You’re smart and ambitious, but you’re looking for more income. Maybe you do some freelance work or have a part-time business preparing taxes or taking photos at weddings.
Maybe you have a full-time business running but are feeling the creep of your children’s college tuition coming up.
In any case, one solid way to bring in a pretty swift income is forex trading, which means foreign exchange trading: trading the currencies of different lands. It’s a simple type of trading, one that can be done twenty-four-seven, one that offers many options and high liquidity.
Forex trading means using, say, Japanese Yen to purchase Argentinian Pesos. You use the current exchange rate to figure out how many Pesos you can get per Yen. If the Peso’s value increases, you now have more buying power than you previously did.
In short, you are trying to get bargains on currencies that will then grow in value. As you gain a desirable balance in your trading account, you can make withdrawals.
One of the main concepts to know when engaging in forex trading is the Pip, which means “price interest point.” This means a change in the exchange rate of one of the currency pairs you’re trading. For example, if you are trading USD (U.S. dollars) for JPY (Japanese Yen) at an exchange rate of 0.5935, this means that $1 will get you 0.5935 Yen. If the concept of pip is not clear for you, it is highly advisable that you pick one of the best forex brokers, who will give you appropriate guidance.
A one-pip increase means the Yen rate is now at 0.5936. Pips are there to give you a sense of how much money you are earning or losing at once. If you have a 20 pip increase and you have $90,000 in play, you’ve made a solid profit. Basically, the pip is the bouncing ball that you have to watch at all times.
The Freedom of Forex
In just about every area of modern life, there are options for various activities that take more or less initial costs, more or less commitments. Forex trading requires only an initial balance of $250 in your account. In addition, there is no sales commission from a broker in forex trading. That sets it apart from trading stocks. Now, you’re not getting away without spending a dime—what you do pay is the equivalent of the spread, which is the difference between the ask price and the bid.
Another very simple thing about forex trading that people enjoy is that it doesn’t involve trying to predict the chaotic changes that might befall a company or their products. All a forex trader has to worry about is currency. That puts him or her in the position of a streamlined actor, one who needs to work out a system for one clear and specific area. Sure, changes in economic factors are at play, and this makes forex trading harder than it seems. But most people perceive that it involves a smaller number of variables.
Liquidity is big as well. The forex market is run (24 hours a day) entirely on the Internet, as an over the-counter market. This means there’s no physical market like the NYSE. Because of this, there are a lot of participants and high-volume trading.
Activity often reaches the trillions of dollars per day. One benefit of liquidity is that it means that swings in price are relatively gentle. Changes in price are the essence of most forex trades—you want to master these, and a liquid market helps.
Forex trading works a bit differently from other types of trading, and this helps traders feel as though they have optimum freedom and options. One of these is a system of “stops” that are available with forex trading. This is similar to “buy low/ sell high” but it works on a timer, essentially. You can set up a system by which you stop a particular trade when a loss reaches a certain point or when other conditions are met.
Forex Is Risky
One of the reasons people who might not trade stocks enjoy forex trading is the way to make a chunk of change very quickly. The ability to do this, naturally, creates certain risks. The biggest risk in forex trading is the simplest one, the one that is fundamental to trading itself. That’s simply fluctuations in exchange rates. Movements in the market don’t have limits on daily prices as other markets do—it’s a roller coaster with steep hills.
Another thing to consider is the presence of margin calls. This means that if you’ve leveraged money from your broker, you may be called upon to add an additional margin due to fluctuations in price fluctuations. In general, knowing about leveraging is pretty important.
It’s also important to get a good sense for how high a roller you can be. If you have an account of $5,000, how much you should you put into play at once. How many different trades, or lots, should you have going at once? If, for example, you’re trading in USD, or US dollars (not surprisingly, the most common currency traded) and you run into harmful conditions, you’ll be in a type of double jeopardy as far as dollars go. That’s why stop losses, described above, can be a pretty important thing to implement.
New traders also need to understand how interest rates affect their trading, as well as other factors such as settlement, replacement, default of counter parties, etc. Remember that you’re trading with others, meaning that their cunning and experience is your opponent. This can be different from investing in companies that you think will do well and maintaining a diverse portfolio.
So, the picture is probably becoming clear that forex trading is fun and simple, allowing for trading from your computer any time you feel the inclination. And yet its high liquidity can cause problems for someone who isn’t as educated as s/he should be. This is why a lot of people recommend that people learn to play the stock market some before diving right into forex trading. Further, it’s probably a good idea to go through a broker, even though it’s possible to trade forex on your own. Remember, you’re not staring down the barrel of commission charges.