Speculation is defined as guessing with reasonable certainty about an outcome. It is also a word applied to mining in that if you are a speculator or speculating for precious metals you are hoping to find profit. In the foreign currency exchange you are a speculator because you are looking to make a profit on currency movements, with a reasonable assumption of what movements will be made. You are basically mining the forex market for money just waiting on you. There are other options besides being a speculator. You could be a hedger in which case you place a position in the market and then hedge another position to ensure you will not lose profit. Both concepts will be examined as well as ways to speculate in the market.
Foreign Currency Exchange Hedgers
International companies, governments, and banks are typically hedgers in the foreign currency exchange. The best example is a company that has signed a new deal with another company. Company A is going to buy new products Company B is manufacturing. To sweeten the deal Company A has decided to pay in Company B’s home currency.
Unfortunately, the market can move in which a currency loses value it possessed. At the time the deal was made to the time the money is swapped the domestic currency might lose value. Company B wants to hedge against losing money made on the deal so they will place a hedging transaction in the currency exchange to ensure profit is inline. A savvy speculator can turn to hedging, but it takes time to learn and it is always best to start off with simpler forex trading methods.
Foreign Currency Exchange Speculators
Speculators tend to start in the spot market. The spot market is a buy and sell, immediately, of currency. If you want to buy USD and sell AUD you would choose the AUD/USD and click sell. You sell one currency to buy another. At the close of transaction you hit buy and you buy AUD back selling USD. The sale occurs the instant you hit send on the transaction in a foreign currency exchange platform.
ETFs or exchange traded funds are a whole different mining game. ETFs are through the Stock Exchange even though they are a foreign currency exchange. These products are like mutual funds and provide the diversification benefit of mutual funds. You also have the liquidity of the forex market. FXE or Euro Trust is one ETF where you buy currency shares.
You buy or invest in several currencies at once comparing the value to the USD. It is a basket of currencies compared to the USD rate. There are three asset groups to choose from in ETFs, which will not be explained further. The point here is the different options you have. Spot forex is the simplest method to trading currencies based on value because it is a trade for one currency into another. Some of your other transaction options like ETFs are better handled with a fund’s manager helping you.