How to Make Money on Currency Conversion

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Trading currencies involves a significant degree of risk.
Trading currencies involves a significant degree of risk. (Image: exchange fluctuations image by Raimundas from Fotolia.com)

Making money on currency conversions requires that the price at which you buy the currency is lower than the price at which you sell it. Because foreign exchange currency market is very efficient these days, finding a bank or a currency exchange desk that would allow you to do that instantaneously, buying at one exchange desk and immediately selling with a profit at another, is almost impossible.

However, you can buy a currency, wait for its price to go up, and sell it back to the market, making a profit.

Research the currency market. Read currency reports from respected sources such as the Wall Street Journal or Bloomberg. Watch for any clues about which currencies have good chances of rising. Read specialized publications produced by investment banks and foreign exchange brokers that contain advice on what currencies to buy.

Although expert advice is based on good analysis, it doesn't mean that the exchange rates always move as forecast. Otherwise, forecasters would be the richest people on the planet.

Identify and buy the currencies that you think will appreciate in the near term. Buy not just one, but a number of currencies. The greater diversification of your portfolio of currencies, the greater the chances will be that you will make some money on conversions when currencies rise in value.

However, if you are certain that only one currency will rise in price, concentrate only on this currency. Remember, however, that the exchange rates can also go down as well as up, so be prepared to suffer losses in case things go wrong.

Wait for the exchange rate to go up and then sell your currencies. If currencies do not rise, you can wait until they do, or sell them at a loss. Whether to wait to cut your losses depends on your expectation about which way the currencies will eventually go.

Explore additional ways in which you can make money converting currencies. For example, think about buying currency options. A currency option is basically a financial instrument that allows the buyer to buy or sell a currency at a predetermined price called a strike price, in the future.

For example, if you buy a call option, an option that gives you the right to buy a currency, and the exchange rate rises, you will be able to exercise your option, buying the currency at a lower price. Then you can sell the currency in the market, making an instant profit.

These days, many online brokers allow clients to trade currency options.

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