If you’re ready to get serious about a multicurrency life, here are some key ideas you need to know.
Reference and Living Currency
The first thing you have to know is the difference between a reference currency and a living currency. A reference currency is the currency that you use to measure your net worth. Your living currency is the currency you use to buy your groceries or pay your living expenses.
Simple Cautions
It’s critical to remember that the currency market is massive, trading trillions of dollars daily. Since we’re talking big money, expect to play against some huge financial institutions. As a chess player, I’d like to use some chess analogies to put this into perspective. In terms of power, you may feel like a pawn playing against a queen. In terms of speed, you may feel like you’re playing a blitz game against a chess master.
In addition, leverage is a big factor in the currency markets. With only $1,000, you may control a $10,000 position, which means that a small move in the markets could mean a big gain or loss for you. Moreover, only about one-third of retail trades are profitable. So if you don’t know what you’re doing, odds are that you may lose a lot of money very quickly. Now, if you still feel that this is a market you want to trade in or have someone trade for you, let me leave you with one last piece of advice — don’t trade with your living currency. Never trade with money that you need for paying your bills.
5 Currency Trading Tips
1. Keep the trades small, both in terms of dollar amounts and the percentage of your portfolio.
2. Set limits. Decide on your entry and exit points before you trade.
3. Avoid trading programs. If they really worked as well as advertised, sellers would just use them to make money.
4. Diversify.
5. Charts are unreliable indicators of future events since past performance is no guarantee of future returns.
Naturally, I’ve only touched the surface here, so for more information, please watch my free webinar here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published September 10, 2014.