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Two Ways to Approach Forex Trading
For most investors or traders with stock market experience, there has to be a shift in attitude to transition into or add currencies as a further opportunity for diversification.
1. Currency trading has been promoted as an "active trader's" opportunity. This type of opportunity suits brokers because it means they earn more due to the nimbleness that accompanies active trading.
2. Currency trading is also promoted as leveraged trading, and therefore, it is easier for a trader to open an account with a small amount of money than is necessary for trading in the stock market.
Besides trading for a profit or yield, currency trading can be used to hedge a stock portfolio. For example, if someone builds a stock portfolio in a country where there is potential for the stock to increase in value, but there is downside risk in terms of the currency (i.e., the U.S. in recent history), a trader could own the stock portfolio and short the dollar against another currency such as the Swiss franc or euro. In this way, the portfolio value will increase, and the negative effect of the declining dollar will be offset. This is true for those investors outside the U.S. who will eventually repatriate profits back to their own currencies. (For a better understanding of risk, read "Understanding Forex Risk Management.") Opening a forex account and day trading or swing trading is most common with this profile in mind.
