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Today's comment is by Sean Hyman, Currency Analyst and long-time foreign-exchange trader and instructor.
Good Day Currency Traders!
It's no secret that most Americans feel more comfortable investing on the U.S. stock market than any other market. Roughly half of Americans own stocks, either through their retirement account or outright according to the U.S. Census Bureau.
Even foreigners are fairly comfortable investing on the NYSE or AMEX.
But what all those stock investors don't know is it's actually easier to successfully invest in currencies - particularly during difficult markets like these.
Far Fewer Currencies Out There Than Stocks
If you're looking for what stocks to buy, you have over 13,000 publicly traded stocks to choose from right now. That's a lot to weed through and it significantly drops your odds of choosing a winner. Even the best of stock pickers still don't always screen for the exact combination of things that you would look for in a stock.
However, in the currency world, there are only eight major currencies: U.S. dollar, Euro, British pound, Japanese yen, Swiss franc, Canadian dollar, Australian dollar and the New Zealand dollar. So this makes about seven major pairs when paired against the U.S. dollar.
If you're trading in the FX market, you could technically also pair these currencies with other currencies besides the U.S. dollar. But even then, you only have 15-30 pairs to choose from - compared to over 13,000 stocks.
In other words, you don't have to watch thousands of currency pairs, because the pairs are such "macro" instruments. Also, there are only so many major countries in the world with high (triple A) ratings.
This makes things simpler. All you have to do is pay attention to the most important data that comes out. The economic announcements for a country can easily be found on an economic calendar at www.dailyfx.com or www.forexfactory.com.
More Trustworthy Data and Much Less of It
In "stock land" not only do you have to watch a ton of stocks, but you also have to look at many aspects of stocks. For example, once you have a stock to watch, you need to keep an eye on that stock's P/Es, Dividends, PEG ratio, market capitalizations, present earnings and the earnings projections from the company, etc.
And you've got to keep up with this on every company that you follow.
However, in currencies, you can look to either one of the economic calendars I mentioned above and find all the fundamental announcements that you need to successfully track your currency trades.
There won't be 50 announcements coming out "before and after the bell" like in stocks. No, on a typical trading day, you will get a few announcements for each major currency ...and only one to two of those announcements are usually important.
In fact, some days, there may be no important announcements. You don't even have to know a lot about currencies to understand which data is important. The sites I mentioned above will rank the latest data for you by using words like "high" meaning a potentially high impact announcement on currencies. Or, as on Forex Factory's site, certain pieces of data have a red hot sign next to them in the "Impact" column.
All you have to do is watch the trend in these important announcements. Is your selected currency (and its corresponding country) improving overall? Or is that currency missing the mark quite often? Once you know the "trend of the fundamentals" you will know the long-term trend of the currency.
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