Cashing in on Currencies

The guru of gold tells how to spot hard and soft currencies-and what to do with them.

Making money with money, investing in money, can be fun. And it's a skill that, once learned, will be with you forever. It enables you to be portable. You can make your living anywhere in the world. You can live where you wish. And as your talent grows, so will your profits and feeling of security.

Using currency rates to make fortunes has many aspects and many avenues. By touching on them briefly, I hope to open the door for some of you and coax you to explore further on your own.

One must first decide whether or not to use leverage, and if so, how much. If you prefer no margin, then you won't get rich very fast, but you'll take less risk. In this event, you profit by picking the right currency—or rather, the right time. The appreciation of any currency (and they all fluctuate) will obviously give you a capital gain plus interest. And you can follow (via charts, for example) the fortunes of any currency the same way you can follow any stock or commodity.

But if you elect to use margin, you can become a millionaire in short order—if you use proper tactics, if you do your homework, if you exert emotional control. Never before in history has it been so easy to get rich. "But you can lose too," they will say. Yes, of course. But that's where tactics come in. If you refuse to get trapped, then you can't go broke. It's the same in stocks; if you sell as soon as a stock turns against you, you can't go bankrupt. And if you secure a few winners and build on them, you'll score in a major way.

I'm referring here to using commodity futures for currencies. The Chicago International Money Market offers you a choice of seven world currencies. The margin requirement is minimal. Therein lies both the risk and the opportunity. You can get literature from your broker or from the IMM that will tell you about the technicalities, the routine, the choices, options. It's not complex, except for the first few minutes.

The secrets in this area lie, as in all investments, with judgment and strategy. Only here, it pays off better than usual. Judgment is involved first with picking the most likely winning currency. In early April, for example, the British pound was the strongest world currency. Sound peculiar? Unlikely? No, it's because of North Sea oil. So moving into pounds in the spring produced outstanding rewards.

At the same time, the Japanese yen was a good short sale and apparently heading lower still, despite a sharp fall. And the Swiss franc and the German mark had been weak for some months. But the new European Monetary System (EMS) provides that currencies be supported at certain levels and stopped from rising at certain higher levels. The EMS in fact may be giving us a "guaranteed" profit if we buy low and sell high between these limits (which are not rigidly fixed but can be approximated). Study their price patterns. They could provide "social security" for you. It doesn't matter whether you go long or short; both are equally acceptable. You are betting against the US dollar if you go long. You're betting on the dollar if you go short.

Far more important are tactics, because you can make the wrong judgment and still salvage the situation with good tactics. There isn't room here for spelling out a complete set of trading tactics, but a few essential rules can be mentioned. For an example: if you take a position in any commodity or currency, let's say long on the British pound, and it immediately turns against you, there are two good choices and one bad one. The latter would be to do nothing—ride it out. With margin, that can be too costly. It could be that you picked the wrong currency or the wrong posture (long instead of short) or simply the wrong time (at the beginning of a correction). The other choices are: (1) Sell the position—take a small loss and wait until the trend is clearer. (2) Hedge the bet. That means you go short while holding your long. Or go short partially—that is, if you had four longs, you go one short, or two or three. This freezes all or part of your situation, stopping loss until you see which way the wind is blowing. You may then lift either the short or long "leg." You can also lift it in stages. The name of the game is avoiding big losses.

While you are learning the game, I suggest that you set modest goals. Take profits early. Later you can try pyramiding—building up profits and only selling when your profits have been wiped out, and otherwise going for a killing in one particular commodity or currency. Toward the end of being cautious, I suggest that you use stops to catch intraday highs and lows for your buying and selling. Put orders in to buy below the market when it seems feasible, and put other orders in almost simultaneously to sell out when it reaches a desired reasonable, modest target, which may be hit intraday.

I also suggest that you begin with very small numbers, however much money you have. Buy just one contract in each currency you wish to trade until you see that you understand what you're about. I am staggered that some of my clients buy 10 and 20 contracts. When all goes well, that's fine; but if a reversal sets in and you don't act fast or use stops, that many contracts can wipe out your reserves.

If you find yourself making a profit at the very start, beware. It's dangerous to win at first. It gives you too much confidence, makes you think it's quite easy or that you are very talented. It's almost better to lose at first. Or if you don't, be rational enough to realize you had beginners' luck. Continue to be conservative, until you experience some reversals.

It's also best to trade in more than one situation. And don't be only long. If you have the dollar estimation wrong and are, for example, long on the DM, the Swiss franc, and pounds, you could get badly caught if the dollar turned suddenly. Better to be long on the pound and short on the yen, for example.

Does it sound complicated? If you're new to all this, it probably does. But it's not that bad. Study a bit, and you'll find it fun and very rewarding—more so than almost anything you can find today. Good luck.

Harry Schultz publishes the International Harry Schultz Letter, is president of the International Investment Association, and has written 13 books on money.