Socionomics Watch—Currency Trading

Small Investors Make Big Bets on Currencies There's the bubble effect, where investors who can't make money in stocks have turned to the leverage available in the currency market. If there's a sign that the bubble still has room to burst, this may be it. More interesting is the comparison to Wiemar Germany. As the mark weakened, more and more people turned to currency trading. Eventually, most of the country's currency traders were short their own currency.
The heightened interest in currency trading comes as the dollar is sagging. On Friday, it fell below 90 yen for the first time since early this year. Since April, the yen has gained nearly 12% on the dollar. The euro is pressing up against $1.50, a level it last attained in August 2008.

Investors are typically attracted to currency trading because of the vast leverage available -- as much as 500 to 1. That allows an investor to put up just a few hundred dollars of capital to make a bet of tens or hundreds of thousands of dollars. For example, at 200:1 leverage, common in the industry, a $500 investment controls a standard-sized $100,000 block of cash.

But leverage also points to the risk of currency trading. Depending on how much leverage is deployed, a move of just half a penny in the euro/dollar pair, the most popular pair among currency traders, "would eat up your entire capital," says Brian Dolan, chief currency strategist at Forex.com.

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