The large number of currencies and associated economies around the world are constantly changing in value. The fluctuation in the value of one currency, in relation to other currencies, offers investors the opportunity to make money from the difference in value. However, trading in order to make money from currency exchange rates can be a high-risk investment that can cause investors to lose money as well as making a profit.
Trading currencies in pairs
When it comes to trading foreign exchange, the value of a single currency is established by how much it is worth in relation to a different currency. This means that currencies are traded in pairs, with a base currency and a quoted currency. For example, an investor may already have funds in British pounds, known as a base currency, and would like to purchase a currency such as the US dollar, referred to as the quoted currency. In one simple example of making money in this type of transaction, an investor may then use their funds in US dollars as a base currency to purchase the quoted currency of British pounds once more, when the US dollar has risen in value against the British pound.
When to buy and sell
The simple rule to making a profit in the foreign exchange market is to use a strong currency to buy one with a low value that is expected to rise. Once the value of the new currency has increased sufficiently in relation to another currency, it should be sold to turn a profit. Following trends in the value of currencies can help to identifies trends, as well as when their values are particularly high and low. However, there is no guarantee that profit will be made from simply following trends as unforeseen circumstances such as war can affect a country’s economy in an instant.
How to get started
Anyone looking to make money from currency exchange rates should begin by practising their trading and analysis before investing any real money. Some firms dealing with currency change offer the opportunity to set up a practise account online that will give investors an idea of how much money they could gain based on their current trading techniques. Following trends in the value of different currencies and learning to understand graphs that monitor the behaviour of a currency can also help to improve trading skills. Some investors may wish to use a broker to improve the chance of making money by benefitting from their experience and understanding of world markets.
While trading in currencies can seem a straightforward way to make money, profit is not guaranteed. The chance of making large profits can also tempt investors towards high-risk investments that are most likely to result in a loss of money. Investors should always be prepared to lose money and avoid investing too much at any one time.