Over the past three months, the US Dollar has been on a tear against the other global currencies. The dollar has gained, or more accurately "won back," 20% against the Euro, British Pound and Canadian Dollar in the past three months alone. In some cases this has reversed losses made over a year or more. This three month trend is not unique in the world of the Foreign Exchange. The valuation of one currency versus the other is primarily driven by much larger and fundamental economic forces relative to what drives an individual stock's movements. A few of the larger factors that drive currency values are as follows: interest rates and the increase or decrease in those rates by their central banks, inflation, GDP (Gross Domestic Production), trade balance trends, real estate and stock market rates of return. As you can imagine, none of the aforementioned economic forces turn on a dime or pivot on an analyst's rating of just one quarter's valuations, as is too often the case with stock trends. These factors tend to occur over multiple quarters, even years. As a result, currency markets tend to trend in a more consistent fashion and for longer periods than do individual company-based stocks until one of these fundamental factors changes. For this reason, currencies tend to attract technical traders with a keen understanding of fundamental economic forces. A currency trader might look to take a position on a technical pullback in a longer-term trend supported by fundamentals. These can be ideal entry and exit points for swing traders, which tend to make up the majority of the currency trading population (although Spot Forex is also well suited for intraday trading for those that so desire).

The currency markets have only recently opened up to retail traders since the emergence of online charting, analysis and trading tools in the latter 90's. Before this time, the Foreign Exchange, or Forex, was mostly exclusive to banks, multi-national corporations and the ultra-wealthy. My entry into the Forex occurred back in the mid 90's while living in Japan. In order to take advantage of meaningful currency fluctuations I would literally withdraw cash money from my Japanese bank, load it into my backpack and then physically carry this cash to a US bank in Tokyo to have my Yen converted to US Dollars. When the trend would reverse itself I would reverse the process and convert dollars back to Yen, and so on. Not only was this cumbersome and time consuming, it was downright nerve-racking to transport $50K+ through suburban Japan by foot, bicycle, train and bus, and took up the majority of a day's time.

Nowadays, the currency trader and investor have more options than ever. In this article, I'll discuss one of the newest ways to gain Foreign Exchange exposure utilizing Currency ETF's. Rydex Investments has created a series of eight currency ETF's they call CurrencyShares. These ETF's are designed to reflect the price of eight different currencies as valued in dollars. The eight currencies that are represented are:

• FXA - CurrencyShares Australian Dollar
• FXB - CurrencyShares British Pound Sterling
• FXC - CurrencyShares Canadian Dollar
• FXE - CurrencyShares Euro Trust
• FXF - CurrencyShares Swiss Franc
• FXM - CurrencyShares Mexican Peso
• FXS - CurrencyShares Swedish Krona
• FXY - CurrencyShares Swiss Franc

Let's take a look at the one-year chart on the FXE, which measures the value of the Euro against the dollar:

Since this chart measures the value of the Euro in dollars, when the chart is moving up, this represents a strengthening of the Euro, or said another way, a weakening of the dollar. When the price moves lower, this represents a weakening of the Euro or strengthening of the dollar. Between December and February, the FXE was range-bound, finally breaking through resistance on February 26th, supported by both the MACD and Stochastic indicators at the bottom of the chart. A trader taking advantage of this technical move would have enjoyed a nice run up of the FXE until April 20th when the 30-day SMA was violated to the downside. Additionally, the return on the position was enhanced by a $0.41 and $0.46 dividend in March and April. From May through August, the FXE was again range-bound, breaking down through support on August 8th and falling precipitously from 150 to 140 in the following 20 days. Utilizing short strategies such as a short sale, straight put, put spread or bear call spread would have captured much of this downside move.

As discussed earlier, the currency markets tend to be less fickle than the equity markets. However, when they move, they tend to move quickly and aggressively and then establish a new range. Again, this setup provides a technical trader an opportunity to watch and wait for the move and then move into the trade when the opportunity presents itself. Just like stock trading, trades cannot be forced! The chart above shows the FXC, which represents the value of the Canadian Dollar (or "Loonie" or "Cad") as represented in US Dollars. You can see that, starting on the left side of the chart in November, the Loonie was selling off quickly against the dollar. It then found support in the mid 90's in January. For the next seven months, the chart respected that support level until breaking down through 92 and dropping dramatically to the high 70's. Here, an astute trader would watch and wait for such moves and then take a position. Take some time and review charts on the eight ETF's listed above and notice how the currency trends tend to obey Technical Analysis more literally than do most stocks, and act more like large indices such as the Russell or the Wilshire.

The Currency ETF's are a way in which a technical trader that is looking for exposure to the Forex can utilize his/her skills outside of trading Spot Forex or Currency Futures. One other advantage of using currency ETF's is that the majority of brokers allow ETF trades in an IRA. There are relatively few FX dealers that allow spot Forex and Futures to be traded inside a retirement account. However, there are also some issues you should be aware of with the currency ETFs:

•The Foreign Exchange trades from Sunday afternoon through Friday afternoon non-stop, and currency ETF's trade only during US market hours. Since the currency ETF's replicates the move of the underlying FX pair, this means that each morning you will see each of the currency ETF's gap up or down at open from where they closed at 4:00pm Eastern. This lack of control throughout the night can be unsettling and can trigger and execute stop orders upon opening away from where the stop was initially set.

•The variation of interest rates between one currency compared to another can generate monthly distributions that appear like dividends (you can see this in the charts). For example, the FXA (Australian Dollar) is currently yielding just under 7%. Being on the receiving end of these monthly distributions is an added benefit when you are long, but being short the FXA in order to take advantage of a strengthening US Dollar would mean you were on the hook to pay the dividend out of your own account essentially eroding any profits made from the move in the position itself.

•There are options on the CurrencyShares. As an active option trader, this is a terrific benefit for my various strategies. However, the lack of substantial volume creates large spreads and the lack of open interest makes it difficult to execute any more than a few contracts without "slipping" or moving the market with one's own orders, even if rather small. In time, as the retail trader and investors learn more about currency opportunities, I believe volumes will pick up and spreads will naturally tighten, but that will take time. Until then, exercise caution and utilize limit orders if exploring the options on the CurrencyShares.

Despite these shortcoming, the currency ETF's open up global investing, hedging and speculating to the astute trader and offer a simplified, cost-effective way to enter the currency markets. For an active trader, these ETF's are like the family mini-van, not much in the way of sex appeal, certainly not fast, but comfortable and extremely useful, even though it doesn't get you to your destination very fast. On the other hand, the more commonly traded market, the Spot Forex, is like a high performance sports car: sexy, fast, noisy, and will get you where you want to go very fast, provided you don't run it into a ditch along the way and it explodes in a fireball. Regardless, I'm just happy I no longer need to hike around a foreign country with 10 pounds of cash in my backpack...

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

The security used in this example is used for illustrative purposes only. Investools is not recommending that you buy or sell this security. Past performance shown in examples may not be indicative of future performance.

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