How Does a Currency Trader Make Money?

It is easy to get currency trading confused with currency exchange. Currency exchanges are things like banks, retailers or exchange services that will take one type of currency from an individual and give them another for a small fee. A currency trader is someone who buys and sells large sums of world currencies with the intent of holding it rather than spending it.

Currency traders buy and sell world currencies in an attempt to make a profit, just like stock traders buy and sell stocks. Like any asset, currency itself is a sort of investment in that its value relative to other currencies changes over time. Currency traders try to predict which currencies will perform well in the future, i.e. become more expensive for foreigners to buy, and buy that currency with the intention of converting it back into the original currency at an altered exchange rate which yields a profit.

Currency trading is based on speculation of the future exchange rates of both the home and foreign currency. If the trader expects his home currency to become less valuable, he might trade out of it even if he doesn't expect the other world currencies to perform well relative to each other. Investing in this way is extremely risky, since overall, the exchange markets are a zero sum game, that is, for every gain made for holding once currency, there are equivalent losses for holding the another currency. One unforeseen event, such as a natural disaster in a country the investor believed to be stable, could drastically alter his predictions and cause a large loss of investment. Therefore, currency trading is best left to professional investors.