There are several markets in which an individual can make a profit by trading and foreign exchange is one of them. Or perhaps you have a business that trades products internationally and want to hedge your foreign currency risk. Well, then you should look at corporate forex services. Either way, having some basic knowledge of currency trading can benefit your bottom line. While this article won’t be an exhaustive resource on forex, I will touch on some of the basics.
Let’s say that you want to trade currencies to make an extra grand per month. You would start by opening an account for trading. There are many different brokers and most likely, you could find one online. I checked with my online broker and others that I have used in the past and several have the ability to trade foreign currencies. So opening and funding an account would be relatively straightforward.
Next, it is important to know a little bit about how trading works. Although the forex market is open 24 hours a day and never closes, there is little activity over the weekends absent some major news event. Furthermore, the majority of activity occurs in London and New York which would be open from 3 AM to 5 PM US Eastern time.
The ability to read a quote is another important skill that differs from the stock market. Currencies are always traded in pairs, meaning that you are selling one currency in order to buy another. The first currency in the pair is called the “base currency” and the second is known as the “counter currency”. So if I am looking at the pair EUR/USD, then Euros are the base currency and the United States Dollar is the counter currency. If I think that the Euro will get stronger relative to the US Dollar, then I could sell my Dollars and purchase Euros. Once the move occurred, I would sell those Euros to get back more US Dollars, making a profit in my own currency which increases my purchasing power at home.
Another important difference from the stock market is the size of a lot. As you know, a lot in the stock market refers to 100 shares of company stock. But in forex, a standard sized lot is 100,000 units of the base currency. You might think that it would be difficult to trade $100,000 worth of US Dollars, but with forex you can use a lot of leverage.
Leverage is another word for borrowed money. This borrowed money comes from your broker and with forex can be as high as 50:1. This means that $2,000 is enough to take a $100,000 position. Thus leverage can really maximize gains, but it can also maximize pain! It wouldn’t take much of a move in the wrong direction to wipe out your entire account. Therefore, I would suggest that you read a lot about trading currencies, practice trading without real money first, and then begin with small positions and little leverage.
While making an extra grand per month with forex sounds great, it will take some education and practice for those just starting out.