You may have heard of foreign currency trading and wondered what it is and how it works. Well, foreign exchange (often shortened to forex or simply FX) trading is a way of making money from investment in money instead of stocks. Forex traders make money from the fluctuations in value of the different world currencies. These values are constantly changing and a trader can make money by buying a currency when its value is about to rise, or selling one whose value is about to fall.
How Money Is Made
At a very simple level, imagine that you used some of your investment fund to change US dollars into euros. You might give $100 to buy 72 euros. Then the value of the euro increases (or the value of the dollar falls) and you change them back. Now with the new rate you get $102 for your 72 euros. You just made $2, which is a 2% return on your investment.
Forex traders make money by doing this kind of trade over and over. Most traders would make many small trades, probably several in a day. They use margins so that they can control large amounts with only a small investment. $100 in a mini forex trading account will often allow you to control $10,000, that is 100 times your investment. The broker covers the rest because he knows that the market is unlikely to change by more than 1% in a short time.
A Global Market
Foreign currency trading happens all over the world. Because it operates in many different time zones you can trade 24 hours from Monday through Friday. The market opens in Sydney, Australia first and moves west as each new time zone's business hours begin. By the end of the business day in the US, the Sydney market is reopening for the next day.
You can trade in any currency, too. You are not restricted to your own country's currency. So if your national economy is unstable, you can trade other currencies instead. It is usually better not to get involved with currencies that are very volatile. Forex is always risky and dealing with unstable prices makes it more risky still.
Foreign Currency Trading For You At Home
While the markets are still dominated by the major banks, more and more home investors are getting involved in forex trading because they want to make money from home. Brokers are responding to this demand by offering mini forex trading accounts where you can get started with just a few hundred dollars. They give you access to the programs that let you handle trades on your account through the software on their website. They also give you up to date market information including charts that will help you track and hopefully predict the direction of the price movements.
Money changes hands so fast on the currency markets that your money will never be tied up for long in the way that it could be with some other types of investment. Costs are low, and you are always in control of your account.
So what do you need to get started? A computer with a high speed internet connection, time for your trading and some money that you are willing to risk. Good money management skills are useful: you do not need to be a financial genius, but it helps if you can at least balance your checking account. You will also need a profitable system which you can apply manually or a forex robot to trade for you. With these in place, foreign currency trading can be very profitable.
