Turning Forex Trading Into Additional Income Source

Forex Trading is the subject of the following article. This informative piece is a very concise piece by blogger and online marketing consultant Agnese Geka:

With the uncertainty of modern times, many people are realising that they need to take charge of their own financial situation and ensure that they have adequate income for their current needs (and wants) as well as preparing for the future. Forex trading can be an excellent way of earning an additional income.

What is Forex Trading?

Forex is short for Foreign Exchange. Forex trading is the practice of buying one currency (e.g. dollars) with another currency (e.g. pounds).

Who Undertakes Forex Trading?

Picture from freedigitalphotos.net

Most Forex trading is undertaken by companies to facilitate international trade and to provide stability when managing their finances. A typical example of this would be a company which wishes to import goods from Japan to sell in the United States. By buying Japanese Yen in advance and paying in the local currency, the US company knows exactly what the exchange rate will be. They can then proceed to make future plans and projections without having the added complication of potential exchange rate fluctuations.

Banks are also major participants in Forex trading. In addition to the fact that their customers may want (or need) to make purchases in international currencies (such as tourists buying souvenirs with their credit cards) and rely on their bank to facilitate this, they also use the currency markets to make additional profits for their shareholders. Finally, institutional investors (such as hedge funds) and private investors trade in currencies in the anticipation of making a profit.

How Does Forex Trading Actually Work?

Traders take loans in currencies linked to countries where interest rates are low and use the money to finance loans in currencies linked to countries where interest rates are high. The difference is the profit. The reason why Forex trading is popular with people looking for a regular income is because interest is calculated and settled at the end of each business day rather than every month (or even every year) as with some other forms of investment.

The classic example of this has been buying Japanese Yen (where interest rates have been held at zero for many years due to government policy) and using them to finance loans in countries such as Australia where a strong economy fuelled demand for credit and hence created higher interest rates.

Where is Forex Traded and How?

Unlike equities, Forex is traded 'over the counter' i.e. via computers belonging to traders across the world rather than in specific exchanges. This means that while specific equities can only be traded during the working day of the exchange where they are registered, currency can be traded 24/7, five and a half days a week.

Most trading on the Forex market is what is known as 'spot trading'. This means that trades are based on the price at the actual time of the trade. There are two other markets known as forwards and futures, both of which are essentially agreements to make a trade at a future date. These markets are more complicated and therefore more specialised.

Understanding Currency Quotes

A typical currency quote will look like this:JPY/AUD=123.456. The currency on the left (in this case Yen) is the base currency and the currency on the right (in this case Australian Dollars) is known as the counter currency. The number after the equals sign shows how many units of the counter currency are equal to one unit of the base currency. In short, 1 Japanese Yen will buy  123.456 Australian Dollars.

In reality, when trading on a currency exchange, currencies are likely to be quoted like this:

JPY/AUD=123.456/7

This is shorthand for saying that the bid price (used when selling) is 123.456 and the ask price (used when buying) is 123.457. The first currency quoted is always the currency in which the trade is being conducted. Hence, if a trader wishes to sell Japanese Yen, they will receive 123.456 Australian Dollars for every Yen they sell. If they wish to buy Japanese Yen, then they will have to pay 123.457 Australian Dollars for every Yen they wish to buy.

What are the Risks of Forex Trading?

The big risk of Forex trading is that many Forex brokers allow their clients to buy on leverage, i.e. using money loaned to them by the broker. This means that traders can realise much greater profits when they make good trades, however there is the potential for significant losses if a trader makes a mistake. There are two ways to manage this risk. The first is simply to refrain from using leverage and to trade on available funds only (as in the equities market) and the second is to ensure that trades are placed with a 'stop loss' order which does what the name implies and ensures that a position is sold if a certain level of loss is reached. (Both of these strategies can be used together).

What are the Benefits of Forex Trading?

The main benefit of Forex trading is the liquidity of the market (as compared with the trading process for other assets such as equities, bonds and property). This liquidity means that intelligent traders can make regular profits, leading to a reliable source of income. In addition to this, if the currency itself increases in value, then traders can make substantial gains. The key to using Forex trading to create a regular income is to understand that it is an activity which requires attention. It is about making good decisions time after time and reaping the rewards of dedication and perseverance.

Article submitted by Agnese Geka – a blogger and online marketing consultant for www.SurveyCompare.net, which is providing advice and latest updates on work from home topic for anyone who is looking for extra income sources. 

For latest updates follow us on Twitter/surveycompare .