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Currency trading mystery unearthed
To trade in currencies, one first finds a broker typically online and opens an account.
Every so often, individuals come across information about opportunities to invest, many times in familiar undertakings like merchandising, real estate, or used car importation.
Sometimes, however, the opportunities are about obscure pursuits like mining, oil exploration, or in this case currency trading.
Over the last year or so, currency trading with the promise of lucrative returns has taken Kampalans by the storm. Self-styled money managers have attracted investment capital from folks of all walks of life luring them with promises of 10%, 20%, or more guaranteed monthly returns and downplaying the inherent risk of this business.
Tricky part
Unfortunately, most of these ‘clients’ know very little about this trade beyond the promise of prosperity. And, I suspect that there are more people contemplating the jump in. In a familiar instance, a money manager that had grown their assets under management by leaps and bounds during 2011 ended the year unable to make the promised monthly payments or even to give back the initial investment.
Moreover, clients were being asked to recapitalize the firm so they can at least recover their principal. So here I attempt to provide a cursory introduction to foreign exchange trading in a two part series.
In the first part, I give a description of the basics of forex trading that gives readers some working knowledge. In the second part, I provide a simple illustration of the double edged sword that currency trading (CT) is.
In effect the series give a counter perspective to the mindset that views currency trading entirely as a get rich quick scheme. Readers are encouraged to learn more about investing in currencies using the abundant on-line resources.
Currency Trading explained
CT has been around for as long as currencies have existed. However, what we call forex trading today started taking shape following the agreement in Bretton Woods by the industrialized nations to allow currencies to float freely in the 1970s.
As the name implies, it refers to transactions involving buying or selling currencies, or promises to buy or sell currencies in future.
Where it has worked
CT has been typically done by large international companies desirous of paying their obligations denominated in non-home currencies or of converting trade receipts from abroad into home currencies. These companies enlist large international banks (i.e. Citibank, JP Morgan Chase, Barclays International) on an ongoing basis to do this for them.
Governments also play a dominant role in CT through their central banks in an attempt to buttress the value of their currency as the Bank of Uganda has been doing recently.
Even though most major currencies (the dollar, yen, euro and its predecessors) have been freely floating for a while, those of many developing economies were controlled by government institutions until several embarked on financial liberalization in the 80s and 90s.
Besides these large participants, there are numerous investors and/or speculators who trade in currencies trying to capture gains from anticipated currency gains or weakening and this is the business of CT pertinent to this series.
Forex market
The foreign exchange market is literally a network of computers interfacing varied buyers and sellers of the world’s currencies in 24 hours a day, almost seven days a week action packed virtual environment where seconds lost can mean the difference between a huge gain or huge loss.
Consequently, a basic but often ignored requirement for successful trading is having fast and reliable internet connectivity where trades are not held up by lapses in connectivity. I will let you judge how well Uganda’s internet connectivity is based on your experience with it.
Generally, to trade in currencies, one first finds a broker typically online and opens up an account (look up www.forexbrokerguide.com). They will ask for some information about you and help you with opening the account.
Most brokers also have training accounts called demo accounts that allow interested novices to learn about the business provided for free. It is strongly suggested that one spends time trading in a demo environment before putting their hard earned resources to work.
Jimmy D. Senteza Ph.D Associate Professor of Finance Drake University (USA), Fulbright Scholar Uganda Martyrs University, Nkozi
