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The Sensible Guide to Forex: Safer, Smarter Ways to Survive and Prosper from the Start by Cliff Wachtel

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CHAPTER 1

Three Must-Know Forex Facts

Forex's Top Three Lessons

The three most important lessons you'll ever learn about foreign exchange (forex) markets are:

1. Everyone needs forex diversification. Just as every competent investor needs to diversify by asset classes and sectors, so too they need exposure to assets in multiple currencies and an understanding of forex trends and what's driving them. Yet most have almost all their assets denominated in one or two currencies. Today, that is an especially fatal error, because the governments behind most major currencies intend to get out of debt by causing inflation, which allows them to repay their bonds with depreciated money. That's good for those governments, and disastrous for those holding their weakened currency and anything denominated in it. They won't admit it, but historically low interest rates and a steady stream of economic stimulus programs betray their real intentions. They want to reduce their real debt, and, in the process, your wealth, through the subtle tax of inflation. To protect yourself, you need as much of your assets as possible to be denominated in the currencies that are likely to hold their real value or appreciate in the long run, and lift your portfolio along with them. Having some commodities exposure is also a means of hedging this currency risk and playing forex trends, so both forex brokers and traders typically also deal with commodities. Thus while they're different asset classes, in practice ...

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