Right now the stock markets are bearish. Nobody knows when the stock markets will turn around. It can be a few years before the global economy comes out of the recession and with that the stock market sentiment turns bullish. When the stock market is performing poorly, the forex market enables you to offset your losses. When the stock market is doing well, the forex market also enables you to accelerate your profits. The real magic of forex market unfolds when you combine it with other profit generating markets like the US Stock Market.
Buy and hold investing was the norm among most of the public investing in stocks. But all of a sudden the stock prices plunged and never recovered again. Many small investors lost their lifetime savings in the stock market crash that happened in 2008. Most of us invest in the stock market. You should use the forex market to complement your stock market investing and supercharge your returns on investment if you do nothing else with the forex market.
Many foreigners invest in the US economy because of its size and the opportunities that is offers. US treasury bonds and stocks have been popular among foreigner for a long time. US stock market attracts investors from around the globe. The US stock market is the largest and the strongest stock market in the world. Before foreigner can invest in US stocks they need to convert their native currencies into US Dollar.
When the US stock market is performing well and the stock prices are rising, more and more foreigners want to invest in US stocks. But they cannot directly invest in US stocks. First they have to convert their native currencies into US Dollars. The value of US Dollar will rise when they exchange their native currencies for more and more US Dollars.
But what happens when the US stocks start going down just like that has happened now. More and more foreigner and Americans look for other investment opportunities when the US Stock Market isn’t doing well. When they sell US stocks, they get US Dollars. They need to convert these US Dollars into their native currencies or whatever currency they prefer. Investors start selling US Dollar to buy other currencies when this happens. The value of US Dollar drops.
The US Stock Market had been going up till 2008 when the sub-prime mortgage crisis started. Historically, there has been an upward drift in the US Stock Market that lasted many decades. In actual reality the stock market is cyclical. It ebbs and flows as the market participants vacillate between levels of confidence and doubt. Remember the NYSE crash of 1929. Many of us were not ever born then. It took a decade for the stock prices to recover. The same might happen this time again.
What happens when the stock market is booming and the stock prices are rising and rising? During the stock market boom, the investor emotions run wild. Everyone gets overexcited to the point of buying stocks selling at ridiculous prices. So the stock market booms and busts are fueled by the same investor emotional volatility.
Similarly what happens when the stock market bubble bust and the stock prices go down and down? The investor emotions run wild again during stock market busts also. Everybody panics and start selling stocks at ridiculously low prices. Sometimes there is no rhyme or reason to what happens to the stock market. This is exactly what is happening at the moment.
Good times are easy. Everything is so easy when the times are good. Everyone who picks stocks looks like a genius during good times. It just seems to happen so naturally. You don’t have to put a thought into it. Times like these give you an excellent opportunity to enhance your returns in the forex market.
But what happens during bad times. The world turns upside down. Many people lose their lifetime savings. Virtually nowhere else the forex market works as a perfect hedge for your investments than in the stock market. Forex market becomes more useful when the stock market loses its value.
You can retain more control of your financial future if you put a portion of your money in the forex market. So when there is a downturn in the stock market like that in the present, you can offset your losses in the forex market. You are completely at the mercy of the stock market if you have all your money invested in the stocks.
What moves the stock market down? How to counteract those movements in the forex market? We are going to focus when the stock market goes down like the present.
When people start seeing the stocks go up, they become excited. Contrarians suggest that the majority is bound to be proven wrong in not too distant a future when an overwhelming majority of investors begin to think alike.
Savvy investors jump in early. They are the lucky ones who will reap all the fruits of early entry into the up-trending market. As the stock market begins to move higher and higher, more and more investors jump in as they now believe in the upward movement. While most investors stay on the sidelines still undecided trying to figure out whether the stocks will go more up or not!
The up trend continues. Stock prices continue to rise. Majority who has been sitting out decide they can’t afford to miss out on any more profit making opportunities. They jump into the game finally near the top of the uptrend. The savvy investors who have been enjoying the bullish run decide to take profits and run at about the time that these investors are jumping in.
As investors begin to unload their positions, suddenly there is a mass fire sale and the market crashes. The selling generated by these people eventually begins to pull the market down and people start to panic.
S&P 500 Stock Index represents the market capitalization of 500 largest US companies that are traded on the US Stock Markets like NYSE, AMEX and NASDAQ. The S&P 500 Stock Index is the most recognized US stock market index in the world. How to keep track of S&P 500 Stock Index? You can track the movement of the S&P 500 through an ETF, the Standard & Poor’s Depository Receipts (ticker symbol SPY).
More and more investors invest in US stocks when the US economy does well. S&P 500 index rises. The value of the US Dollar rises. S&P 500 index is closely correlated with the US economy. US economy does well, it goes up. US economy does not do well, it goes down.
On the other hand, more and more investors want out of the US stocks when the US economy does not perform well. S&P 500 index falls! The value of the US Dollar falls. The easiest way to monitor S&P 500 is to invest in SPY. You can predict the direction of any currency pair involving US Dollar on one side by monitoring the movement of the S&P 500.
Tracking SPY is the easiest and the best way to get a clear perspective on what is happening in the US economy and the market place. Invest in SPY to see how the stock market is going to affect your portfolio.
The forex market will immediately react to some short term movements in the US stock market. However, the forex market is more susceptible to the longer term influence of the stock market. You need to keep track of SPY whether you invest in SPY or not. You can watch SPY on a weekly basis.
