If one thing is glaringly obvious when it comes to investing, it is that a majority of retail speculators limit themselves greatly when it comes to what markets they participate in. Most people I speak to are mainly invested in mutual and equity Funds and maybe the odd stock here and there. Even if they are more heavily focused on a diverse portfolio of stocks in the broad market indices, they are still lacking depth when it comes to being truly diversified. No matter how diverse one tries to be, when you are limiting yourself to positions in stocks alone, you are always reliant on the overall S&P 500 to perform.
What Is True Diversification?
True diversity comes from embracing different asset classes which have opposing relationships with each other, not anchoring yourself to just the stock market alone when you are on the ride for both the up moves and the down moves as well. However, the average retail investor has probably not even heard of markets like Forex, let alone ever thought of using it as an alternate investment vehicle.
It can also be daunting to think of opening a new account and having to learn the nuances of a new market that you have little or no experience trading in. This is why some many people stick to what they know, even if what they know is holding them back from achieving their long term goals. It doesn’t have to stay this way though. There are always alternatives and I’d like to discuss some of them further.
Diversifying Investments Using Forex Without Opening a Forex Account
When I first stared trading Forex, my only goal was to generate monthly income from it. I came from a previous career in a low paying environment and needed to get ahead. Growing and preserving wealth was the last thing on my mind, as I simply didn’t have any to worry about. I, like the majority of Forex traders, started in the Spot market currency world, trading through a broker and dealing with the majors: Euro, British Pound, US and Canadian Dollars, Australian and New Zealand Dollars, Swiss Franc and Japanese Yen.
As you may already know, the major FX currencies are traded in pairings through the Global Forex markets like EUR/USD or AUD/JPY for example. When we trade Forex, we are buying one currency in an exchange for the other in the pair, meaning that we are speculating that one will rise against the other. If I buy the pair of GBP/USD it is because I believe the Pound is going to appreciate against the US Dollar. Similarly, if I were shorting the pair, I would be hoping to see the opposite, with the Dollar rising against the Pound.
Here is a chart of some recent price activity on one of the most popular pairings in the markets, EUR/USD:
I have marked off a number of key Supply and Demand zones which indicated major imbalances between the willing buyers and sellers. The footprints, as I like to call them, are evidence of major institutional buy and sell activity, marked by the drops and the rallies in the yellow box areas. These areas represent trading and investing opportunities and make up what we call our Core Strategy at Online Trading Academy. The zones give us potential buying and selling areas for low risk and high potential reward setups.
As an active trader in Forex, we can look to take advantage of these areas but we can also use these zones on a derivative of the currency markets as investors too. One of the most popular tools we can use for investing is the ETF (exchange traded fund).
An ETF is an investment fund traded on the Stock Exchange and gives investors an opportunity to buy into the fund which tracks an underlying stock, commodity, bond or other asset. In this case, let me introduce you to the FXE, which is an ETF based upon the value of the Euro against the Dollar. We can effectively trade the Euro like a stock, without needing to open a specific Forex account. Here is a screenshot of the FXE:
As you can see, the FXE moves in a similar price fashion to the EURUSD and as such, I have highlighted the corresponding Supply and Demand zones found on the EURUSD currency pair, to the FXE. The areas in green and red were literally hit and respected at the same time as their counterparts on the currency pair. This is because the FXE is a fund which allows investors to access the Euro with holdings of physical Euros in a deposit account, and these Euros are then tracked in value against the US Dollar giving it a direct correlation to the EURUSD pair.
With its near-identical price action to the EURUSD, the FXE offers both long and short-term investors the ability to expand their reach with a more diversified portfolio and bring in a much needed alternative to the equity markets, but through the ease and simplicity of a regular investment account. Using an ETF like this also has key tax benefits, such as being able to trade it through an IRA account and even employ further risk management practices as well, such as using options to protect our exposure and potentially increase our rate of return, if the right conditions present themselves. This will be an ideal subject for discussion in a future article.
I hope you found this helpful,
Sam Evans – Sam.Evans@tradingacademy.com