Guide to Trading Currency

A few weeks ago I stopped by my friend Robert’s house to see what he was up to, and was amused to find him clicking away on his laptop keyboard before a black screen with ever changing numbers and graphs. I asked what he was doing, and he told me that he was trading currency online. Not really understanding what he was talking about, despite his attempt to explain it to me, I shrugged it off. A couple weeks later Robert gave me a call to inform me that he had made over five hundred dollars so far with his trading. I was impressed, and decided to figure this out for myself (a tricky task, as I’ve never been great with numbers).

It turns out that trading currency is done on something called the Foreign Exchange Market, also known as Forex, or a Spot market, and has a daily turnover of 3 trillion dollars.
The Foreign Exchange Market is decentralized, which means that there is no official and enforcing entity to regulate or govern over it. Forex is self regulated, meaning the individual traders need to get along with one another and play nice, because if they choose not to there won’t be anyone or anything on hand to settle a dispute. I know – this sounds like a recipe for disaster – but the system works surprisingly well most of the time, probably because cooperation is needed between traders to make the system function at all. In other words, it’s set up in a way that makes cooperation mandatory. Sometimes Forex dealers within the United States join an organization called the National Futures Association, and do commit to the regulation of disputes.

In the beginning, only the wealthy elite had the capabilities to trade on the Forex, but modern technology (specifically, the invention of the world wide web) has opened up this lucrative practice to anyone with the patience to learn the ropes. The advantages of trading on the Forex compared to the Stock exchange are many. For starters, there is no real time crunch, as the Forex is open twenty four hours a day, six days a week. Also, and perhaps most importantly, you don’t have to pay a broker commission. Another great advange of trading currency is that, unlike stocks, you will almost never be stuck trying to sell something you don’t want. Except in rare and drastic circumstances, currency will always sell at once.

So what is currency trading, exactly? Thankfully, the answer to that question is relatively simple – it’s prediction. The value of any given currency is influenced by supply and demand, the central banks, and at times seemingly simple things like a particular news broadcast. Let’s say I buy a dollar because I think the value will rise, and then the value of the dollar does goes up by two cents – that means I’ve just made two cents profit. If I had purchased one hundred dollars, I would have made two dollars there. However, if the value of the dollar drops by two cents after I’ve purchased it, then that’s my loss. Now (try to stay focused), if I sell my dollar and the value of the dollar decreases, I make money. If I sell my dollar and the value increases, I lose money.

It works that way because, when you trade currency, you’re going to be buying money and selling money at the exact same time. For example, you’ll trade a dollar for an euro – you’ll sell the dollar and purchase the euro. This is called a currency pair (Forex trading is always done in pairs) – and the question in this case is, What is the value of the dollar compared to the value of the euro?

Let’s say that the value of the euro is slightly higher than the value of a dollar, and I predict that the value of the euro will rise in comparison to the value of the dollar. I would purchase a euro with a dollar and some change, and if I’m right and the value of the euro rises above that of my dollar and change, I get to keep that profit. This is how you make money trading currencies. You can put in as much money as you like, but it’s important to be careful. While it’s true that the more money you put in reaps a greater reward, it can also mean a great loss if your predictions prove to be inaccurate.

When you first start out, you’re going to want to find a reputable online Forex broker and get yourself set up to trade. Make sure the broker of your choice has a demo (or demonstration) option – this demo will allow you to “play trade” with no fear of financial ruin while you learn the ropes. Play the demo for awhile, and once you feel confident that you at least halfway know what you’re doing you can throw in some real cash. Regardless of how confident you’re feeling, it’s a good idea to keep the real money down to a few hundred dollars at first. If you get too big for your britches and lose two grand in the first day, you’ll probably end up hiding under your bed in tears – so be careful. You’ll want to open a mini account (and make sure the account you open is called a “spot” account). There’s some paperwork involved, but they’ll walk you through it and it’s nothing major. Once you begin to trade, make sure you have it set so you can only lose a certain amount of money from your investment. This will mean that you can only gain a certain amount as well, but it’s better to be safe than sorry, especially when you’re first getting started.

But how do you predict whether or not the value of a currency will rise or fall? Well, there are a couple ways. The first is called Fundamental Analysis, which means that you study the economy of the country in question and base your prediction on how well or how poorly it’s doing. The second way is Technical Analysis, which means that you study the pattern of the way the money is moving on the chart (which will be displayed on your computer screen) to predict which way the money will move next. For example, if you notice a trend in chart movement, base your prediction upon where the money should move according to that trend. My friend Robert uses both of these things – he keeps up to date on international news while keeping one eye glued to the chart. According to the writings of seasoned professionals, one way is not any better than the other, so it’s a good idea to become fluent in both and try to learn to use them simultaneously.

Trading currency takes awhile to get used to, and at times it may prove very frustrating. Like anything, it takes a good amount of practice to master, and even then you’ll have your good days and bad. In case you’re wondering, I’ll save you the suspense – if you’re the average Joe or Jane (and 99.9 percent of us are), you’re not going to sit down at your computer tomorrow, trade a few currencies, and make a million dollars. Chances are you won’t even make a hundred dollars. Heck – you might lose a hundred bucks! But if you hang in there, find your safe zone, and get to the point where you’re a confident trader (and confident does not mean big money – it means skill level), then there is a chance that some day you may make your living from trading currencies. You won’t be lounging around your mansion or taking dips in your brand new gold plated heated indoor swimming pool, but you can at least save yourself the indignity of putting on a fast food uniform, reporting in to a disgruntled boss at the rooster’s crow each morning, and scooping french fries for minimum wage just to keep a roof over your head and ramen noodles on your table.

Think it over. Practice, be patient, and be careful. Try not to go diving head first into the rainbow after that pot of gold – making a living at trading currencies is harder than it looks (otherwise, everyone would be doing it), the more you look for a quick and easy win the faster you’re going to become frustrated and call it quits. Keep in mind that it’s a slow but steady process, and you should be fine. Your computer will thank you for your levelheadedness, as it won’t end up smashed against the wall in ten different pieces.