Foreign exchange trading, sometimes called FOREX trading, or just FX, is the buying, holding, and selling for world currencies in order to make a profit. World currencies may be trade for one another at a certain exchange rate at any point in time, a rate which fluctuates based upon complex economic and political factors. Making money in foreign exchange is a speculative practice where one buys a certain currency that they think is going to go up in value, in order to sell it back into their home currency at a later time.
Research world currencies and exchange rate trends. Making money in FOREX trading is difficult, because if you buy a currency that goes down in value you will lose money, and it is not possible to reliably predict future exchange rates. Still, researching currencies and exchange rate trends is an important part of determining which currencies are likely to increase in value.
Go to a bank and exchange your home currency for the foreign currency of your choice. One of the advantages of FOREX trading is that one does not need to pay a stock broker; one can simply exchange currency at a bank and hold onto physical cash themselves. The downside is that banks and other currency traders include a small fee into the prices of currencies. US dollars, Euros, and Japanese Yen are some commonly traded currencies.
Hold onto the foreign currency and track the changes in exchange rates over time.
Go back to the bank and trade the foreign currency back into the original currency. If the foreign currency has increased in value relative to the home currency during the time you held onto it, you will make money. (Minus any exchange costs)
- In general, currencies of smaller less industrialized countries are more volatile and therefore present a greater risk for investment.
- Foreign exchange trading is risky, in part, due to the fact that it is difficult to mitigate risk with diversification. Even if one invests in several different world currencies, if the home currency performs poorly, they will likely lose money on all investments when money is traded back into the home currency.
- Advanced traders may use web based currency trading services in order to quickly by and sell currencies on a day to day basis.