Long-Term Currency Trades to Consider Now

02/16/2011 5:00 am EST

Focus: FOREX

Over the past few years, forex traders have really had to step up their games in order to continue making money in the markets. Back in the day, before currency trading was mainstream, currencies used to trend in one direction for long periods of time with low levels of volatility.

But with so many individuals now involved speculating on price action, coupled with international concerns in most countries, the once slow and steady currency market now moves like the stock market with large price swings on a weekly and even daily basis.

With currency trading growing at an incredibly fast rate, stock traders have been given tools to trade currencies using ETFs. If you are familiar with leveraged ETFs then you have most likely seen the huge opportunities (100%, 200%, even 400% gains) that they can provide during major trends.

Below are a couple major trends that both forex and ETF traders should be keeping their eyes on.

Japanese Yen

Over the last couple years, China has taken most of Japan’s manufacturing, creating some terrible fundamentals overall for the Japanese yen. With a weakening economy and the yen making a major top in 1995, I feel we could be seeing a 16-year double top forming. This means shorting the yen for a multi-year correction (bear market). This could generate some serious gains in the coming two to five years with very little work required.

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ProShares UltraShort Yen ETF (YCS)

This fund allows stock/ETF traders to play the currency market within their regular trading accounts. The YCS fund is a 200% leveraged inverse fund, meaning this fund goes up in value as the yen declines. For example, if the yen drops 10% in value, theoretically, YCS will rise 20%.

(Use caution when trading leveraged ETFs unless you are a daytrader due to the “slippage” often seen in their performance numbers over time.)

Everyone has seen that infomercial to cook food with the saying “Set it and forget it!” Well, that’s more or less what this position will be like if we get a set-up to buy this fund. This trade could easily last five or more years with the potential to generate 150% - 400% gains.

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US Dollar

Taking a look at the more common currency, the dollar, we see that it has been forming a similar price pattern and is trying to form a base and bottom. The dollar does have one major issue, which will most likely cause a breakdown and even lower values in the coming year. The problem is that the Federal Reserve constantly prints money, increasing the money supply and devaluing the dollar (quantitative easing).

Currently, the dollar is trading within a large range and is poised for a short-term bounce. There will not be any major trends until a breakout of this trading range to either the upside or the downside.

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In short, while playing shorter-term trends is exciting, rewarding, and keeps us busy on a daily/weekly basis, it is nice to have some long-term positions at work, which slowly mature into large percentage gains and can boost your overall portfolio value each year with little work.

Both the yen and dollar look as if there is big potential just around the corner for those who simply use a buy-and-hold mentality.

By Chris Vermeulen of TheGoldAndOilGuy.com

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