forex basics

Real life usage of FX

Daksh Murkute | | |

When people see the letters “FX” they often assume it’s referencing trading. But, currency is a part of everyone’s daily lives and increasingly, so is foreign currency. Whilst trading FX is about making a profit, properly managing FX in daily life is about limiting losses.

 

Technical analysis can be good when waiting for opportunities, but waiting isn’t always on the table when you have to exchange your overseas sales income or wages in order to pay rent. Likewise, having a pool of reserved currency for foreign purchases may be a good idea, but that reserved cash has a trade-off in which it could be making a return on other investments.

 

When looking at FX transfer questions and answers, it’s clear that there is a disconnect between the world of trading and the world of the daily management of money - and understandably so. Customer services, user experience, withdrawing, budgeting features, virtual bank cards, and type of payments are just some of the aspects that are less involved in the world of FX trading that we often find on FX money transfer apps.

 

So, let’s dig into the daily use of FX and the areas that trading cannot attend to when it comes to safely managing our currency.

Contents

 

 

Hedging Risk

 

Hedging Risk

 

No matter how confident you are in your skills of technical analysis, you cannot mitigate currency risk from technical analysis alone.

 

In a simplistic example where a successful trader makes a greater profit in a successful trade than their loss during an unsuccessful one (i.e. due to stop losses), then it’s possible that a successful trader may only turn a profit on 50% of their trades. Technically, it could be even less whilst retaining yearly profits depending on how big the wins are when they come.

 

The point is, if you’re forced to make a decision with your entire month’s wages from your day job, there may only be a 50% chance you won’t mess up the timing of the exchange. In this instance, technical analysis isn’t an effective way to mitigate this currency risk and cannot be relied upon from month to month.

 

Instead, hedging is used. This has been a popular technique for well over a century among the big corporations, but recently it has filtered down into the world for small businesses, remote workers, and even expats. Of course, traders aren’t exactly unaware of hedging, but it’s ironically a technique that more commonly applies to the daily management of money than it does trading for profits.

 

One common use of hedging is the use of forward contracts as a marketplace seller. Exchange fees are a rip-off when done internally with the likes of Amazon, so virtual overseas collection accounts are created with FX specialists. As these accounts get filled up, they’re routinely exchanged periodically to pay for business costs back home.

 

Knowing that you will have to exchange $10,000 in a month’s time and there’s currently a lot of political instability going on, it makes sense to pay a slight premium for that forward contract and lock in a pre-agreed rate for the upcoming transfer.

 

 

 

Macro Trends

 

Furthermore, your decision about the need for hedging may arise from suspicion of macro events. Fundamental analysis rarely gets its due credit when it comes to FX, but that’s because intraday price movements are mostly caused by traders using technical analysis, so fundamental analysis is factored less into the price…Until it isn’t.

 

No amount of technical analysis could have foreseen the Russian Rubles crash, for example, yet it was mighty obvious for anyone paying attention to the news. Furthermore, the Ruble is recovering already, which can only make sense by reading deep into news and analysis pieces. 

 

Ultimately, whilst intraday price movements are mostly driven by the behavior of technical traders and algorithms, the monthly price changes are caused more by macro events, external shocks, and so on.

 

Furthermore, there seems to be diminishing helpfulness by technical indicators when stretched over a long enough period of time. It’s difficult to know exactly at what point this diminishes, though, because technical indicators actually grow stronger with longer time frames (until a point).

 

This isn’t to say that you can predict price movements using fundamental analysis alone, of course, it’s very difficult to do so and opportunities are fewer and farther between compared to technical trading - and often higher risk. But it’s important to know when gauging risk, mostly volatility, and to help inform day-to-day decisions around our currency holdings.

 

Ultimately, a technical trader who knows how to effectively manage their currency in their daily lives, as well as taking into account macro trends, will be in the best position.

 

The degree to which you hedge could be determined with the help of technical analysis, of course, as well as dictating where you may want to travel to as an expat, or which country to change to for your supplies. 

 

In fact, locking in those forward contracts could even paradoxically be done in an aggressive, speculative manner, in which you seek out underpriced currencies for your business/lifestyle/investment needs - banking on turning to different countries down the line. Ultimately, in an ever globalized world, we need more of a marriage between daily currency management and our trading activities, as opposed to treating them as separate entities.

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