Forex Trading:The Big Bucks Lurking In Booming Economies

Many skilled traders are never fooled by booming economies. The reason why is that many of these economies may not be as sound as they seem.

To an unskilled eye or to those that have a poor understanding of how economies work, many are easily taken in that a boom may even be long lasting.

However, to the trained eye, what matters is the data underlying these growth rates.

Let us take for example the world's largest economy, the United States.

In the 1990's, the American economy had its second longest running post-war expansion. Things were so good that the unemployment rate dipped below 4.6% making labor so scarce that many companies had to forgo expansion plans due to a shortage of workers.

Not only was growth strong, but inflation stayed low. This was quite strange and many predicted there was a new economic order at America's doorstep.

The growth however was initially fuelled by cheap money and fuelled by a technology boom characterized by massive investments in the IT sector particularly internet shares. A commentator called the funds flowing into the stock market then as the"100year flood"

Internet share prices truly were defying gravity with stocks making virtually no profits at all valued at billions of dollars. To most markets watchers, this was nothing strange when many remembered the spectacular results hitherto hardware and software minnows such Dell, Microsoft and Apple had delivered to investors.

The dollar too was strong with the exchange hovering around $1/E1.20. Funds were pouring into the U.S economy at such a torrid rate that it made its currency quite strong without dampening growth

However, things suddenly took a turn for the worse in Early 2001 when a downturn was officially confirmed. This downturn was to last till 2003 and the jobless recovery that followed was primarily fuelled by cheap money with the Fed rate as at early 2002 a ridiculously low 2%

The downturn however did not come as a surprise to some. The Economist magazine had for years been cynical about the new order and stated plainly that the American economy was overheating. And that high asset prices in the form of overpriced real estate and technology shares simply disguised high inflation.

When interest rates shot up, the bubble got pricked and the economy fell to earth.

But what is most important to forex traders was what happened to the currency.

The dollar duly fell over time against most currencies with the worst being the euro. It is now trading at E1/$1.25. It has over time lost over 40% of its value to that one currency!

It is having such foresight that produces astounding profits for traders even though they may have to sit out and wait.

Most experienced traders wait until they believe such an economy as run the length of its boom and then take their positions. Alternatively, they may even engineer the slowdown themselves as occurred with the Asian crisis of 1997 where George Soros was embarrassingly called a moron by the then Malaysia premier Mahathir Mohammed.

So next time an economy roars, it may be time to start taking positions!

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