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Home Opinion Opinion Stops and limits critical
Stops and limits critical PDF Print E-mail
Written by Gary Howes   
Thursday, 11 June 2009 10:22
Spikes in forex rates have made the retail trading market more popular than ever.

There are been a great deal of excitement in the foreign currency trading world recently as volatility spikes provide 200-300 pip movements in a single day.

These fluctuations present opportunities for large profits and granted those brave enough with significant gains.

Zen Bajina finds out what has been going on and talks about spread-betting forex with Ben Cuthbert from Tradefair:

There has been a general increase in forex trading by individual investors since its starting point in the 1980s.  Ben tells me that this is particularly prevalent in Asia, where Tokyo now has a 15 billion dollar-a-day retail market.  Here in the UK, the availability of online trading and spread-betting accounts has opened up the market place but it may be opportunities for larger-than-normal profits, as currencies swing up and down against each other in the current economic and political environment, which is fuelling its popularity. Individual speculators also like the abundance of leverage available. For example, £10,000 can be leveraged to trade with as much as £100,000 by using margins - allowing the chance of great returns (although not without risk).

Tradefair has seen ‘spikes’ in forex trading volume too, with Aug 08, Dec 08 and Jan 09 having notably higher amounts of forex trading. You can see its appeal when, for example, in December 08, the EUR/USD went from 1.2454 on 2nd Dec to 1.4719 on 18th Dec – a 2265 point move.  

Had you bet at £100 per point that the dollar would rise at the start of that period and closed the bet at the end of it, the profit in those 16 days would have been £226,500.

The forex marketplace is extensive and individual investors are unlikely to be unduly affected by the giant hot-shots who occasionally corner other markets. George Soros bet a huge amount that sterling would decline recently and reportedly made around $2 billion in profit.  He is a real forex success story. However, Soros is well-known for accepting that losses will be made and need to be part of the plan.

Despite appearing to be less information available on foreign currency trading, general world news is really what affects currency values. The recent news reporting about swine flu sent the Mexican peso down and the resurgence in the oil price helped appreciate the Norwegian krone by 15% during April and May. Rebounding currencies that have been oversold also provided good profit opportunities. Currencies which suffered a lot earlier in the year, such as the rand (South Africa) and Polish zloty, are now on the up.  

The future holds…?

April and May have been positive months for many markets and early indicators suggest the start of economic recovery in is on the horizon. In forex, there are signs of a healthy carry-trade environment, where the market likes currencies from countries that have higher interest rates. This tends to appear in the period following a recession. So, with this is mind, what you are looking for are currencies where the country is attractively valued, interest rates are relatively high and economies are growing. The Norwegian krone is a good example of this.

However, if you are spread-betting anything in this environment, stops and limits are critical.  Decide an exit strategy and then put them on when you make a trade.  

Ben says “If you are not using them you are crazy, unless you are a bank and have an endless wallet of money. I use them all the time in the current conditions.”

Now that markets are a little tamer than before but still yielding profit opportunities, perhaps now is the time to dip you toes in the forex market.
 

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