Currency Swap: The lucrative world of foreign exchange Matt Brennan Being just shy of 62, Alasdair Taylor-Newman,

or Al as he is known by his friends, is someone a lot of people look up to in life. But it is his intricate knowledge of the foreign exchange (forex) market, combined with his ability to profit regularly that makes him the oracle of the forex world. Al speaks with a Morgan Freeman-esque narrative tone, and at social functions he is often like the quarterback, with everyone huddled around him transfixed as he holds the floor on anything from table tennis, to Gyroscopes latest album, and of course, the foreign exchange market. It is almost too easy to set up an account. Al uses the trading platform forex.com/au, where after providing basic proof of identification documentation to authenticate the process, investors are one step closer to the world of forex. Unlike share trading, where brokerage provides an initial hurdle before trades can become in the money, forex has no fees. The only entry cost lies in the bid/ask spread, where if an investor wishes to enter the market immediately, they must set their order, their bid, above the current quoted price of the currency they wish to buy. To illustrate this, Ill use the fourth most traded currency pair, the AUD/US. A currency pairing refers to the fact that in order for an investor to buy one currency, they must simultaneously sell another. When this article was written, $1 AUD could be exchanged for $1.0583 US dollars, but at the time, if the investor was looking to enter immediately, they could only acquire $1.0567 US dollars with their Australian Dollar. This 0.16c bid/ask spread may seem insignificant, but most trading platforms require a minimum order of $10,000, which from the example, equates to a $16 price differential the investor has to make up before the trade is profitable. The bid/ask spread is only exacerbated when exotic pairings are traded such as the US Dollar/Vietnamese Dong combination, and this is due to low volumes of trade and a greater distortion in perceived value of the Vietnamese Dong by investors. Some investors may be slightly worried since they do not have a spare $10,000 to complete the transaction. This fact stands out like a Goth at a Wiggles concert, and is the area which leads to the primary trap of foreign currency trading: Leverage. Foreign currency trading platforms vary, but most will allow up to 200 times leverage on a common currency pairing. This level of leverage allows the investor to reach the minimum investment requirement of $10,000 with just a $50 note, or alternatively, with a $10,000 or greater investment, allows them to achieve 200 times the profit of someone with no leverage. Or 200 times the loss. Al remorsefully recounts that he made the rookie mistake of leveraging at 200 times when he first started currency trading. Fortunately for Al, he was wise enough to set an appropriate stop loss, which allowed him to lick his wounds and try again. Al carries many financial battle scars from forex trading, although his victories greatly outweigh his losses. He gleefully regaled the time he made $200 between his walk from the Curtin Tavern, to the Bankwest ATM and back again. Although a hefty amount of the profits were consumed that night, this was only one of many success stories from Al, heres one Al was particularly proud of, I was in the 402 labs and gold was on a hot streak I saw some momentum and jumped on the trend and the beauty of forex.com/au is that it allows you to trade on unrealised profits, which enabled me to use the profits

from the first trade to make a second trade, and so on until I had three simultaneous trades all pushing in the same direction, I made over $1,000 that afternoon.

Investor Beware: Foreign Exchange is full of potential slip ups, disguises and traps Images Courtesy of
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Foreign exchange is not limited to currencies; Al explains that he even exploits trends in soybeans, wheat and corn. I use the Dow Jones Newswire which sorts upcoming announcements into degree of impact, which I then combine with my fundamental analysis on the commodities. This approach is reflective of Als broader strategy: I do not base my decisions solely on when one line crosses another; I like to think that it was my reasoning which got the trade home. This reasoning is backed by his continual acing of exams which have set him on the path to becoming a fully-fledged financial broker, as well as the 78% he achieved in his derivatives unit at Curtin, one of the most feared amongst economics and finance students alike, being indicative of his university results. The foreign exchange market is deep and liquid, with data announced recently from the US Central Bank suggesting more than $4 Trillion US is traded daily. In 2012, the Australian share market (ASX) had an average of around $59 Billion AUD* traded daily (this figure is for domestic trades only, but these comprise the vast majority of all trades). Regardless of size differential, profits can be made when the market moves in any direction, even when the market is stagnant, which allows investors to even profit on entities or indeed an entire countries fiscal collapse. Profits can also be made from the poor decisions

and naivety of investors who are misfortunate enough to jump on a trend too late or sell a stock or currency way too early, allowing exit/entrance for another investor. In the share market, if the trading conditions were likened to chess, there is a healthy balance of experts and beginners who beat each other on a regular basis. However, be wary in forex trading, as there are very few novices, the speed of the game is so much faster, the stakes and potential gains are so much higher (especially with excessive leverage) and the opponents are akin to Russian chess champions whom will checkmate the rookie quicker than you can say Gorbachev. Matt Brennan takes readers Questions

*Appendix
All Ords Price Index 4664.6 4518 4535.4 4406.3 4339 4289.4 4135.5 4133.7 4467.2 4420 4388.1 4325.7 S&P/ASX 200 Price Index 4648.9 4506 4517 4387 4316.1 4269.2 4094.6 4076.3 4396.6 4335.2 4298.5 4262.7

Month

Dom. Equity Mkt cap $m 1,335,837 1,293,214 1,299,830 1,257,957 1,241,738 1,228,855 1,185,936 1,176,673 1,274,182 1,261,145 1,249,742 1,226,882

Dec-12 Nov-12 Oct-12 Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12

Total traded in the year: $15,031,991,000,000 Number of trading days in calendar year = 254 (i.e.; no weekends and public holidays that fall on weekdays) Amount traded per day: $15,031,991,000,000/254 = $59,181,066,929.13 Roughly 3 months trading on the ASX is equivalent to one day on the foreign exchange market.