​Forex: The Best Year-End Investment Strategy

Michael S. Young  |


With year-end fast approaching there is no shortage of advice regarding tax planning, charitable giving and retirement strategies. While it is certainly important to pay attention to these topics, it is also wise to focus on how to preserve and grow your wealth. Fortunately, the foreign exchange (Forex or FX) market is a great way to give your portfolio a boost. Isn’t it time to begin thinking about asset classes that are non correlated to the Red Hot Stock market?

Forex trading strategies essentially involve participants who buy, sell, exchange and speculate on currencies. Currently a $5.2 trillion market per day, Forex trading involves banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers and investors. As the largest financial market in the world, Forex continues to grow in popularity due largely to the fact that the performance of a multi-currency foreign exchange portfolio has traditionally been non-correlated with that of customary equity and fixed income investments. Unlike equity and fixed income managers, a Forex manager typically engages in both long and short spot Forex positions and multiple complex FX OTC strategies to ensure profitability in any market condition.

As the basis of Forex trading, currency pairs are important to understand. Essentially a currency pair is the quotation and pricing structure of the currencies traded in the Forex market. The value of a currency is a rate and is determined by its comparison to another currency. The first listed currency of a currency pair is called the base currency, and the second currency is called the quote currency or cross rate. The currency pair indicates how much of the quote currency is needed to purchase one unit of the base currency. All Forex trades involve the simultaneous purchase of one currency and sale of another, but the currency pair itself can be thought of as a single unit, an instrument that is bought or sold. If you buy a currency pair, you buy the base currency and implicitly sell the quoted currency.

The bid (buy price) represents how much of the quote currency you need to get one unit of the base currency. Conversely, when you sell the currency pair, you sell the base currency and receive the quote currency. The ask (sell price) for the currency pair represents how much you will get in the quote currency for selling one unit of base currency. For example, if the USD/EUR currency pair is quoted as being USD/EUR = 1.5 and you purchase the pair, this means that for every 1.5 Euros that you sell, you purchase (receive) $1 in U.S. currency. If you sold the currency pair, you would receive 1.5 Euros for every $1 you sell. The inverse of the currency quote is EUR/USD, and the corresponding price would be EUR/USD = 0.667, meaning that 66.7 cents in U.S. currency would buy 1 Euro.

There are as many currency pairs as there are currencies in the world. The total number of currency pairs that exist changes as currencies come and go. All currency pairs are categorized according to the amount of volume that is traded on a daily basis for a pair. The currencies that trade the most volume against the U.S. dollar are referred to as the major currencies. These include the EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD and USD/CAD. All of the major currency pairs have very liquid markets that trade 24 hours a day every business day, and they have very narrow spreads.

Quite often, the stock markets can hit a lull, resulting in shrinking volumes and activity. As a result, it may be hard to open and close positions. Furthermore, in a declining market it is only with extreme ingenuity and sometimes luck that an equities investor can make a profit. It is difficult to short-sell in the U.S. stock market because of strict rules and regulations. Forex offers the opportunity to profit in both rising and declining markets because with every trade, you are buying and selling at the same time, and short-selling is, therefore, a part of every trade. Since the Forex market is so liquid, traders are not required to wait for an uptick before they are allowed to enter into a short position, as is the rule in the stock market.

Aside from providing a floor for the buying, selling, exchanging and speculation of currencies, the Forex market also enables currency conversion for international trade and investment. The Forex market has unique characteristics and properties that make it an attractive market for investors who want to optimize their profits. In addition, the use of leverage in the Forex market is one of the highest that investors can obtain.

Be sure to conduct proper due diligence before selecting a Forex manager with which to work. Mediatrix Capital’s managed account strategy, for example, is anchored by a defensive investment philosophy emphasizing portfolio construction with an asymmetric return profile and definable downside risk to capital invested. The trading team manages pre-programed algorithmic positions through both overlay and absolute return strategies that employ distinctive methodologies that integrate the study of correlated and non-correlated currency pairs, quantitative model-building, fundamental and technical forecasting.

For further information, visit www.mediatrixcapital.com or call 1-800-905-1006.

Source: Investopedia

Disclaimer
In no event should the content of this material be construed as an advertisement, express or an implied promise, guarantee or implication by or from Mediatrix Capital Inc. (MC) or any of its partner or subsidiary companies. This is not an attempt to sell or solicit any security and should not be taken as such. The content of this document is for informational purposes only. Potential Accredited Investors are advised to carefully read the Disclosure Documents to determine whether a managed investment in MC is consistent with their financial situations and investment objectives. Past results are no guarantee of future performance. Mediatrix Capital is a foreign corporation based in Nassau Bahamas, and does not operate within the United States.

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