Page 132 - Ultimate Guide to Currency Trading

Selling Risk Short with Currency Trading

If the DAX, the S&P 500, and the FTSE100 have all gone through a sudden good fortune and have risen
for the past several days, then you could start to look around for ways to capture the risk aversion that
will inevitably come. It is human nature to think that the stock markets will go up for-ever; in fact,
professional traders secretly hope that the average investor will push the world's stock indexes higher
after they have begun to rise. The world's professional traders, both equity, index-futures, and stock-
options traders know when it is time to take their profits and run. They will have no problem in
reversing their positions and taking the cash out of the long-risk trades. The same should be true for
you. You can learn when the market is going to change direction, and trade accordingly. With this
strategy, you will essentially be trading risk. You will be buying and selling the attitude of the equity
traders of the world. With the right directional trade you can capture the heightened risk aversion that
happens after a big run-up in the markets. The values of currencies are very closely related to the
growth of home economies. If there is a perception that there is slowing growth—or worse,
stagnation—then the risky, growth oriented currencies will fall relative to safety currencies.

One of the best ways to capture this safety and growth relationship is the shorting of the
Swedish krona against the EUR and the USD. The Swedish krona is considered a growth currency and is
tied very much to the successes of the U.S. and European stock markets. This is true because Sweden,
while an independent currency, is heavily reliant on the export of its industrial and consumer goods to
Europe. It is safe to say that long USD/SEK and EUR/SEK positions will gain when stock markets fall.

While most Forex brokers allow you to trade upward near fifty currency pairs, this book
only covers the basics. These basic currency pairs are used to teach you the inner
workings of setting up winning trades. It also helps that these basic trades offer more
than basic returns!

Traders will unwind SEK positions, and this will force the upward movement of the USD and
the EUR. Also, money will flow into the USD naturally as the USD is considered a safe-haven currency
during times of economic uncertainty. This is a second factor to sway you to go long a USD/SEK
position.

The second pair that will most likely move dramatically is the EUR/CHF, if you short the EUR
into the Swiss franc. The EUR/CHF pair is a favorite of professional currency traders worldwide: it has a
predictable movement when times are (or seem) to be getting worse. Money will flow from the euro
and into the Swiss franc at even the slightest perception that times are getting worse in Europe. This is
because the Swiss economy is considered naturally stronger than that of neighboring Belgium,
Luxembourg, and France, which are countries that use the euro. Additionally, the Swiss National Bank
(www.snb.ch) is considered to be very well managed, and historically has done a fine job of being
conservative, which, in turn, is good for the Swiss franc.