Foreign Exchange (Forex)

What a forex position actually is, how returns are made, how currency pairs are priced, evaluating a specific trade, its risks, costs and taxes, and where it fits, if anywhere, in a portfolio.

Trading one currency against another

Lessons

• Every currency trade is a bet on two countries at once — A forex position is always one currency against another. Retail traders usually hold it through leveraged broker products, while every international investor already holds currency risk without trading at all. (9 min)
• Price moves, interest differences and leverage - in a market where one side's gain is the other's loss — Forex returns come from exchange-rate moves and interest-rate differences, magnified by leverage, in a market that is roughly zero-sum before costs and negative-sum after them. (12 min)
• No earnings, no dividends - just relative rates, inflation and flows — A currency has no cash flow to value. Its price reflects interest rates, inflation, trade and capital flows and sentiment, and forward prices are set mechanically by interest rate differences. (11 min)
• Appraising one trade: size it from the loss, not from the leverage — Before a currency trade, set how much of your account you will risk, where the trade is wrong, and what the broker and costs add. Position size follows from those, never from the maximum leverage available. (12 min)
• Leverage, gaps, the broker itself, and a tax treatment that depends on the product — The biggest forex risks are leverage and sudden gaps. Costs include spreads and overnight financing, and tax treatment varies widely by product and country. (11 min)
• Manage the currency risk you already have; think hard before adding more — For most investors, currencies belong in portfolio thinking as a risk to manage, not a market to trade. Leveraged currency trading has no natural place in a long-term plan. (8 min)

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