Currency trading is an area of the market many traders overlook. And I think that’s a mistake.

Perhaps I’m biased. I’ve been trading currencies for 40 years. And foreign exchange (forex) has given me plenty of profitable opportunities.

That’s because it has many special features…

The liquidity of the currency market is about $7.5 trillion worth of transactions daily. That means it can easily accommodate large global institutions and small traders alike.

And basic supply and demand drives forex…

For example, if the U.S. has higher interest rates, investors will borrow another currency with low rates and buy U.S. dollars to get that higher yield.

That pushes up demand for the U.S. dollar and sends it higher.

This example explains what happened when the market plummeted on August 5.

Investors borrowed yen cheaply. (After all, rates in Japan were negative up until March this year.)

Then they converted their yen to U.S. dollars to invest in higher-yielding assets like bonds. (Rates are 5.25-5.50% in the U.S.)

But then the Bank of Japan raised rates for a second time in 17 years on July 31. And data in the U.S. suggested rate cuts were around the corner.

That changed the profit dynamics of the trade… and the markets unwound dramatically.

This set off the broad-based selling we saw on August 5.

Yet all this action led to several profitable trading opportunities for my subscribers…

When Things Come Undone

Investors in the carry trade rushed to dump their stocks and bonds. That let them raise U.S. dollars to close out their yen positions.

This caused the yen to soar and the U.S. dollar to tumble…

You can see that dramatic move in the chart below…

(Note that when the price is falling, the U.S. dollar is dropping in value against the yen… and vice versa.)

USD/JPY Spot Price

Source: eSignal

But like any move, things can become overdone.

The U.S. dollar sank too far against the yen. So we looked to capture a move if the U.S. dollar snapped back the other way.

This was a classic mean-reversion trade – just like we regularly use for stocks and indexes.

So during that sell-off on August 5, we entered a position to buy the USD/JPY. We were aiming to capture a strengthening USD versus the yen.

And as the chart shows, we got our timing exactly right…

The USD/JPY pair bounced off its lows as the Relative Strength Index (RSI) rebounded from oversold territory (red circle).

And we hit our profit target just two days later on August 7.

That equated to a $2,041 profit for anyone trading a standard lot position size.

What’s more, since August 7, we’ve closed out another three winners on the USD/JPY. That comes out to a combined $4,558 across all four trades over two weeks.

Don’t Miss Out

You can see just how much opportunity trading forex can offer.

Currencies can at first seem a bit daunting. And to be fair, there are new things you’ll need to learn.

That’s why I’ve worked hard to provide special reports and videos to help my Currency Wizard subscribers. That way they can learn the lingo and unique features of forex trading.

But by starting small and building things slowly, forex can be an excellent addition to any trader’s portfolio.

Better still, given its low correlation to stocks, you can make money trading currencies even when stocks are tanking.

That’s something to keep in mind, as potential rate cuts could return volatility to elevated levels before year-end…

Regards,

Larry Benedict
Editor, Trading With Larry Benedict