The Benefits of Trading in a Currency Basket
A basket is a cylindrical container usually made of wicker or wood that holds goods for transport. A basket is usually large, sometimes weighing more than 100 pounds, and may contain a number of different items. Common basket contents include food and beverages, decorative objects and delicacies, cleaning supplies, flowers, confectionery, toys, bones, ashes, and leaves. Historically, baskets have been used for transportation, but the modern usage of the basket continues to change throughout the world.
The basket option is one transaction type in FX trading that is quite unique. Unlike futures and options trading, where the value of the product being traded is set at the time of trade, the value of a basket option contract is not determined at the time of purchase. There are numerous types of these contracts, ranging from a simple stand-alone contract that guarantees a buyer a specific volume of a certain commodity at a fixed price, to complex multi-tier basket options that offer the buyer a series of options on the underlying goods. While all of these choices are viable trading platforms, it is the basket option that offers the maximum potential return because there is practically no margin requirement.
For the most part, the basket transactions in the FX markets revolve around one central point. This point is the price level of the underlying stock or currency pair at the time of the trade. In most cases, this price is determined by a centralized authority that sets the opening and closing values, often based on information coming from a number of sources within the broker network. While all of these arrangements are legitimate business practices, there are some advantages that most individual traders do not take advantage of. For instance, when you purchase a basket option, you are buying stock that you believe will increase in price over time. Depending on how well the basket trading company chose the underlying securities within the basket, your profit and loss will be calculated on the basis of how much you would have made if those securities had risen in value instead of decreased.
The benefits to traders using the currency basket option are twofold. First, the cost to execute the transaction is very low, allowing large individual investors to enjoy a substantial risk reward. The second advantage to traders using these products is that they do not require any cash up front. When comparing the various basket transactions in the currency markets, this factor becomes particularly important, as few traders will be in a position to guarantee the purchase of specific stocks while only having to guarantee the sale of standard, unlisted securities.
Currency trading is primarily speculative in nature, and baskets provide their users with an extremely low risk opportunity to participate in the market for shares of foreign currencies. This fact also has a couple of other benefits. First, most people that buy these products are doing so with the idea of eventually cashing in on the increase in value of the product. Secondly, many of the products are traded on margin, and if the market moves against the investor’s basket, the trader’s margin will be wiped out.
One other thing that may interest you when comparing trading options is to know what is called a basket swing trade. A basket swing trade occurs when you execute one market order and simultaneously execute another market order. For instance, if you make a market order to buy 100 shares of Dell at $90 each, then immediately after you sell off all of your shares, you execute another basket order to sell off the remaining Dell shares to the open market. This is just one example of a basket trade, and obviously both of these transactions will generate income. A well developed basket-swinging strategy can significantly improve your bottom line over time.