What Type of Yields Are Possible in Foreign Currency Market Trading?
It is possible to make large profits (up to 10 times or more on your initial investment) trading foreign currencies, but it is also possible to lose huge sums. You are allowed to take advantage of large financial leverage when trading the foreign exchange (ForEx) markets, up to 100 to 1 margin in some cases, which makes it possible to make or lose large amounts of money with just a 1 to 2 percent move in a currency.
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Set up an Account at a Foreign Exchange Brokerage
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Set up an account with a foreign exchange broker, such as FX Solutions. Citi FX Pro or Interactive Brokers (see the ForEx broker ratings link in the Reference section). As soon as you fund the account ($500 minimum in most cases), you are able to begin trading.
Research the Foreign Currencies You Are Considering Buying & Selling
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Research the foreign currencies you are interested in trading. Keep in mind that you can make money money no matter which way a currency moves. You can "buy" a currency (long position) if you think it is going up, or you can "sell" a currency (short position) if you think it is going down.
Many factors go into the valuation of a currency, including macroeconomics, geopolitics, and world opinion, and it is very difficult to accurately predict short term movements in the currency markets. But longer term trends can be identified, and some people are willing to take a longer view and invest on that basis. Others trade with a more short term view and often buy and sell based on specific technical indicators.
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Trading Foreign Currencies
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Establish a position in a currency you have researched. Protect yourself by deciding in advance at what point you will sell to take a profit or sell to prevent further loss. You can place "stop limit" and "limit" orders in advance so that you will automatically sell the position when the price moves a certain amount up or down.
A Long Position
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As an example of buying a currency (long position), say you bought $10,000 worth Japanese yen trading at 100 (100 yen to 1 dollar), and you used 10 to 1 leverage so that you control a $100,000 position. If the yen moves up to 103 and you sell, then you have locked in a 3 percent, or $3,000, profit.
A Short Position
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As an example of selling a currency (short position), let's say you "sold" $10,000 worth of Euros at 1.20 (1.20 dollars to 1 Euro), using 20 to 1 leverage for a $200,000 position. If the Euro moves down to 1.05 and you sell, you have locked in a 12.5 percent, or a $25,000, profit.
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References
- Photo Credit Foreign Currency image by Stephanie Mueller from Fotolia.com
