How to Trade Foreign Currencies

If you watch the financial news you will have noticed how the US dollar rises and falls against other currencies. You may have also noted that there is a profit to be made if one learns how to trade foreign currencies in the Forex markets and then buys and sells appropriately. If the idea of making money in the Forex markets interests you here is a bit about how to trade foreign currencies.

How Does It Work?

There are three major Forex markets: London, Tokyo and New York. Trading is available around the clock on every business day. How do you connect to these markets? Investopedia has a nice article about how to open a Forex account and how to trade.

Trading forex is similar to the equity market because individuals interested in trading need to open up a trading account. Like the equity market, each forex account and the services it provides differ, so it is important that you find the right one. There are many brokers listed online. Make sure that the one you choose is licensed and find out what their spreads are.

If you are planning on opening a Forex account, it is important to know that each firm has different spreads on foreign currency pairs traded through them. While they will often differ by only a few pips (0.0001), this can be meaningful if you trade a lot over time. So when opening an account make sure to find out the pip spread that it has on foreign currency pairs you are looking to trade.

Compare services and fees and look at the trading platform that the broker uses as you will be using it too. Then you will purchase a trade station and software compatible with your broker’s platform and practice simulation trading to get the feel of how Forex trading works.

How Do Know What to Trade?

Forex traders make money when currency rates are volatile. Because Forex is traded in currency pairs such as the USD versus the YEN you will want to pick a pair where first of all there is volatility and second of all you have a clear grasp of the basics that drive that currency pair. That means you will need to learn about monetary policy, trade figures and the economies of the nations whose currencies you trade. Take a look at our article about the best currency pair to trade.

How Do You Make Money Trading Currencies?

There are two basic approaches making money in the Forex markets. How to trade foreign currencies depends on which route you take. The first route is to learn about what drives the value of yen versus the dollar or the British pound versus the euro and anticipate currency movements. This is swing trading and you will buy one currency with the other and wait until the change you expect happens and then take your profit. The other approach is called day trading. In this case you rely on the technical analysis of Forex currencies. This is the statistical analysis of price movements. Day traders are less worried about long term trends than about than reactions of the market throughout the trading day. They use their technical analysis software to predict small changes, make appropriate purchases or sales and take recurring small profits. If you want to be a day trader you will start by doing lots of simulation trading on your trading platform to get the steps right before you risk your own money.