Trading the currency market can be a very lucrative
business, especially with the large amounts of leverage
that most forex brokers provide. In order to be a trader
that can consistently earn pips in the forex market, it is
wise to have at least a basic understanding of all the
economic factors that go in to determining exchange rate
values (and in fact many successful traders have multiple
economics-related degrees).
However as I have recently found out, when it comes to your
knowledge of the global economy and your day-to-day
knowledge of the exchange rates of all the major
currencies, you can apply this knowledge outside of forex
trading and make money by investing in companies that have
a certain business plan. This stock picking strategy is
the topic of this article, and I have personally used it to
make tens of thousands of dollars all by trading the forex
as I normally do and then finding companies who have a
business plan that is heavily dependent on international
trade.
This investment strategy works because of a very simple
principle: Companies that do business in multiple countries
must always exchange their native currency for a different
country's currency, and because of this their costs and
profits are highly dependent upon the currenct exchange
rate. This is why I mentioned the background in economics
because for a man or woman who has spent years learning
macroeconomics, they have no trouble understanding the
different effects that the appreciation or depreciation of
a particular country's currency will have on their
international trade.
In terms of the amount of time that I recommend holding on
to the stocks that you pick for this strategy, it is
probably wise to approach it as a swing trader and hold on
to positions for 7-14 days at a time. Those of you who
thrive on daytrading may not be happy to hear this, but the
fact is that it takes at least a week for the increased or
decreased costs of doing business (due to exchange rate
changes) to affect the price of that company's stock in any
noticable way. And if you ARE a forex daytrader like I am,
you are in a unique position because you are constantly
informed of where exchange rates are and where they should
be headed, and you can use this knowledge to determine
whether business is going to become cheaper or more
expensive for American companies working in Europe,
European importing parts from America, etc.
For this stock picking strategy to work, there are a few
things you need to know. For starters, you need to find at
least one company whose business plan relies heavily on
importing or exporting. A good example would be an American
company that sells laptops and imports most of their
supplies from European manufacturers. If a stock is
publicly traded then all of this information should be
readily available, and you want to find a business model
that is largely centered on only two countries (or rather,
only on two currencies such as the Euro and the dollar, so
that any large movements of this single currency pairing
will affect the costs of this company).
Once you have found at least one company like this, and it
is obvious to you that a large change in the value of one
currency (such as the USD appriciating) will significantly
impact this company's profits, the next thing to determine
whether the specific currency pair that you have isolated
is trending or not (in our example it would be EUR/USD). If
the currency pair is moving sideways then that might not do
you much good, but if the currency pair is in an obvioud
trend then this should work to your advantage. We are
looking for a trend that is at least one month long, and
during that time we are looking for a change of about 100
pips per week or more.
In our example of the American company that sells laptops,
if the USD was appreciating against the EUR (meaning that
EUR/USD was in a downtrend), then it would become cheaper
for the company to import parts since their dollars will
now buy more Euros. This would mean that, since costs have
been slowly declining over the past few weeks, profits
should be slowly rising and there is a good chance that you
will see this factored into the value of the stock. So if
you met all of your trading conditions and the EUR/USD was
in an obvious trend for at least one month and was moving
at the rate of 100 pips per week or more, then you would
want to buy or sell the stocks of companies that rely on
importing or exporting.
When I finally began to apply this trading strategy a few
months ago, I was quite simply amazed that I did not think
of it before because it is just so obvious. I have been
trading forex for years, but I have only recently ventured
into the stock market because I discovered a way to apply
my currency market knowledge to stocks. Hopefully reading
through this article has got your brain working and now you
can more easily come up with ways that you can pick stocks
based on exchange rate values.
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If you want to learn more about how you can use your
knowledge of the forex currency market to make a killing by
investing in specific stocks, you can read more on these
two pages:
http://TheCurrencyMarkets.com/forex-stock-trading.htm
http://TheCurrencyMarkets.com/stocks-forex.htm
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