Bower explains what currency hedging is,
Put simply – currency hedging means taking exchange rate risk out of the equation. Exchange rate risk is the potential for an investment not priced in Australian dollars to lose value due to currency fluctuations.
For example, say if you bought five shares of Apple Inc. from your broker for US$200 each (not Apple’s current share price, but bear with me) at an exchange rate of $1/US $0.75. You’ve just spent US$1,000 or $1,250 in Aussie dollars. Then say the greenback and Aussie dollar reach parity three months later, but Apple shares stay at $200. You’ve just lost $250 Aussie dollars from the value of your shares, even though they’re worth the same in US dollars.
If this investment was hedged, the currency movements would not affect the value of your shares, meaning you would only see a return if Apple shares appreciated in value. Although this sounds fantastic, bear in mind that it works the other way too. Read more…
International currencies don’t ride the trends in isolation. The apparent technical motion in between 2 currencies in a set may trigger a result in the behavior of each separate currency. A third currency will likewise have some bearing increasing or fall of a relatively unrelated pair, in the view of an intermediate or beginning trader. Even experienced trend cowboys may miss out on the odd substantial occasion that results in a trade loss.
Technical analysis frequently consists of the bulk of the independent speculator’s trade decisions, however, some attention to basic news need to be included for a total overview of what is taking place in the market at that particular moment. Neither weather condition, beetles, dry spell, hostile takeovers nor indicted CEO’s have much genuine bearing on currency values, but the timing of the release of economic reports need to identify if a trade is practical or not.
An increasing tide raises all ships, however, the trading ocean is made of waves, with deep troughs and high crests. A rising ship may have a tether to another that is falling the other side of the swell. As one currency in a trade set rises, it may pull another currency up with it, or just the opposite. A drop in the Euro might permit an increase in the value of the GBP, which will certainly have an influence on the USD/GBP spread.
When considering the merits of a good trade, also take into account the activity of each currency’s most carefully associated cousin. When trading the Canadian dollar, you should certainly think about the relative motion, or lack thereof, in the United States dollar. Canada’s biggest trading partner is the US, so fluctuations in the United States economy may or might not have an impact on the Loonie, depending upon the gravity of the news.
The UK kept its own currency, the British Pound, but the economic organization of Europe can still influence the directional pattern of the Pound Sterling. The French Franc will likewise be swayed by the enterprise of the common Euro. As you evaluate your charts, make sure to make a quick evaluation of any volatile activity in any comparable currency.
The typical day trader and specific speculator can not possibly stay up to date with all the financial press releases every day and still have time to consume and trade lunch, and old news has currently shown itself in the charts. One must pay attention to important published financial developments, and typically prevent trading on report days. But the trend will suggest market belief, and great profits can be made by keeping the major focus on technical analysis.
International bankers and currency houses have developed complex mathematical models to track currency connection, however, these are beyond the scope of this article. In summary, just examine how related currencies are trending, when preparing a trade.
The apparent technical movement between two currencies in a pair may cause a result in the behavior of each separate currency. As one currency in a trade set increases, it may pull another currency up with it, or simply the opposite. International bankers and currency homes have actually developed complex mathematical models to track currency connection, but these are beyond the scope of this article. In summary, simply inspect how associated currencies are trending, when preparing a trade.