How to Make Money with Currency Exchange

There is nothing restrained about the multi-trillion-dollar foreign exchange market, the adjudicator of the price of the world's money. In this market, governments grapple with one another to achieve the more desirable rates for their country's money as they create an international exchange market.

This activity, in and of itself, provides the foundation for a growth industry with lots of opportunities to make money with currency exchange. The problem is that the exchange rates fluctuate constantly as large banks trade money and, in the process, make big profits. Whether betting against the stability of the Japanese yen or waging heavily on the plunge of the U.S. dollar, rates shift up and down second by second. Consequently, opportunities to reap big profits are matched by the risk of huge losses.

The Global Forex Market

According to the Bank for International Settlement, trading in forex markets reached $6.6 trillion​ per day in April 2019. Access to the market is easy, so it attracts both novice and expert traders. The use of borrowed money and the existence of always-on trading sessions as well as the fairly low market entry costs attract traders of different stripes.

Here are some tips to make money in the foreign exchange market regardless of your skill level, as well as some forex terms for beginners.

Learn About Forex Trading

As with any effort to earn a profit, a trader in the global currency market must learn about the forex market and the strategies most likely to contribute to your success. You should review the best sites to learn forex trading and enroll in classes about forex markets and the economic factors and geopolitical events that affect forex trades, then gain experience by making small trades. This strategy should incorporate investment screening methods, risk management methods and funding long- and short-term goals.

Partner with a Reputable Broker

Oversight of the forex industry is somewhat lacking, so the risk exists that you may partner with a disreputable trader. Consequently, it's essential that you open an account with a member of the National Futures Association (NFA) and that's registered as a futures commission merchant with the Commodity Futures Trading Commission (CFTC.) What's more, you should research the specifics of your chosen broker's account offerings.

Employ Good Money Management Techniques

The use of proper money management techniques is central to making money in forex trading and, to make money with currency exchange, you must avoid losing money. Central to this effort is the use of protective stop-loss orders, or limit orders that protect existing gains and counters losses. This strategy, as well as setting a maximum daily loss amount, will limit your losses in that it closes all positions at some point and prevents the initiation of new trades during a trading session.

Use Platform Tools

The forex trading platforms offer a number of tools to support your market analysis efforts. To use the tools effectively, identify a few you think will be most effective. Next, work with the tools to understand the analysis they support and the significance of certain market indicators. Once you're adept in the tools' use, select additional ones to expand your trading repertoire.

Place Hypothetical Trades with Simulated Account

Before you risk your money, place some hypothetical trades using a simulated account the trading platforms make available to you. Once you're proficient with order-entry techniques, such as opening and exiting a position, you can create an actual trading account and place orders.

Limit Your Position Size

When you begin trading, start small, then evaluate your results and make adjustments to your trading plan. Doing so allows you to improve your analytical skills and continuously adjust your plan while simultaneously limiting your risk exposure.

Document Your Trades

Use a trading journal to track the events of your trading day, including your wins and losses. Make note of the strategy that worked, dates of trades, what you bought and sold and your profits and losses, then evaluate your performance. When you do so, you can avoid repeating mistakes and increase the likelihood you'll become a successful trader.

Understand the Tax Implications of Your Trades

To prepare for tax time, understand the tax implications of forex trading. If need be, consult a tax specialist who can help you take advantage of tax laws related to your trades. For instance, it's important to record an asset's value at its current market value.