1-Hedging Your Foreign Investments
Whenever you buy stocks from another country, for example a Canadian citizen investing in the NYSE or the NASDAQ, your holdings’ value is prone to changing along with the currency of that country. It could be in your best interest to limit the impact that currency fluctuations could have on your portfolio.
To buy stocks in the United States stock exchanges, you would have to change your currency from Canadian dollars to United States Dollars (the process can be automatic when you place your order).Your portfolio’s value would then be fluctuating with the stock price and the USD value.
If your intention is not to invest in the United States’ currency, then what you could do is hedge your foreign holdings by taking the opposite side in a Forex position. Here’s how you would do it: if you bought 5000 CAD worth of shares, you would open a short position in the USD/CAD for the same amount, without setting a stop-loss. That way, your Forex position would negate any fluctuation in currency from your stock market position.
Please note that there could be swap fees for holding positions during long periods of time. You would have to determine what those are beforehand.
2-Investing In Countries
The same way you can form an opinion on the direction of stock prices, you can try to find out which country is going to become a big player before it has happened.
If investing in specific public companies from foreign countries does not interest you, what you can do is invest in their currency. If a country starts developing its economy, increasing its GDP or establishing advantageous relationships with other countries, their currency is most likely going to follow suit.
Let’s say you thought that Singapore was going to develop and become more prosperous. What you could do to take advantage of their progress is either buy contracts in favor of the SGD, or open a long term position in a Forex pair in favor of the SGD.
Currencies can be a good investment since they have so much fundamental data backing them up. Unlike public companies, which can go bankrupt if a big enough mistake is made, currencies usually hold their value in a more consistent way.
3-Take Advantage Of A Crash
Whenever big moves in the markets start taking place, large sums of money can be made. Most of these big moves are crashes caused by a big economic event, by fear or by inflated values coming down, often compared to a bubble. Depending on the importance of the reason behind the move, it can be a good idea to invest in a crash for the long term.
If you decide to hold your stocks during a big move on the downside, having a way to profit from it could reduce the drawdown in your equity curve.
Taking advantage of a crash is done by betting against the instrument that is crashing. Technically, you could short some stocks that you borrowed from your broker. Chances are that your broker is not going to be willing to lend you stocks during a crash, not going to have any available, or charge you exaggerated fees to protect themselves.
What you could do, instead, is place short positions in the Forex pairs that are correlated to the crash. You could also go long in commodities that could profit from a crash, such as the gold.
A good example would be the crash that followed the Brexit, when the United Kingdom withdrew from the European Union. The GBP/USD dropped over 1250 pips the day after the separation was announced, and kept dropping for weeks after. An investor that was ready for such an opportunity could’ve easily taken advantage of this big move.