European Debt Woes Mean Profit Opportunity For Forex Traders

Austin, TX (PRWEB) September 29, 2011

Can foreign currency (FOREX) investors profit from the European debt crisis or should they sit on the sidelines and wait for the storm to pass?

The Forex market is one of the few markets in which investors can profit through short selling of the euro against other currencies, in particular the U.S. dollar. And while financial woes in the US accelerate, the US dollar may also be shorted against other currencies.

Short selling is when an investor sells a borrowed security or currency with the expectation that it will fall in value.

Short selling is best explained by way of example. You need a bottle of wine for a dinner party you are having that evening, but all the stores are closed. Your neighbor just bought a bottle of wine for $ 10. You ask your neighbor for the wine and offer to pay for it. Your neighbor refuses the money and tells you to just buy a bottle as a replacement. The next day, you go out to buy the wine for your neighbor and find the same kind selling for $ 8 a bottle. You buy the wine for your neighbor and you make a profit of $ 2 since you borrowed something worth $ 10 but were able to buy it for $ 8. That is short selling.

How does this relate to the euro? Greece is still in trouble. The European Central Bank has spent $ 22 billion dollars buy sovereign debt and keep spreads low. The five year Italian bonds are trading at 5.5% but the Italian government can’t afford to pay that kind of rate. So, the euro, which interestingly enough is worth $ 1.36, is due for a fall. It is not a matter of if, but when.

When the euro falls, investors can sell the euro against the dollar. One expert, Andrew Busch, a global currency strategist for BMO Capital Markets, recommends that FOREX traders take profits after a 4-cent slide and setting a stop-loss to exit the trade after about a 1-cent rise in the euro.

Similar to the Boy Scouts, FOREX traders must be prepared by setting plans and security measures in place to protect their position while short selling. By being prepared and taking action, FOREX traders can profit from the European debt situation.

To learn more about the foreign currency exchange (FOREX) market go to:


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