This post may contain affiliate links, allowing us to earn a commission on the products we would recommend to our families and closest friends. You can find more info on our Legal Stuff page.
One of the most creative ways to greatly increase your income is via the foreign exchange market. But this income-generator is also high-risk and speculative. Let’s dive into some of the basics of forex trading so you can decide whether it’s a good fit for you.
What is Forex?
Basically, forex is the market in which global currencies are traded. To conduct foreign exchange or business, countries rely on forex. As a simple example, if you were to want to purchase a UK-manufactured item of clothing from ASOS, but pay via US-dollars, there is an established exchange of how much you will pay. That’s decided on electronically by a variety of elements that decide how much a currency is worth in regard to another currency.
How does forex trading work?
Instead of buying a single stock, forex trading works in that you are purchasing one currency and selling another at the same time. The way that you make money in this is when the currency rises in value. If, for instance, you buy a Euro with a US dollar, you then wait until the Euro is worth more than what you paid for it in comparison to the dollar. At that point, simply by waiting you’ve made money when you go to sell the Euro.
As an investor, you can profit from the difference of two currencies by purchasing the currency with the higher interest rate, and selling the currency of the lower interest rate.
Why do currencies change in value?
There are a variety of factors that may cause one currency to be worth more or less than another currency over a period of time. The largest reason is due to supply and demand; if the US prints more money, for example, this causes inflation, making the US dollar is worth less than it was previously.
Other reasons currencies are not static in value include interest rates, an increase or decrease in general confidence in the currency, rate of growth of the country, and geopolitical tensions.
Should you become a forex trader?
The speculative market of forex trading is not to be taken lightly since it is so high risk. However, with risk comes great reward when it pays off. If you’re ready to get involved in the forex trading market, start small by watching only 2 currencies at a time. Researching and keeping track of multiple currencies will become overwhelming.
A benefit of forex trading is that it occurs 5 days a week, for 24 hours at a time. If you’re willing to put in work to understand the larger picture of where various countries stand politically and their interconnectedness, forex trading may be a solid way for you to bring in extra income.
Before deciding whether forex could work for you, make sure you have a grasp on economic fundamentals. Forex trading can be incredibly profitable, but also stressful because it is so high risk and speculative. For a good read, check out Kathy Lien’s book Day Trading and Swing Trading the Currency Market.
Comments (0)