An Overview of Currency Speculation

Of the myriad forex strategies prevailing in the forex market, currency speculation is preferred by most professional traders and businessmen. While it can be immensely profitable, currency speculation entails more risks than usual trading.

Generally speaking, a forex currency speculator is a trader who purchases, sells or holds on to a currency, commodity or asset. While the usual forex trader looks to profit from interest rates and investments, the currency speculator bases his actions on the price movement of the asset he is holding. The fluctuations in the forex market price determine his decision to buy, sell or hold on.

There are numerous techniques employed in currency speculation. One of the keys is to know the proper use of leverage, as this can spell the difference between a profit windfall and a huge financial loss. Forex speculators also use several types of technical analysis tools, including Gann studies and arbitrage.

Because of the high risk involved, currency speculators often use hedging strategies to offset any possible losses, or at least minimize them.

While professional traders and investors have made huge profits in currency speculation, it is not without benefit to the currencies market. The importance of speculation in the forex is that it provides liquidity and activity, which leads to more competitive prices.

If currency speculators did not participate, activity in the forex market would slow down, leading to illiquidity. The end result would be a wide differential between the bid and ask price of commodities and currencies, which is financially detrimental to a trader. Conversely the liquidity that follows currency speculation helps narrow the spread difference between the buy and sell price.

As with any other financial instrument, currency speculation is not without adverse effects. A currency speculator that believes a currency or commodity will go up in value in the future will buy the said asset in huge quantities. This will have a chain effect in the forex as other players follow suit.

The end result is that the value of that particular asset will go up artificially. It can lead to inflation. The other consequence is that a period of buying will be followed by massive selling as the market will eventually correct its value. This can have serious effects not just on a currency but can also have wide ranging implications for a country or region.

The 1997 Asian financial crisis, and to some extent, the skyrocketing oil prices have been blamed in part to extensive speculation.

Currency speculation is not an easy subject to master, and the risks involved require that you have a substantial bankroll. If you want to take part in it, it is imperative you study all the relevant material, thus limiting potential loses.

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