouros (2015), most overseas markets are strong, hence, can help traders to invest in risk-free strategies. I purchased most of the currencies in US Dollars where their open rates looked attractive like I bought the New Zealand Dollar at 0.6533 and in the combined transaction, I made a profit of AUD$1,421.65. This profit is attributed to the steadiness of currencies such as the New Zealand Dollar and European Euros against the US Dollars. Connolly and Swoboda (2018) assert that when certain currencies are steady against another, traders make good profits from that but individuals should be careful because the steadiness does not last for long. Therefore, the traded pairs can easily come back to their original starting positions and even become weak leading to huge losses. Most of my profits came from my trades in the New Zealand Dollar, which performed better than the rest, which is why I devoted most of my money in buying the NZD using the U.S Dollars. According to Buckley, Clegg, Voss, Cross, Liu, and Zheng (2018), the New Zealand Dollar did well because of the Euro-Zone crisis but benefited the Chinese market and performed better than the European Euro making China to grow. The growth of the Chinese market might be a challenge when the country reduces its international business but the Euro-Zone problems might control any substantial setback. Therefore, my favorite trade was in the New Zealand Dollar against the U.S Dollars because I made a lot of profits from the pair, as the New Zealand Dollar grew stronger than the other currencies. To me, the market favored the buyers and in the long-term, the traders who are bullish might make good profits by using strategies such as setting the TP levels around the next resistance levels. The Trade and Risk Management Tools To make the profits I used the take profit (TP) and stop losses (SL) levels strategy, which ensured that I played safe and became a bit risk-free. According to Fischbacher, Hoffmann, and Schudy (2017), forex dealers use both the TP and SL levels to protect themselves from the unnecessary financial risks and to make sure that they use the profits that they make in to trade successfully. The forex traders use both the TP and SL levels as orders that they place in the forex market in order to close the positions that are open. It is not wise to enter a trade without a good risk management strategy, which these two orders become part. Both the TP and SL levels help traders to calculate what they are likely to lose or gain from the trades that they enter. Setting the take profit (TP) levels too close to the buy or sell price ensures that a trader plays safe and is likely to gain faster before the price starts taking the reverse direction. Even though some traders might see the TP levels as not important, they reduce numerous problems that the traders face in order to win. Most forex traders regard the stop loss (SL) levels than the take profit (TP) levels, hence, become more careful when setting them because prices can take a reverse direction as soon as an individual invests, which results in huge losses. Ozturk, Toroslu, and Fidan (2016) assert that the TP and SL levels are important because they stop the forex traders from making choices based on their emotions when entering the trades. Traders in the forex markets fear when they make losses and become greedy when they make good profits. This behavior can make those who ...