Three Ways to Make Money in Forex

The decentralized foreign exchange market is by far the largest market by volume in the world. Five trillion dollars in world currencies are traded every business day. This leaves a lot of room for profit for the savvy currency trader. If you are new to the currency trading game there are three ways to make money in Forex. How does this work?

Inefficient Markets versus Efficient Markets

The efficient market hypothesis states that prices of stocks, commodities and currencies are always correct, given available information. However, contrarian traders seek and profit from market inefficiency. Last week we wrote about Greece and its debt issues. Greece is still in the EU for now and its problems are a drag on the Euro. Anyone with sufficient insight into EU debt issues will have an advantage in predicting the value of the Euro versus other currencies in the medium and long term. These folks will likely make money trading the Euro. This is an example of the first of our three ways to make money in Forex.

Never a Straight Line

At the end of a trading day we read in the news that the dollar fell one percent versus the Yen. But, if we look at a chart of the USD YEN trading pair throughout the day it has all sorts of little ups and downs on its way from start to finish. One of the more profitable online Forex day trading strategies is to scalp profits from the little up and down moves in the market. This requires a technical approach to the market and attention to minute by minute moves throughout the day. Traders buy, set their sell stops in minimize the risk of loss and to take a profit when offered. This is the second of three ways to make money in Forex

What Are Your Options?

Forex options are our third of three ways to make money in Forex. Forex options are used in business to limit currency risk and by speculators in search of profit. When traders purchase calls or puts on one currency with another they limit their losses to the price of the options contract. The use of options is typically a medium range strategy used to take advantage of inefficient markets. This third of our three ways to make money in Forex allows a trader to execute a contract when it is profitable to do so or simply execute the opposite options trade without ever buying or selling the currency in question. Currency options are commonly used in international business. The purchaser buys calls on the currency of the seller. If the seller nation currency rises against the currency of the buyer he executes the contract and pays at the contract price. If the currency of the purchasing nation goes up he lets the contract expire and simply uses his not more valuable home currency to purchase the foreign currency and make payment. Buying options also allow traders to leverage their trading capital as they do not need to buy the currency in question but simply pay for a little insurance that keeps them in the trade until the contract expires. Because a trader can simply exit the contract with a profit he can, at times, gain multiple on his trading capital.