BASIC TECHNIQUES
Forex Is Your Friend
Foreign Exchange As The Trader's Alternative
by Mark Galant
Trading opportunities in the forex market deserve serious consideration as a diversification strategy for your portfolio.
While online equities and futures trading have enjoyed exponential growth and widespread notoriety over the past few years, online foreign exchange trading is only now gaining popularity among seasoned active traders, commodity trading advisors (CTAs), and other professional money managers.
Until recently, large international banks dominated the foreign exchange (FX or forex for short) market, only allowing access via telephone trading to a select few such as Fortune 1000 companies, large funds, high-net worth individuals, and so on. But now, the tide has turned and finally there are established online trading firms that provide individual investors with direct access to the largest, most liquid financial market in the world.
DIVERSIFY YOUR DIVERSIFICATION STRATEGY
In addition to the market's trading opportunities, foreign exchange can be a solid diversification component in your financial portfolio. Most diversification strategies involve a combination of sector allocation, foreign and domestic equities, and fixed income. Some participants have branched out into precious metals and/or energy products; however, few traders consider expanding into forex. Why?
The reason may be in the simple fact that in the US, investors tend to be underexposed to foreign exchange. Unfamiliarity typically breeds misconceptions, and foreign exchange in the US is no exception.
Figure 1: SIMPLE TRENDLINE. This hourly GDP chart shows an excellent opportunity to enter a short position on a trendline break of a previously strong upward trend.
RISKY BUSINESS?
Is forex as risky as everyone thinks? One way to measure risk is to compare a financial product's risk relative to its return. If you take the time to compare an investment in forex to common investments such as equities and fixed income, you will find that from a risk/reward standpoint, forex investments provide respectable returns and should be considered viable portfolio diversification tools.
...Continued in the August 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the August 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.