It takes money to make money.

How you can gain a sizable return from currency trading

From mid-July to late August 1998, the major stock market averages dropped about 20%, generating headlines and massive concerns among investors. With less fanfare, the investment community witnessed an even greater market move. It began last July and continued into January. The Japanese yen rose 35% against the U.S. dollar.

When such fluctuations occur, there are winners as well as losers, creating opportunities for disciplined investors to profit. What's more, currency trading isn't correlated to the stock market, so it's possible to register gains even when the Dow drops like a stone.

How can you participate? By trading currencies, which might include the yen, the Swiss franc, the British pound and the new euro, among others. The risks can be enormous, though, so you need to know the rules before leaping into the game.

For the individual investor, gaining exposure to currencies usually means dealing in futures contracts, which are traded on the Chicago Mercantile Exchange (www.cme.com). "With futures contracts, you can go short as easily as you can go long," says Ken Steben of Steben Asset Management, Rockville, Maryland. That is, you can bet on a decrease or an increase in a currency's value.

Currency trading involves the use of "margin," a "good faith" investment an investor must put up when buying or selling a futures contract. This process substantially raises the stakes. "A euro contract worth more than $138,000 might be acquired for only $3,000 in good-faith money," says William O'Grady, vice president at A.G. Edwards, a brokerage firm in St. Louis. If the futures prices move adversely, the investor must put up more money to meet margin requirements.

"In currency trading, you need to control your risks while setting targets that can offer large rewards," says Keith Raphael, president of Crosscurrents Investment Advisory in Danbury, Connecticut. "Knowledgeable traders try to hold losses on each trade to 1% or 2% through stop-loss orders to their broker." Through a stop-loss transaction, the customer orders his or her broker to set the sell price of a security below the current market price in order to protect profits or prevent losses it the value of the security drops.

How can you be among the triumphant 10%? Here are some tips for investing in currencies:

* Start with a sizable stake. "Many individuals are undercapitalized," says York. "Although you can trade currencies with as little as $3,000, I'd put $10,000 as the minimum necessary. You're better off with $20,000 or more."

* Follow the markets. Informed investors will know, for example, that this year Japanese officials have been trying to "talk down the yen" to reinflate the Japanese economy. "Make sure you effectively use both fundamental and technical analysis," says York. "Don't invest on hot tips."

* Plan ahead--and stick to your plan. Learn the lingo of the futures markets so you can use different types of orders properly. Always calculate an exit price once you have entered a new position. "The greatest mistake made by currency traders is to let losers ride while cutting their profits short," says O'Grady. "They should be doing just the opposite."

* Pay attention and protect yourself. "You need to monitor your trading activity regularly," says Raphael. On nights and weekends (including holiday weekends), currency trading goes on around the world.

The Risky World of Currency Trading

To give you an idea of the shifting currency rates that traders have to analyze on a daily basis, BE calculated the exchange rates between the U.S. dollar, Japanese yen, Brazilian real and the euro and other major world currencies.

             Value of Currency per Unit of

                                    U.S.    Japanese
Currency              Symbol       dollar     yen

Australian dollar      AUD         1.5896    0.0135
Belgian franc(*)       BEF        36.7562    0.3130
British pound          GBP         0.6136    0.0052
Canadian dollar        CAD         1.5182    0.0129
Danish krone           DKK         6.7755    0.0577
Dutch guilder(*)       NLG         2.0079    0.0171
Euro                   EUR         0.9112    0.0078
French franc(*)        FRF         5.9768    0.0509
German mark(*)         DEM         1.7821    0.0152
Italian lira           ITL      1764.2551   15.0247
Japanese yen           JPY        117.445      1.00
Swiss franc            CHF         1.4575    0.0124
United States dollar   USD           1.00    0.0085

         Value of Currency per Unit of

                       Brazilian
Currency                  real        Euro

Australian dollar        0.8606      1.7445
Belgian franc(*)        19.9005     40.3399
British pound            0.3322      0.6735
Canadian dollar          0.8217      1,6655
Danish krone             3.6691      7.4375
Dutch guilder(*)         1.0873      2.2040
Euro                     0.4933        1.00
French franc(*)          3.2365      6.5607
German mark(*)           0.9650      1.9562
Italian lira           955.3611   1936.5904
Japanese yen            63.5859    128.8936
Swiss franc              0.7890      1.5994
United States dollar     0.5413      1,0972

(*) The currencies have been fixed against the euro

As of 3/18/88

Source: Bloomberg.com and blackenterprise.com3