In theory, trading in capital markets should be a zero-sum game; since all participants are seeking to maximize profits, one participant’s gain should come at the expense of another. Forex markets, however, appear immune to this phenomenon, due to the presence of participants that don’t seek to necessarily maximize profits. Stated another way, there are many participants that exchange currencies because they have to (i.e. tourists, exporters/importers) or because they are trying to achieve political/economic ends (think central banks). Such participants’ relative price inelasticity generates excess profits that can be extracted by shrewd traders: they key is having a strategy, such as carry trading, momentum trading, or fundamentals trading. The Economist reports:
[Forex] returns do not appear to be correlated with the other main asset classes of shares and bonds. A currency fund can thus be a useful source of diversification for the average investor's portfolio, improving the trade-off between risk and reward.
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