Trade The Forex? Profit From This Stock Trading Strategy
Posted by admin on Mar 1, 2008
rading the currency market can be a very lucrative business, especially with the large amounts of leverage that most forex brokers provide. In order to be a trader that can consistently earn pips in the forex market, it is wise to have at least a basic understanding of all the economic factors that go in to determining exchange rate values (and in fact many successful traders have multiple economics-related degrees).
However as I have recently found out, when it comes to your knowledge of the global economy and your day-to-day knowledge of the exchange rates of all the major currencies, you can apply this knowledge outside of forex trading and make money by investing in companies that have a certain business plan. This stock picking strategy is the topic of this article, and I have personally used it to make tens of thousands of dollars all by trading the forex as I normally do and then finding companies who have a business plan that is heavily dependent on international trade.
This investment strategy works because of a very simple principle: Companies that do business in multiple countries must always exchange their native currency for a different country’s currency, and because of this their costs and profits are highly dependent upon the currenct exchange rate. This is why I mentioned the background in economics because for a man or woman who has spent years learning macroeconomics, they have no trouble understanding the different effects that the appreciation or depreciation of a particular country’s currency will have on their international trade.
In terms of the amount of time that I recommend holding on to the stocks that you pick for this strategy, it is probably wise to approach it as a swing trader and hold on to positions for 7-14 days at a time. Those of you who thrive on daytrading may not be happy to hear this, but the fact is that it takes at least a week for the increased or decreased costs of doing business (due to exchange rate changes) to affect the price of that company’s stock in any noticable way. And if you ARE a forex daytrader like I am, you are in a unique position because you are constantly informed of where exchange rates are and where they should be headed, and you can use this knowledge to determine whether business is going to become cheaper or more expensive for American companies working in Europe, European importing parts from America, etc.
For this stock picking strategy to work, there are a few things you need to know. For starters, you need to find at least one company whose business plan relies heavily on importing or exporting. A good example would be an American company that sells laptops and imports most of their supplies from European manufacturers. If a stock is publicly traded then all of this information should be readily available, and you want to find a business model that is largely centered on only two countries (or rather, only on two currencies such as the Euro and the dollar, so that any large movements of this single currency pairing will affect the costs of this company).
Once you have found at least one company like this, and it is obvious to you that a large change in the value of one currency (such as the USD appriciating) will significantly impact this company’s profits, the next thing to determine whether the specific currency pair that you have isolated is trending or not (in our example it would be EUR/USD). If the currency pair is moving sideways then that might not do you much good, but if the currency pair is in an obvioud trend then this should work to your advantage. We are looking for a trend that is at least one month long, and during that time we are looking for a change of about 100 pips per week or more.
In our example of the American company that sells laptops, if the USD was appreciating against the EUR (meaning that EUR/USD was in a downtrend), then it would become cheaper for the company to import parts since their dollars will now buy more Euros. This would mean that, since costs have been slowly declining over the past few weeks, profits should be slowly rising and there is a good chance that you will see this factored into the value of the stock. So if you met all of your trading conditions and the EUR/USD was in an obvious trend for at least one month and was moving at the rate of 100 pips per week or more, then you would want to buy or sell the stocks of companies that rely on importing or exporting.
When I finally began to apply this trading strategy a few months ago, I was quite simply amazed that I did not think of it before because it is just so obvious. I have been trading forex for years, but I have only recently ventured into the stock market because I discovered a way to apply my currency market knowledge to stocks. Hopefully reading through this article has got your brain working and now you can more easily come up with ways that you can pick stocks based on exchange rate values.
If you want to learn more about how you can use your knowledge of the forex currency market to make a killing by investing in specific stocks, you can read more on these two pages: http://TheCurrencyMarkets.com/forex-stock-trading.htm http://TheCurrencyMarkets.com/stocks-forex.htm
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