Page 116 - Ultimate Guide to Currency Trading

Higher FX to Traditional Investments Ratio

If you would like to build an aggressively managed, high risk/high reward currency account, you will
need to allocate a higher percentage of your total investments to Forex. While a traditional currency
account would amount to about 10 percent of your total investable assets, a high risk/high reward
port-folio would be around 20-25 percent of your investments. If you put 20-25 percent of your assets
in your FX account, you will have the dollars available to take on multiple currency pairs at one time.
You will also be able to use advanced hedging such as three-sided trades. Lastly, you will be able to
pyramid into your currency positions.

A larger account can allow you to have enough dollars to take big bites into trades when the
opportunity presents itself. When the Asian stock markets crash and in turn the European and U.S.
markets follow suit, the currency-risk trades will also fall. Sometimes they will fall dramatically. The
SEK will fall against the USD, the EUR will fall against the Swiss franc, and the Australian dollar will fall
against the U.S. dollar. These are the times that a currency trader loves! These are the setups that you
should be looking for, and with a larger account, you can buy large amounts of Swedish kronor, euros,
and Australian dollars.

With a higher percentage of your assets in a currency account, you can buy proportionally
larger amounts of these risky currencies relative to your assets. You can also buy larger amounts of
these directional trades (meaning they are profitable only when the markets start doing well again)
and still build in enough cash margin to cushion the blow if the market continues to fall before
rebounding.

Essentially, a larger percentage of your investable assets equates to giving yourself time to
withstand a continued fall in the market after your first buy into the long side of a risk trade. You
would buy into the long side of a risk trade after the market has gone down. This type of trade will
earn you a profit when the market goes up and the world's traders are once again looking to increase
risk assets in their portfolios.

A high balance in your account will also give you the opportunity to add to your currency
positions at a lower price. This can add to your earnings if the currency pair continues to move against
you once you are in the trade. If you have a large balance you can engage in a more risky procedure of
buying more of the currency pair at lower and lower prices. For example, if the risk appetite of the
world's traders goes down and the AUD/USD falls from 108 to 105, then you might decide that it is a
good time to go long the AUD/USD and buy some Australian dollars. If on the next day the U.S. and
European stock markets continue to go down, the AUD/USD might fall from 105 to 103 or even 102. If
you have a large account and cash margin to spare (think of your cash margin as wiggle room) you can
double or even triple the amount of AUD you now have in your account. Doubling or tripling the size
of an already cheap trade can boost the gains on the long AUD/USD trade. Such an increase in your
position is adding to your risk, but once the risk appetite comes back to the market you will be looking
at enough gains to take the rest of the week (or two) off!