Can You Make Money Trading Forex?

The dollar and other currencies go up and down in currency markets but how can you make money trading Forex? Profitable currency trading requires a volatile market. In other words the exchange rate between two currencies such as the euro and the US dollar need to change. A simple example is that you buy euros with US dollars. The value of the euro goes up and you sell the euros for dollars and you have more dollars than before. But how does this happen in the real world?

Online Currency Trading

In our electronically interconnected world currency trading happens online. Here are some thoughts about how to trade Forex online.

How to trade Forex successfully requires a firm grasp of economics, monetary policy, and international policy, and politics involving the countries whose currencies one trades. How to trade Forex online successfully is to work at a trade station with sophisticated computer software that is linked to a Forex market such as London or Tokyo through a broker. The software needs to be compatible with that used by the broker and should contain technical analysis software. How to trade Forex online successfully, versus offline through a broker, is to trade minute by minute, and second by second, reading changes in the relative prices of the two currencies in a trading pair. How to trade Forex successfully online or otherwise is to stay in touch with pertinent market making news and developing price patterns as highlighted by trading software.

As the trading day progresses the exchange of a currency pair such as the EUR/USD fluctuates up and down. When the currencies are being traded in more than one market at a time online traders can practice arbitrage. This is the practice of quickly spotting a profitable difference between the rates in two markets, quickly buying and selling and exiting the trade with a profit. This can be a profitable way to make money trading Forex but it is time consuming. A more common approach in day trading Forex is to trade in the same market, buying and selling as the prices rise and fall.

Day trading Forex is typically the province of speculators in the currency markets. Traders use analysis of both fundamentals and technical factors to profit from hour by hour and minute by minute price changes of currency pairs. To the extent that a trader is at work at his trade station when substantial news hits the market he will be able to profit from the short term market inefficiency that occurs before a new market consensus is obtained. At most times day trading Forex currencies is most profitable in major currency pairs. These currencies trade at high volume and liquidity. Their fundamentals are clear. Technical analysis of major Forex currencies is typically more accurate that technical analysis of minor Forex currencies. Thus most active day traders stick with major currencies in day trading.

And there is swing trading. This is the province of those who only consult the fundamentals that eventually drive rates. Traders buy a currency that they believe will eventually rise in price and wait until that happens before selling. This approach requires large jumps in exchange rates to make a meaningful profit.

Options

Forex options work like options in the stock market. Buy a call on the euro with the dollar and execute the trade if it turns out to be profitable. If not your losses are limited to the premium paid to secure the option.