Currency trading – also referred to as forex, foreign exchange or fx trading – is simply where one currency is exchanged for another at a certain exchange rate, with the expectation of making money when the exchange rates change. This currency is held for a (usually short) period of time, and then exchanged again whenever the rate moves in the trader’s favor. These rates are constantly changing, influenced by many factors such as market news, national or international events, and political developments, to name but a few.
As a basic example, imagine you buy British pounds with your US dollars. Say you give $100 to buy £65. You wait until the exchange rate changes in your favor and then you exchange your British pounds back into US dollars. Now with the altered exchange rate you get $103 for your £65, and so you’ve made $3, or a 3% return on your investment.
It is this kind of thing that currency traders do all of the time, with the sole aim of increasing the total value of their funds through many small trades. By doing these trades through brokers rather than through banks, they can trade on margins. This means that, in the example above, rather than having to hold $100 in their brokerage account, they might only have to hold $10 to make the trade, even though the amount is $100. The broker will be happy to cover the rest because they assume that the market is unlikely to change by more than 10% in a short time.
The real advantage of this is that they can control larger amounts with only a small investment, and so leverage the returns that can be made.
Forex trading is not new, but it was almost entirely controlled by banks and other big financial institutions with large investment funds – until the rise of the internet. Because of the internet and online trading, ordinary people can now trade currency from their home computers alongside the major players.
Of course the financial institutions are still the big fish. Approximately US $4 trillion changes hands every single day on the currency trading markets, and home traders obviously make up only a very small part of this. But the opportunity is there nonetheless.
By it’s very nature, foreign exchange is a worldwide market, and given the different time zones around the world you can trade 24 hours a day; there will always be a foreign exchange market open somewhere in the world. And you are not limited to dealing in your own country’s currency. Unlike the stock market, there are no restrictions to which country’s currencies you can hold.
Again because of the new horizons opened by the internet, these days brokers are very keen to attract home investors, including those who do not have a lot of capital, so it is possible to get started with just a few hundred dollars. Because it is a very volatile market, there are always many opportunities to profit – but also the potential to lose your shirt.
That is why, particularly when just starting out as a currency trader, it is highly recommended that you get advice from a reliable signals provider, with a good track record in predicting profitable trades. Your broker will usually provide you with market information, including charts showing the direction of movement of all the different currency pairs, but there are many other external factors to consider. A good predictive service will take all of these into account and greatly increase your chances of profiting from all your currency trades.
Provided you have some self discipline, a little money to invest in your initial trades, and carefully choose which system to follow, currency trading can be very enjoyable and extremely profitable – even for the complete novice.