How to Trade Foreign Currency

Foreign currencies ...

In this time of globalization, currency trading is gaining more and more popularity. Many currency traders compare buying a foreign currency to buying stocks. The country whose currency you buy is like a company, and the currency reflects the nation's financial health just as a share reflects a company's financial picture. Those who want to trade in foreign money often don't know where to begin. This article will tell you how to trade foreign currencies, often referred to as FOREX trading.

Instructions

Step1

Research the currencies you are interested in trading. Some of the factors that influence a country's currency exchange rate are central-bank interest rates, budget deficits, trade deficits, gross domestic product, inflation and growth rate.

Step2

Establish a trading plan for investing in a foreign currency. An example is to buy an ETF, such as CurrencyShares Japanese Yen Trust (FXY), that trades just like a stock on the NYSE and tracks the performance of the Japanese yen. Another strategy would be to simply buy your desired foreign money at the bank and hold it.

Step3

Educate yourself on FOREX trading. Foreign exchange trading or FOREX is the most established way to invest in foreign money if you are serious about actively trading currencies. See the additional resources for some popular currency trading websites.

Step4

Like traditional stock trading, to participate in FOREX trading, you will have to establish a FOREX account. Once you establish an account, you will have access to what is called a trading platform (Ex: FOREXTrader at Forex.com).

Step5

To make a trade, select the currency pair you want to trade. The major currencies (US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar) make up the majority of FOREX trading, though it is possible to trade other currencies.

Step6

Buy Euros with Dollars. As an example, say you want to trade EUR/USD (buy Euros with Dollars). The current rate given by your trading platform is 1.4616/19. This means that you can buy 1 euro for 1.4619 dollars or sell 1 dollar for 1.4616 euros. If you think the Euro will rise against the dollar, you would buy Euros (sell dollars) and then wait for the exchange rate to rise (hopefully!). If it does, you then can sell your Euros (buy back dollars), and realize the difference as profit.

Step7

Watch your trades carefully. FOREX trading is characterized by liquidity, so it can be volatile. It is important to watch the daily trades carefully. Know your goals and strategies to make sure your trading isn't ruled by your emotions.

Step8

Remember that foreign currencies are not very useful outside of the country where it is accepted. In other words, you can't use pesos to go shopping in New York. Make sure you keep enough of your assets in your national currency to cover your expenses.