Everyone who hopes to make money dreams of an easy way to increase their cash. For many, investing in stocks and bonds is as close as they will come to making free money because when stocks go up, or bond yields rise, investors see money pour in without needing to do any other work except to decide when to sell. However, if you have a more adventurous heart, trading currency on the foreign exchange market can be a lucrative way to put your money to work for you.
Trading currency on the foreign exchange markets is known as Forex Trading, with “forex” being a contraction of “foreign exchange”. The foreign exchange market exists because when people buy goods or services across international borders, they need to exchange their currencies in order to do so. For example, if an American purchases a luxury designer leather purse from Italy, that transaction occurs across a currency barrier. Americans use dollars, while Italians use euros. As a result, in order for the transaction to go forward, the currency has to be converted so that American dollars can end up in Italian euro-based bank accounts. This is why foreign exchange markets were created.
These markets set the exchange rate between currency and are the reason that the value of currencies relative to one another change from day to day. This market is also the largest in the world, even larger than stock markets, with more than $2,000 billion in value traded each and every day. The forex market volume tops $5 trillion per day, according to the Bank for International Settlements. However you count it, this is a lot of money, and it’s the reason that many people have turned to forex trading as a business.
To make forex trading into a business, you have to be willing to buy and sell currency around the clock, tracking the changes in value for money everywhere on Earth. Forex traders are glued to the news, waiting to hear the latest political and economic reports from major countries in order to anticipate how their currencies will react. The ideal situation is to trade into an underpriced currency right before its value rises, selling when that currency hits its peak, and reaping the difference as profit. However, knowing exactly when that will occur is the challenge. Today, forex traders rely on sophisticated algorithms to model how currencies will react to a range of events so they can make a trade the moment that the trend toward higher value hits.
But while this is the basic concept behind forex trading, it is only the base level. Trading in actual currencies is known as spot trading, and while it is the largest part of the forex market, it is not always the one that offers the greatest return on investment. Two other forex markets often offer more reward, but also more risk. Two other markets are called the forwards market and futures market, and they are more speculative, based on contracts to buy currency in a certain amount and at a certain value on a certain expiration date. Forwards and futures are typically used by large corporations as a hedge against price fluctuations. In other words, they buy these contracts in advanced in the event that the price of a currency rises above what they anticipated paying for it, a form of insurance.
However, speculators can use these same contracts with the hope of making money off of swings in currency prices. By trading these contracts, investors can gamble that the price of the currency will exceed the price guaranteed in the contract, allowing them to reap a profit by selling the asset for more than the face value of the contract. This is similar to the futures markets in other assets, such as the famous agricultural futures traded against the real value of cattle, hogs, wheat, etc.
If you plan to make forwards and futures speculation into a part of your forex business, you’ll need a good strategy, the ability to crunch large volumes of data, and more than a little luck! The foreign exchange market may not be for everyone, but if you have the skills, the smarts, and the bravery to put your money to work for you, the rewards might just be worth the risks.
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