Successful foreign currency trading requires careful analysis and discipline.
Foreign currency trading is becoming increasingly popular for a variety of reasons, including diversification, hedging and leveraged returns. In forex (or fx), as foreign exchange is commonly known, currency traders simultaneously buy and sell currency pairs hoping to gain from a change in the exchange rate between the two. Although this can appear to very complicated, the process of trading currencies is actually quite simple.
Instructions
1. Conduct fundamental research on the currencies you are interested in trading. Some of the factors that affect a currency's exchange rate are interest rates, inflation expectations, perceived political stability, gross domestic product and the unemployment rate. These types of macroeconomic data drive the fx market, can be found at various internet sites, and are released regularly by government agencies.
2. Open an account with an online currency broker. To directly participate in the forex market and actively trade currencies, enter your trades using that broker's trading platform. The forex account will allow you to buy and sell various currency pairs at the spot market exchange rate, and show a profit or loss with fluctuations in the market in real time.
3. Select the currency pair and the size of the trade in your base currency. For instance, if you want to go long the EURUSD, you would be buying euros with dollars at a given rate. If the spot rate given by your trading platform is 1.4251/53, you can buy 1 euro for $1.4253 (or sell 1 euro for $1.4251.) The major currencies -- U.S. dollar, euro, yen, pound sterling and Swiss franc -- make up the vast majority of forex trading.
4. Monitor your open positions very closely. Although forex trading is very liquid, due to excess margin and leveraged positions, its returns can be very volatile. Hedging spot positions, using stop loss orders, and buying puts or calls can help to intelligently manage risk.
