How To Buy and Short Sell Currencies
Foreign currency trading is no longer exclusive to the world's most sophisticated traders.
Every currency pair consists of two individual currencies: The base currency (left) and the quote currency (right). When you open a trade, you are buying and short selling the base currency.
For example: For EUR/USD, a buy (to go long) trade is a purchase of Euros using borrowed US Dollars (since you're trading on margin.) A short sell (sell to open the trade) is a sale of borrowed Euros to buy US Dollars.
The mechanics of this is less important than the fact that if you think the base currency will go up, you take a long position (buy to open the trade, sell later to close.) If you think it will drop, you take a short position (sell to open the trade, buy back later to close.)
While stocks and bonds (as well as commodities, in the view of some) are long-term investment vehicles, currencies are well-suited to short-term speculation.
Why? Firstly, a trader should come to understand the nature of the FX markets.
Historically, paper money and coins were intrinsically tied to the value of a multiple or fraction of a precious metal. Many of today's top currencies trace back to a heritage of being essentially an "IOU" for a specific amount of Gold, for instance.
In the past, governments have tried repeatedly to detach their currencies from the old Gold or Metal-based valuations... and most have failed.
The final twist in the story, however, is that it all came to an end in the 1970's when the US Dollar's Gold standard was ended during President Nixon's term.
While this event is often referred to with a tone of pessimism, implying it was the beginning of the end of all sane currency valuations, it's worth reminding younger generations that the value of Gold itself (in terms of value relative to other resources and goods on the planet) is also arbitrarily determined based on its perceived or actual rarity.
In effect, the end of the Gold standard was simply the beginning of a "virtual" socially-constructed acknowledgement of value standardisation without the involvement of a nature-produced substance.
Today, currencies are viewed by some in terms of hedging. However, the practicality of this approach is limited mainly to people or businesses who rely heavily on exchanging currencies as part of their international trade. (For example, Sony is undeniably affected by the USD/JPY price movements and may need to take positions in the market as a hedge.)
For most individual investors, hedging is generally not a practical use of currencies.
Rather, currencies present an excellent "balanced" opportunity to trade both up and down markets without bias.
While stock investors may dread the day mass-fear arrives in the market and erodes the price of the stocks in his or her portfolio (and may have limited means or favourable risk-reward opportunities to short sell stocks), FX traders can find trends in either direction.
Currencies can also experience the symptoms of mass fear and irrational exuberance, but they occur in both directions on a relatively balanced basis.
In general, currencies are a day trader's tool box.
How To Buy and Sell Commodities
CFD brokers such as Marketsforu offer commodities, which are advantageous to trade on a short to medium term basis.
Commodities in the market include Precious Metals (such as Gold, Silver, and Copper), Energy (such as Oil and Natural Gas), and "Soft" Commodities (such as Coffee Beans, Sugar, etc.)
These naturally occurring substances are assigned value by the market based on major institutions' expectations of their future value. While these institutions employ some of the world's most knowledgeable and highly-regarded (highly-paid) men and women to decide when and where to buy and sell, they are all still human.
The basics of buying and selling commodities is simple: If you believe its price will rise, then take a "long position" (buy it to open the trade, sell later to close it.) If you believe its price will fall, then take a "short position" (sell it to open the trade, buy it back to close it.)
As with currencies, the mechanics behind this is less important than the economic effect. Your goal is to find opportunities that others are blind to.
The key to short-term success in any market is to spot opportunities to take a position different from the generally-accepted view.
While most trading gurus love to tout the concept of "trend following only" as a safe way to teach, it's worth noting that practically none of them have a verifiable list of traders who actually make money using their teachings.
Professional traders find counter-trend as well as trend-following opportunities at the right times. You can be wrong often... but when you're right, have the discipline to hold on.
In commodities, this principle is even more important. After all, unlike stocks and currencies, the value of commodities is not based on human decisions (corporate profits and management in stocks or central bank decisions in forex), they're generally based on nature's whims to make a commodity more or less abundantly available to human harvesting.
While hedging with commodities is often taught, this is generally not a practical approach to the market unless your primary business relies on the commodity (farms, for example, would find practicality in hedging the price of their crops.)
For traders, commodities present a wide array of opportunities to capitalise on nature's swings in making a particular substance easier or harder to find.
If you discover a good reason to believe a commodity will gain or lose value when the general market appears to be oblivious to it, take the plunge.