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Duck And Dive But Not With Borrowed Money

Jan 17, 2008
For a currency deal you need a buyer and a seller. As soon as they do a trade, there will be a winner and a loser.

Let us take a Mr. Brown and a Mr Smith both residing in the U.K. thus their home currency being Sterling. They have enough cash funds on deposit with which they wish to trade. They will not need the money urgently, and can afford to wait for a substantial time should they be unlucky enough to hold a currency that might begin to depreciate.
Both are ducking and diving, happy to work on a small profit.

So, let us assume Mr. Brown bought dollars. To start with, the dollar appreciated against the euro and so he sold his dollars. Mr. Brown made a profit, probably a small one, but nevertheless a profit. He cashed in the profit he made, and he placed the balance of euros now held, on deposit to earn him interest.

On the other hand, Mr. Smith who bought euros is making a loss. However, at this stage he is only making a loss on paper, because he has not sold his euros as yet. He decides to hold on to the euros hoping they will appreciate, and waits. As it happens, the euro gains in value, and actually Mr Smith is now ahead. He waits a little longer to see if the euro will appreciate further, and there is another move up. This makes Mr. Smith decide to take a profit and he sells his euros. He cashes in his profit and the balance of the dollars he is holding, is placed on deposit to earn him interest.

But the currency market never sleeps and money values fluctuate all the time. Thus, from minute one of depositing their money, either Mr. Brown or Mr. Smith will see their euros or dollars in constant action, destined to go up or down in value. Again one of them will see his currency go up or down.

Because their home currency is GBP into which they eventually want to return, they are also watching the position of Sterling in relation to the two currencies they are holding.

Mr. Smith, who is in dollars, notices that Sterling is suddenly taking a heavy fall. He is now interested for Sterling go down more and more, because he can see his way out of trouble by changing his depreciated dollars into a possibly even more depreciating Sterling. Of course, if his dollar should appreciate and the Sterling slip further, he would sing all the way to the bank that much quicker.

It can be seen that it was not just a race between the dollar and the euro, but that due to a big wave, a third currency came suddenly into play throwing a lifeline to Mr. Smith.

Unexpected events are detrimental to some, but beneficial to others.
Often, taking little profits, it is thus possible to duck and dive especially if one is clever enough to notice when these small waves tend to occur, and therefore accumulate some nice money.

Of course abnormal conditions can arrive, as we have seen lately. All of a sudden it is not little waves, but huge waves that come. One extra large unexpected wave can do the damage. It is then, that the gain or loss to Mr. Brown or Mr. Smith can be heavy, wiping out swiftly any profits which one or the other might have accumulated over a lengthy period of ducking and diving. Naturally the lucky man holding the right currency is extremely pleased at that point.

Since it can take a longish time for the loser to get out of trouble before the cycle turns, he has to be prepared for it. For this reason, it is vital not to make investments of this kind with borrowed money, but only with money one can spare. To recoup in due course, one must be patient ad not be upset I having to wait.

When conditions are very volatile, it is dangerous but can be profitable. Not everybody dares to enter that arena. At the moment, the gentle opportunities of rocking up and down are hard to find, but not impossible, a lot depending on which currency one is holding.

In the currency game anything can happen, and it does.

It is strange, but when you desperately need to win, it will seldom happen. The time one wins, is when one is not desperate to win.

If you keep your head you can have plenty going for you in the foreign currency trading. The key is to play with your own money and not with borrowed money because you cannot be sure what will happen and when. There are chances of getting out of trouble when things go wrong if you have the time to wait. Sometimes a big wave can slow you down or help you, but if you are ready for the worst, the odds are you will survive and make money.

Impatient willy-nilly investors in this game do not last long. Patient ones can get out of trouble if under pressure, and fight on with good chances to do well in the long run.
About the Author
Paul Dubsky is director of Foreign Currency Exchange Services Ltd. The company is focused on being able to offer really friendly currency exchange rates and international money transfers. We believe we are the only Foreign Currency Exchange company which offers special rates to Senior Citizens.
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