An Overview Of Currency Trading
Nowadays – especially with unemployment at an all-time high – many people are beginning to wonder how they can make money via the Forex markets. This desire is also driven by the fact that the stock market has been unreliable in the past few years, and so people are seeking to spread out their investment portfolio.
Whilst there are some ‘buy and hold’ Forex traders (who are in it for the long-haul), many Forex traders are in it for the short term; that is, to ‘make a quick buck’. Thus you will find that many traders in these field are day traders and are more short-term orientated. This is not necessarily a bad thing though; it is just worth pointing out one of the characteristics of Forex before we begin.
Okay, so how do we make money by trading currencies? Well, it helps to understand exactly what a Forex market is.
Forex is an abbreviation of the term Foreign Exchange. Which means that you get one currency and turn it into a foreign currency. So – an as example – this might mean getting 1 Euro and turning it into 1.48 USD (USA dollars). This is the base rate. Naturally if you had 1,000 Euros, you’d get 1000×1.48 = 1,480 USD. You can trade with the vast majority of currencies. The most popular are the ?GDP, Euro, $USD and Japanese Yen.
The actual way that Forex traders turn a profit is fairly straightforward. They make a deposit into their Forex account, and from there buy foreign currencies. If the exchange rate strengthens, the value of their foreign currency holding (relative to their original order) increases – thus allowing them to sell at a profit.
There is also a Forex ‘feature’ known as marginal trading. This is where – for a given deposit – you can ‘borrow’ on this deposit and thus increase the amount of funds available to you.
This gives a trader much more leverage; as they might be able to borrow (say) 100 times their deposit, and thus potentially multiply any end profits by 100. This can often be necessary in Forex because changes in currency are fairly small from day-to-day, and so being able to greatly increase your profit potential will also greatly increase your total overall profits.
So here is another example: lets say that you believe the ?GBP will improve against the $USD today, or very soon. You open up 1 trading lot, buying the ?GBP with a margin of 1% at a price of 1.49889. Now you simply wait for the exchange rate to rise – be it today, tomorrow, or later in the week.
Once the exchange rate has risen (say, to 1 GBP = 1.5050 USD), you decide to sell. You have earned 61 pips, which works out at around $405 profit. Your initial investment of $1,000 (i.e. 1% of your $100,000 marginal traded/leveraged amount) has now made you over 40% profit back (i.e. $405 profit on $1,000 capital employed). This might sound hard-to-believe in just a few day’s of trading, but it is entirely possible.
This article has hopefully helped to give you a start in showing you how you can make money via currency trading. The old adage of ‘buy low and sell high’ is more true here than in many markets! Just remember that Forex is a vast field; and this article only covers the basics. We recommend that you start with paper trading (Forex trading without real money) for practise, before starting with actual money.
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