Why don’t forex traders deal in both currencies at once?
I’m looking into the forex (not looking to invest, just researching.) Suppose I am trading in hypothetical scenario where USD/JPY is trading at 10. Let’s say I perform the following actions:
I deposit 0 into my account and exchange half into JPY. 100 USD, 1000 JPY.
The rate changes to 20. I rebalance, converting to JPY. 75 USD, 1500 JPY.
The rate changes back to 10. I bring my USD balance back to the first balance of the 0. Now I have 100 USD again, but now I have 1250 JPY, a gain of from step 1.
Why don’t more investors do this? Or do they? I would assume that it has something to do with fees/taxes making this strategy difficult to make money off of, or that the movement in rates isn’t enough to make a significant difference with this technique, or that the pattern is regulated against.
EDIT: I know the title isn’t very clear but other than saying “why don’t forex traders use this technique?” I wasn’t sure what to call this question.
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Well, your exchange rate changes are deeply unrealistic. But aside from that, there's another problem. You are assuming in step 3 that the exchange rate will return to the same position as it was in step 1. Sure, maybe that will happen. But if instead, it changed to an exchange rate of 30, you now have USD and 1500 JPY worth another USD, for a combined total of 5, or a loss of USD over your original investment.
If you are sure the exchange rate will go up and then return to the original, your best option would be to skip step 1, convert all of your money from USD to JPY in step 2, then convert it back in step 3, doubling your money. But you simply don't. You don't know if the exchange rate will go up and return back. Or go down and return back. Or go up and keep going up, or go down and keep going down.
The key point is that your proposed strategy is unleveraged and is based, as you say, on rebalancing. This is a conservative, hedging-type strategy. It is unlikely to generate high returns (based on realistic currency movements). It might be appropriate, for example, to manage savings this way if you expect your future expenses to be half in the US and half in Japan (e.g., part of your family lives in each place, or you plan to move back and forth, or you're a company with offices in both places). You might get a small benefit from periodically selling high and buying low (the rebalancing effect), but need to make sure commissions don't outweigh this.
Most individual forex traders are engaged in speculation, not hedging. They take highly leveraged positions in futures. In that sense, they do "deal in both currencies at once". For example, they own JPY and are short USD (or vice versa). This has higher risk but the potential for higher returns.
Any investment strategy, that can be described in three easy steps that anyone can understand, dealing in common financial instruments (currency, stock) will not be able to guarantee any gain, expect perhaps risk-free interest in a bank account.
The market already knows about all such tricks, and there is no arbitrage to be made.
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