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How Do You Make Money In Currency Trading?

Copyright (c) 2007-2019

The question, "How do you make money in currency trading?" is being asked by investors and potential investors worldwide as they witness the multi-year downturn trend of the US dollar and upswings in other currencies such as the Euro or Canadian Dollar. Only since 1999 have US citizens been allowed to trade foreign currencies at a individual level while investors in other nations have done this for years. Trading currencies takes place in the foreign exchange (forex) market and is the largest financial market in the world with a $3.2 trillion US dollar a day average turnover according to the Bank of International Settlement in April 2007. With the market open 24 hours a day 6 days a week, it offers more liquidity than the U.S. stock market or treasuries. And thanks to technology and the Internet, individual investors can take advantage of opportunities to earn profits at home, on the road or where ever they may be.

Currencies are traded in pairs such as the Japanese Yen/U.S. Dollar or Canadian Dollar/U.S. Dollar. Those that trade against the U.S. Dollar are most popular, with the U.S. dollar being represented in over 86% of forex trades. Among the top currencies that do so are the Australian Dollar (AUD), Japanese Yen (JPY), British Pound (GBP), Euro (EUR), Canadian Dollar (CAD) and the Swiss Franc (CHF). These particular currencies float freely in value and do fluctuate up and down. Many forces affect their value, such as the economic health of the nation(s) behind a money, interest rates, inflation, news in global stock markets, actions of central banks and so on. For example, in 2007 major forces weighing on the U.S. dollar are the housing market slowdown and foreclosures, bad debt such as subprime mortgage defaults causing billions of dollars of losses to U.S. businesses, overall bad economic health in America, energy price increases in oil and interest rate cuts by the Federal Reserve. In another example, forces that are pushing the Australian dollar up are climbing commodity prices, a very strong economy, a low unemployment rate and high interest rates with more potential rate increases by the Reserve Bank of Australia in 2008. Fundamental reasons such as these or technical analysis using charts are what motivate investors to get in and out of the forex market, with the goal of making a profit. Trading in currencies is tracked in movements called "pips". A pip is the smallest unit of price for all currencies. For example in a EUR/USD (Euro/U.S. Dollar) pair, a purchase price quote of the Euro being 1.4821 to the US dollar, has the smallest unit of price four places to the right of the decimal point. Any change in the price from that position would be the reference point of profit or loss in a transaction. The USD portion of the pair is also known as the quote, which would make each pip movement worth 1/10000 of a US dollar. (There are 10,000 pips in one US dollar making a single pip worth $0.0001.) The EUR portion of the pair is known as the base. If you made a buy of 10,000 Euro base units at 1.4821 and sold at 1.4846, your transaction would have a movement of 25 pips, and your profit would be $25.00 US (10,000 units x .0025 pip movement = $25.00).

When orders are placed through a broker/dealer, they go to an interlinked connection of extremely large commercial banks that buy and sell foreign currencies. There is no centralized exchange or physical location for the foreign exchange market. The forex market, which used to be the domain of banks, now includes multinational corporations, global money managers, dealers, international brokers, futures and options traders and individual investors. Even the governments of nations get involved should intervention be required on their part to provide stabilization of currencies.

Part of becoming profitable in foreign exchange means taking time to do things to insure personal success. Positive steps include making the effort to learn about the forex market before trading, testing trading strategies with a demo account, not being highly leveraged and managing portfolio risk. Investors have made large sums of money in forex, but remember that money can be lost in foreign exchange and one should consider the amount of risk and potential loss involved before starting, and that such trading is not suitable for every person.

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Tom Howze is editor of the Foreign Exchange Business Line website, designed to help businesses and individual investors with computing business profitability, business profitability goal ideas for foreign exchange, and providing up to date currency news.

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2007-12-05 11:36:00

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