How Do You Make Money In Currency Trading?

Copyright (c) 2007 Tom Howze
Foreign Exchange Business Line
http://www.foreignexchangebusinessline.com

The question, "How do you make money in currency trading?" is
being asked by investors and potential investors worldwide as
they witness the multi-year downturn trend of the US dollar and
upswings in other currencies such as the Euro or Canadian Dollar.
Only since 1999 have US citizens been allowed to trade foreign
currencies at a individual level while investors in other nations
have done this for years. Trading currencies takes place in the
foreign exchange (forex) market and is the largest financial
market in the world with a $3.2 trillion US dollar a day average
turnover according to the Bank of International Settlement in
April 2007. With the market open 24 hours a day 6 days a week, it
offers more liquidity than the U.S. stock market or treasuries.
And thanks to technology and the Internet, individual investors
can take advantage of opportunities to earn profits at home, on
the 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 against
the U.S. Dollar are most popular, with the U.S. dollar being
represented in over 86% of forex trades. Among the top currencies
that do so are the Australian Dollar (AUD), Japanese Yen (JPY),
British Pound (GBP), Euro (EUR), Canadian Dollar (CAD) and the
Swiss Franc (CHF). These particular currencies float freely in
value and do fluctuate up and down. Many forces affect their
value, such as the economic health of the nation(s) behind a
money, interest rates, inflation, news in global stock markets,
actions of central banks and so on. For example, in 2007 major
forces weighing on the U.S. dollar are the housing market
slowdown and foreclosures, bad debt such as subprime mortgage
defaults causing billions of dollars of losses to U.S.
businesses, overall bad economic health in America, energy price
increases in oil and interest rate cuts by the Federal Reserve.
In another example, forces that are pushing the Australian dollar
up are climbing commodity prices, a very strong economy, a low
unemployment rate and high interest rates with more potential
rate increases by the Reserve Bank of Australia in 2008.
Fundamental reasons such as these or technical analysis using
charts are what motivate investors to get in and out of the forex
market, with the goal of making a profit. Trading in currencies
is tracked in movements called "pips". A pip is the smallest
unit of price for all currencies. For example in a EUR/USD
(Euro/U.S. Dollar) pair, a purchase price quote of the Euro being
1.4821 to the US dollar, has the smallest unit of price four
places to the right of the decimal point. Any change in the price
from that position would be the reference point of profit or loss
in a transaction. The USD portion of the pair is also known as
the quote, which would make each pip movement worth 1/10000 of a
US dollar. (There are 10,000 pips in one US dollar making a
single pip worth $0.0001.) The EUR portion of the pair is known
as the base. If you made a buy of 10,000 Euro base units at
1.4821 and sold at 1.4846, your transaction would have a movement
of 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 an
interlinked connection of extremely large commercial banks that
buy and sell foreign currencies. There is no centralized exchange
or physical location for the foreign exchange market. The forex
market, which used to be the domain of banks, now includes
multinational corporations, global money managers, dealers,
international brokers, futures and options traders and individual
investors. Even the governments of nations get involved should
intervention be required on their part to provide stabilization
of currencies.

Part of becoming profitable in foreign exchange means taking time
to do things to insure personal success. Positive steps include
making the effort to learn about the forex market before
trading, testing trading strategies with a demo account, not
being highly leveraged and managing portfolio risk. Investors
have made large sums of money in forex, but remember that money
can be lost in foreign exchange and one should consider the
amount of risk and potential loss involved before starting, and
that such trading is not suitable for every person.

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