G&G Associates Tax & Financial Consulting
Why Currency Traders Make Better Stock & Commodity Investors
Hotep G&G Readers,
The late 1990s I got my first exposure to the stock market after attending an investment seminar where I was invited to a free steak dinner from this company that targeted military members new to the military and the investment arena by investing their money in loaded mutual funds. Fortunately, I had a coach who opened my eyes to the on how bad an investment this would have been.
It was then that I started a personal trading account, started attending investment seminars and I did okay for a beginner. Heck, I made money while plenty of investors lost their shirts in the years to come. So I can’t complain.
At the time, one of my friend’s 401k had about $25,000. Not great considering he was planning to retire in a few years. So I offered to help him with it. Fortunately, he took me up on the offer.
Today his 401k balance is over $300,000. Considering most of his peers in his industry have 401ks around $120,000, I’d call that a success.
In fact, I was patting myself on the back for that until I started trading currencies.
Once I came over to the currency (FOREX) markets, I learned just how little I really knew about international markets. I went from being a successful investor to being a global thinker with a worldview and suddenly my stock profits went that much higher.
Why would this be? It’s because the currency market helps you to get a hold of the larger macro view. Trust me, if you don’t understand the big picture, you will have a rough time making money for your stock portfolio. Let me explain:
If You Pick the Wrong Country, then Picking the “Right Company” Doesn’t Matter
When you trade currencies, you get a quick crash course in which economies are likely to grow, and prosper next.
Once you know which countries are likely to prosper, you know where to start looking for the next winning companies (which are generally VERY dependent on the economy where they are located).
To find which countries are growing, you look at the GDP numbers. (Note: GDP stands for Gross Domestic Product. It measures the growth of the entire economy.)
If you notice the GDP numbers are sinking, then you know all the companies in that country will struggle. If the GDP numbers are rising, then you know which companies will make decent headway in their earnings.
You can think of a country’s GDP, as looking at the whole pie – whereas individual companies are merely pieces within that bigger pie.
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So first things first: Make sure you’re trading within a healthy economy with a rising GDP (or “a good pie”).
If the pie doesn’t look good, then get a new pie!
In other words, look at other countries and check out their macro-economic situations. Do they have strong GDP growth? If so, then you stand a better chance for higher stock returns than you do in one that has a lagging (or negative) GDP reading.
By sticking to stocks of healthy, growing economies my stock portfolio dodged quite a few bullets over the next few years.
So rule #1: Look to the overall pie and compare the GDP of your country to that of other major and emerging economies out there.
That’s how I use macroeconomics to help me in my stock investing. However, now I’m going to tell you how I use my stock and commodity knowledge to help me out in my currency trades especially when it comes to commodity currencies.
My Biggest Currency Clue, Courtesy of Oil Prices
Oil is one of those commodities that everyone watches. Even someone without a stock portfolio or someone who has never placed a trade in his life, usually knows where gas prices stand on any given day.
We all know when these prices are trending higher because the final price we pay to fill up the same tank goes up! We also know when oil prices drop because gas prices become manageable once again.
Oil prices can be charted (symbol: $WTIC) but I want to get even more specific. If you want to chart gasoline prices (minus taxes, etc.) then you can go back to stockcharts.com and put in the symbol for gasoline which is $GASO.
Once you learn how to chart gasoline prices you can key on triggers for instance the Canadian dollar. The Canadian Dollar trades closely with gas prices. So as gas prices rise, so does the Canadian dollar and vice versa. (Coincidentally, the U.S. dollar tends to weaken as gas prices rise.) Pay attention here…
So, if ‘Gas Prices Hitting Your Wallet’ then trade the Canadian Dollar to recoup some of that expense. This is ‘My Number One Way to Play Rising Oil & Gas Prices in the Currency Market.’
Once you have a feel for where gasoline prices are heading, you can trade the Canadian dollar (CAD) one direction or the other because the Canadian dollar closely follows gas prices. Canada’s currency tracks oil because this nation is a HUGE oil exporter.
So if you feel gas prices are heading lower, it’s time to sell the CAD. If you believe gas prices are about to rise, it’s time to buy the CAD.
If you’re a Forex trader, then you can trade the major Canadian dollar pair (USD/CAD). Or better yet, you can trade the cross, CAD/JPY. Why? Because Canada benefits from higher oil/gasoline prices, while higher gas and oil prices hurt Japan most. That’s because Japan imports over 95% of their fuel.
Also, you’ll know from trading crosses that they tend to trend longer and go further in their trends. Therefore, this provides even more opportunity to profit.
Also, as long-time readers know, there are countless tiny factors that can move the U.S. dollar as the world’s reserve currency. So on any given day, a news event can move one of your dollar trades (without any warning). But by trading crosses, you don’t have to worry about a U.S. news event coming out and unexpectedly moving your trade.
This is why I trade currency crosses so much. I take the dollar out of the equation and typically gain more pips (percentage in point) even still! The trends are better and I have fewer news events trip me up along the way. It’s an awesome way to trade.
So remember, just by watching gasoline prices ($GASO), you have a huge edge in knowing where the dollar is headed. You also have a huge edge in knowing where the CAD (such as CAD/JPY) is on its way too!
To recap, my stock trading days were great. But my currency trading days have made my long term stock & commodity investing portfolio even greater still!
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Until the next time!
Asante Sana (Thanks)
Tax & Financial Consultant, RFC
866-361-3872 toll free fax
"He that circumscribes your circumference determines the diameter of your thinking."
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