How to Trade Using Currency ETFs

ETFs trade on the stock market alongside individual companies' stocks.

An exchange traded fund (ETF) trades on the stock market much like a regular stock. It is denoted in shares and can be bought and sold at any time. This contrasts with a mutual fund that usually places restrictions on when you can exit a position. Additionally, ETFs do not incur heavy management fees. ETFs exist to track entities that cannot be conveniently traded using ordinary stock. A currency ETF allows the shareholder to profit from a rise in a currency's value. This may be easier than purchasing actual foreign currency.

Things You'll Need

• Brokerage account

Instructions

1. Identify the currency in which you wish to invest. ETFs provide you with the opportunity to not just profit from a rise in a currency, but also a decline in most major currencies. Make a prediction on the future price direction of the currency you choose.

2. Identify a currency ETF that suits your prediction. Dozens of currency ETFs are available. For example, if you wish to speculate on the Euro, the "FXE" ETF ticker tracks the same returns as the Euro's value. If you are confident of the Euro's rise, the "URR" offers double the returns of the Euro. If you expect a decline in the Euro, the "DRR" offers double the inverse returns; this ETF rises 2 percent for every drop of 1 percent in the Euro.

3. Login to your brokerage account. ETFs are openly traded on the stock market and do not require any special type of brokerage account.

4. Type in the ticker symbol of the ETF you wish to trade. Most brokerage platforms provide a field for this on every screen.

5. Buy shares in the ETF just as you would stock. Once the ETF is located in the trading platform, choose the "Buy" or "Trade" button and then enter the number of shares you wish to purchase.

6. Sell shares in your ETF position at any time you wish. Many traders "scale out" of a trade. Instead of selling all their shares at once, they gradually liquidate their holdings as a position becomes more profitable.

Tips & Warnings

• Trading currencies is technically the same process as buying stock. However, predicting changes in currency values is very different than analyzing corporate earnings and predicting a company's health. Currency is affected by many international factors and can be hard to analyze and predict. Never place too much of your investing capital in a currency position.

References

• Stock Encyclopedia: Currency ETF List
• Seeking Alpha: The Complete List of Currency ETFs