Selasa, 26 Februari 2008

If You Trade The Forex, Here's How to To Apply Your Skills to Stocks

by Andrew Shiveley

Trading 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: For companies that operate internatonally, a factor of doing business in different countries is that you must exhange currencies, and costs and profits can be greatly affected by changing exchange rates. 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.

As for how long you should keep your stock position open, this is really up to your own personal trading strategy but you might look to capture a 2-5% price change in 7-10 days. 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. If you do happen to be a forex daytrader, you are in a position that most other traders are not because you have an up-to-date knowledge of where the current exchange rates are for all the major currencies, which shows you whether business is getting cheaper or more expensive for certain companies.

For this stock picking strategy to work, there are a few things you need to know. The first thing you will want to do is find at least one company that either operates internationally or does a lot of importing or exporting of supplies. An example of what you could look for in a company might be a American cell phone distributor that imports 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 costs for this company have recently been declining, and it is likely that these lower costs (and higher profits) are factored into the stock price. 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.

I began applying this strategy recently in my own trading, and it was relatively successful and intuitive application of my forex knowledge to the stock market. 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.

About the Author

If you are a forex trader looking to branch into stock trading (or maybe you just want to learn how to make money this way), you wil find value in the following two articles:

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