Tutorial: Popular Forex Currencies
Unlike the stock market where investors have thousands of stocks to choose from, in the currency market, you only need to follow eight major economies and then determine which will provide the best undervalued or overvalued opportunities. These following eight countries make up the majority of trade in the currency market:
These economies have the largest and most sophisticated financial markets in the world. By strictly focusing on these eight countries, we can take advantage of earning interest income on the most credit-worthy and liquid instruments in the financial markets.
Economic data is released from these countries on an almost daily basis, allowing investors to stay on top of the game when it comes to assessing the health of each country and its economy.
Yield and Return
When it comes to trading currencies, the key to remember is that yield drives return.
When you trade in the foreign exchange spot market, you are actually buying and selling two underlying currencies. All currencies are quoted in pairs, because each currency is valued in relation to another. For example, if the EUR/USD pair is quoted as 1.3500 that means it takes $1.35 to purchase one euro.
In every foreign exchange transaction, you are simultaneously buying one currency and selling another. In effect, you are using the proceeds from the currency you sold to purchase the currency you are buying. Furthermore, every currency in the world comes attached with an interest rate set by the central bank of that currency’s country. You are obligated to pay the interest on the currency that you have sold, but you also have the privilege of earning interest on the currency that you have bought.
The forex market also offers tremendous leverage- often as high as 100:1 – which means that you can control $10,000 worth of assets with as little as $100 of capital. However, leverage can be a double-edged sword; it can create massive profits when you are correct, but may also generate huge losses when you are wrong.
Currency values never remain stationary and it is this dynamic that gave birth to one of the most popular trading strategies of all time, the carry trade. Carry traders hope to earn not only the interest rate differential between the two currencies, but also look for their positions to appreciate in value. There have been plenty of opportunities for big profits in the past. Let’s take a look at some historical examples. (To learn more, read Currency Carry Trades Deliver.)
Carry Trade Success
The key to creating a successful carry trade strategy is not simply to pair up the currency with the highest interest rate against a currency with the lowest rate. Rather, far more important than the absolute spread itself is the direction of the spread. In order for carry trades to work best, you need to be long a currency with an interest rate that is in the processes of expanding against a currency with a stationary or contracting interest rate. This dynamic can be true if the central bank of the country that you are long in is looking to raise interest rates or if the central bank of the country that you are short in is looking to lower interest rates.be legally recognized as a deferred compensation plan, this way needs to be created beforehand for a sufficient period of time.
In a similar way, some practices work with a defined benefit pension program as part of an exit strategy to leverage the retirement capital. When the case is that there’s an old owner and a young owner, the bulk of payments going into the defined benefit plan would be converted to the old owner’s benefit. Such transfers of capital to the old owner on a tax deductible basis is effectively the best possible solution. Still, in order for the qualified plan to build up a big enough benefit, a defined benefit strategy needs to be funded for at least five years beforehand.
Sometimes, non-qualified compensation plans are used as tools for providing retirement income to the departing business owner. For example, instead of getting leverage from an owner’s stock through $2 million in non-deductible payment by installments, the owner would rather offer his or her shares to the business for a defensible $1.5 million. It will also enable them to receive $500,000 in deferred compensation payments. With such a pathway at least 25% of the payments for an exiting owner fall under a deductible category to the company as deferred wages. In order to be legally recognized as a deferred compensation plan, this way needs to be created beforehand for a sufficient period of time.