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This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur and investment advisor in Texas. He has more than 40 years of experience in business and finance, including as a vice president for Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin.
How To Make Money On Currency Exchange
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Today’s market allows average investors to buy and sell different types of global currencies. Most of these transactions are done through the Forex – an online foreign exchange market – which is open for business 24 hours a day, 5 days a week.
With enough knowledge about the market – and a little luck – you trade currencies and make money doing it.
This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur and investment advisor in Texas. He has more than 40 years of experience in business and finance, including as a vice president for Blue Cross Blue Shield of Texas. He holds a BBA in Industrial Management from the University of Texas at Austin. This article has been viewed 431,611 times.
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To buy and sell currency, start by researching the exchange rate for various currencies around the world. Choose a currency to invest in that is expected to remain stable, or, ideally, increase in value, and make a few simulated trades on a demo trading account. Then, when you’re ready, choose a broker and start placing currency trades with the broker. Be sure to set a profit or stop loss order to sell your trade once it reaches a certain price. Read on for more tips from our financial reviewer, including how to choose a broker.
The foreign exchange market (dubbed forex or FX) is the market for the exchange of foreign currency. Forex is the largest market in the world, and the trades that take place in it affect everything from the price of clothes imported from China to the amount you pay for a margarita while vacationing in Mexico.
At its simplest, forex trading is similar to the currency exchange you might do while traveling abroad: A trader buys one currency and sells another, and the exchange rate constantly fluctuates based on supply and demand.
Currencies are traded in the foreign exchange market, a global market open 24 hours a day from Monday to Friday. All forex trading is done over the counter (OTC), meaning there is no physical exchange (as there is for stocks) and a global network of banks and other financial institutions oversees the market (instead of ‘ a central exchange, such as the New York Stock Exchange). ).
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A vast majority of trading activity in the forex market takes place between institutional traders, such as people who work for banks, fund managers and multinational corporations. These traders do not necessarily intend to take physical possession of the currencies themselves; they can simply speculate on or hedge against future exchange rate fluctuations.
For example, a forex trader can buy US dollars (and sell euros), if she believes that the dollar will strengthen in value and therefore can buy more euros in the future. Meanwhile, a US company with Indian operations can use the forex market as a hedge if the rupee weakens, meaning the value of their income earned there falls.
All currencies are assigned a three-letter code, much like a stock’s ticker symbol. Although there are more than 170 currencies worldwide, the US dollar is involved in a vast majority of forex trading, so it is especially useful to know its code: USD. The second most popular currency in the forex market is the euro, the currency accepted in 19 countries in the European Union (code: EUR).
Other major currencies, in order of popularity, are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF) and the New Zealand dollar (NZD).
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All forex trading is expressed as a combination of the two currencies being exchanged. The following seven currency pairs – known as the majors – account for approximately 75% of the trading in the forex market:
Each currency pair represents the current exchange rate for the two currencies. Here’s how to interpret that information, using EUR/USD — or the euro-to-dollar exchange rate — as an example:
A quick note: Currency pairs are usually presented with the base currency first and the quote currency second, although there is historical convention for how some currency pairs are expressed. For example, USD to EUR conversions are listed as EUR/USD, but not USD/EUR.
Most forex trades are not made for the purpose of exchanging currencies (as you might do at a currency exchange while traveling), but rather to speculate on future price movements, just as you would with stock trading. Similar to stock traders, forex traders try to buy currencies that they think will increase relative to other currencies or to get rid of currencies whose purchasing power they expect to decrease.
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The forward and futures markets are primarily used by forex traders who want to speculate or hedge against future price changes in a currency. The exchange rates in these markets are based on what happens in the spot market, which is the largest of the forex markets and is where a majority of forex transactions are carried out.
Like any other market, currency prices are determined by the supply and demand of sellers and buyers. However, there are other macro forces at play in this market. The demand for particular currencies can also be influenced by interest rates, central bank policy, the rate of economic growth and the political environment in the country concerned.
The forex market is open 24 hours a day, five days a week, which gives traders in this market the opportunity to react to news that may not affect the stock market until much later. Because so much of currency trading focuses on speculation or hedging, it is important for traders to be aware of the dynamics that can cause sharp increases in currencies.
Because forex trading requires leverage and traders use margin, there are additional risks to forex trading than other types of assets. Currency prices are constantly fluctuating, but by very small amounts, meaning that traders must execute large trades (with leverage) to make money.
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This leverage is great if a trader makes a winning bet because it can increase profits. However, it can also increase losses, even more than the initial amount borrowed. Additionally, if a currency depreciates too much, leveraged users open themselves up to margin calls, which can force them to sell their securities purchased with borrowed funds at a loss. Besides possible losses, transaction costs can also add up and potentially eat into what was a profitable trade.
Additionally, you should keep in mind that those who trade foreign exchange are small fish swimming in a pond of skilled, professional traders – and there may be potential fraud or information that can confuse new traders.
Perhaps it is a good thing then that forex trading is not so common among individual investors. In fact, retail trading (also known as trading by non-professionals) only accounts for 5.5% of the entire global market, figures from DailyForex show, and some of the major online brokers don’t even offer forex trading. What’s more, of the few retailers who participate in forex trading, most struggle to make a profit with forex. CompareForexBrokers found that an average of 71% of retail FX traders lost money. This makes forex trading a strategy that is often best left to the professionals.
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John Schmidt is the assistant assigning editor for investing and retirement. Before joining Advisor, John was a senior writer at Acorns and editor at market research group Corporate Insight. His work has appeared in CNBC + Acorns’s Grow, MarketWatch and The Financial Diet. To use MetaTrader 4 Terminal For PC, iOS, Android and MultiTerminal for PC, please contact us
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