How to Profit from Currency Crisis?

A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. A currency crisis, also called a devaluation crisis, is normally considered as part of a financial crisis. In general, a currency crisis can be defined as a situation when the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation.

When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency due to accruing an unsustainable current account deficit, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight.

While most investors are panicking as asset prices plummet, those with a cool head are able to see the resulting low prices as a buying opportunity. Buying assets from those restless individuals driven by fear are like buying them on sale. Often, fear drives asset prices well below their fundamental or intrinsic values, rewarding patient investors who allow prices to revert to their expected levels. Profiting from investing in a crisis requires discipline, patience, and, of course, enough wealth in liquid assets available to make opportunistic purchases.

So many people let their emotions get in the way of making the right decision. They feel an irrational fear. The psychological aspect of speculating prevents most people from doing it well. It's hard to be unemotional about risking money. The best opportunities come when financial newspapers and websites are filled with doom and gloom. Everyone is scared. Your friends and family and co-workers will tell you that buying this currency or is crazy.

You can't be like everyone else if you want to make big money speculating. No matter how great the upside potential, almost no one wants to buy when things are really, really cheap… when you should get in and buy with both hands. You'll need patience because things can go down before they start going your way. But when they do, you can make 500%, 1,000%, sometimes in a few months or less. Those with the foresight that a crisis is impending may implement short strategies to profit from a falling market. Of course, timing is everything, and buying too early or late, or holding on to a short position for too long, can serve to compound losses and take away from potential gains.