Expect the Unexpected

Evaldo Albuquerque (January 25, 2010)

(And I’ll Show you where to Profit)

Last week, Kat von Rohr told you that the PowerShares U.S. Dollar Bullish fund (NYSE: UUP) – the most popular “pro-dollar” fund in the U.S. – was running out of shares in December.

The reason? Big-name professional traders in the market all believe the dollar will be spiking higher soon, so they are using this dollar bull fund as a hedge. Everyone from Jim Rogers to Marc Faber and Bill Gross – all long-term dollar bears – are now piling in, believing in the possibility of a dollar rally.

Frankly, I agree…

But the fact that big traders are buying is just one of the indications that a short-term dollar rally is in the cards. Over the next few days, we’ll share the evidence with you to support why a dollar rally is coming, and we’ll show you a few of the best ways to profit when it does.

I’ve even discovered one tactic that can limit your downside and deliver much larger profits as the dollar ticks higher…

The Beginner’s Strategy

One of the easiest ways to bet on a dollar rally is by following the biggest trader’s lead and buying the dollar bull fund, UUP.

You can buy shares through a standard brokerage account and benefit from the dollar’s rise. How much money can you make with a conservative play like this? Well, that depends on how high the dollar soars.

The last time this happened – in 2008 – UUP jumped from $22.79 to $26.50… a gain of 16%. Not bad for an unleveraged investment that you can buy with a click of your mouse on any standard online brokerage account.

But there’s an even better way to capitalize on a rising dollar, and I think you should know about it…

See, while UUP surged 16%, another type of currency play gave traders the chance to line up triple digit gains the last time the dollar rallied, like I predict it will this year.

How is this possible?

Through the $4 trillion Forex market – specifically, by buying the dollar and shorting key emerging market currencies. Take the South African rand, for example…during the dollar rally of 2008, this currency depreciated by 33%. Forex traders who shorted the South African rand in the Forex market were able to pocket gains of 833% (using a reasonable 25:1 leverage).

Similarly, the Mexican peso and the Hungarian forint fell 28% and 34.5% against the dollar that year. That would amount to gains of 700% and 862% in 25:1 leveraged trades.

Of course, this strategy is riskier than buying an unleveraged exchange traded fund like UUP. But with a good risk management strategy, you can easily limit your downside, while benefiting from much higher potential returns.

Minimize Your Risk with Minis

Currency traders have the advantage over commodity or stock traders because they can strictly limit their risk and control their leverage using what’s known as “lots” in the currency market.

As a trader, you have the choice to trade different amounts of currency using standard lots, mini lots or micro lots. Choosing the right type of lot helps you control your leverage – micro-lots use a little leverage, mini-lots use a medium amount of leverage, and standard lots is a LOT of leverage.

Personally, I believe using the medium choice: mini-lots are the best and easiest way to reduce your risk especially when trading exotic currencies.

When you trade mini-lots, you’re actually investing in 10,000 units of a specific currency pair, as opposed to 100,000 units with standard lots. More leverage = more risk, so mini-lots are a safer option for your account.

A Hypothetical

At the risk of getting a little bit technical, let’s look at a hypothetical situation…

Imagine that you have a $25,000 account and that you want to buy the dollar and short the Mexican peso (or buy the USD/MXN pair). You’re looking to earn a 4% gain, with an equal maximum loss.

If you use a standard lot, you will be risking more than 15% of your capital on that one trade.

Sure you have the opportunity for more gains with that added leverage, but you’re also risking a huge chunk of your account. If the trade goes against you, you won’t be able to bounce quickly from the loss.

On the other hand, if you trade two mini lots, you will risk just 3% of your total capital on that trade. But you still can double your money, using 25:1 leverage.
For currency traders, it’s the best of both worlds.

Regardless if you win or lose on the trade, you can ensure you have plenty of cash left in your account to trade with. And at the same time you can target far higher returns than you could ever achieve through a pro-dollar fund like UUP.

There is no doubt in my mind that mini-lots, combined with exotic currencies offer the most predictable, risk-controlled way to play this dollar rally.

By employing this strategy, you can enjoy all the benefits that the professional traders enjoy, with less capital at risk. You will also be able to trade without the anxiety and distractions that come with large swings in the currency market.

Bottom line: The dollar rally is coming. Be sure you’re ready to profit when it does.

Best Regards,

Evaldo Albuquerque, Editor of Exotic FX Alert

P.S. As you can see, the trades can be a bit technical, but I firmly believe forex markets – specifically emerging market forex – will provide some of the greatest windfall profits of our lifetime…read my full report here…

Tags: Currency, forex