Money Talks-How Do You Make Money In Currency Trading?

Money Talks-How Do You Make Money In Currency Trading?


The question, "How do you make money in currency trading?" isbeing asked by investors and potential investors worldwide asthey witness the multi-year downturn trend of the US dollar andupswings in other currencies such as the Euro or Canadian Dollar.Only since 1999 have US citizens been allowed to trade foreigncurrencies at a individual level while investors in other nationshave done this for years. Trading currencies takes place in theforeign exchange (forex) market and is the largest financialmarket in the world with a $3.2 trillion US dollar a day averageturnover according to the Bank of International Settlement inApril 2007. With the market open 24 hours a day 6 days a week, itoffers more liquidity than the U.S. stock market or treasuries. And thanks to technology and the Internet, individual investorscan take advantage of opportunities to earn profits at home, onthe 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 againstthe U.S. Dollar are most popular, with the U.S. dollar beingrepresented in over 86% of forex trades. Among the top currenciesthat do so are the Australian Dollar (AUD), Japanese Yen (JPY),British Pound (GBP), Euro (EUR), Canadian Dollar (CAD) and theSwiss Franc (CHF). These particular currencies float freely invalue and do fluctuate up and down. Many forces affect theirvalue, such as the economic health of the nation(s) behind amoney, interest rates, inflation, news in global stock markets,actions of central banks and so on. For example, in 2007 majorforces weighing on the U.S. dollar are the housing marketslowdown and foreclosures, bad debt such as subprime mortgagedefaults causing billions of dollars of losses to U.S.businesses, overall bad economic health in America, energy priceincreases in oil and interest rate cuts by the Federal Reserve.In another example, forces that are pushing the Australian dollarup are climbing commodity prices, a very strong economy, a lowunemployment rate and high interest rates with more potentialrate increases by the Reserve Bank of Australia in 2008.Fundamental reasons such as these or technical analysis usingcharts are what motivate investors to get in and out of the forexmarket, with the goal of making a profit. Trading in currenciesis tracked in movements called "pips". A pip is the smallestunit of price for all currencies. For example in a EUR/USD(Euro/U.S. Dollar) pair, a purchase price quote of the Euro being1.4821 to the US dollar, has the smallest unit of price fourplaces to the right of the decimal point. Any change in the pricefrom that position would be the reference point of profit or lossin a transaction. The USD portion of the pair is also known asthe quote, which would make each pip movement worth 1/10000 of aUS dollar. (There are 10,000 pips in one US dollar making asingle pip worth $0.0001.) The EUR portion of the pair is knownas the base. If you made a buy of 10,000 Euro base units at1.4821 and sold at 1.4846, your transaction would have a movementof 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 aninterlinked connection of extremely large commercial banks thatbuy and sell foreign currencies. There is no centralized exchangeor physical location for the foreign exchange market. The forexmarket, which used to be the domain of banks, now includesmultinational corporations, global money managers, dealers,international brokers, futures and options traders and individualinvestors. Even the governments of nations get involved shouldintervention be required on their part to provide stabilizationof currencies.


Part of becoming profitable in foreign exchange means taking timeto do things to insure personal success. Positive steps includemaking the effort to learn about the forex market beforetrading, testing trading strategies with a demo account, notbeing highly leveraged and managing portfolio risk. Investorshave made large sums of money in forex, but remember that moneycan be lost in foreign exchange and one should consider theamount of risk and potential loss involved before starting, andthat such trading is not suitable for every person.


Tom Howze is editor of the Foreign Exchange Business Line (http://www.foreigne xchangebusinessl ine.com)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(http://www.foreigne xchangebusinessl ine.com/sitemap. html#news)


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