How To Succeed At Foreign Exchange Trading

By: Matt Ehrlin

Foreign exchange trading is one of the largest trading opportunities available. Every day, nearly two trillion dollars worth of foreign currency is traded on the bourses. Because of the immense size of this market, no single investor can substantially impact the market. Even multibillion dollar transactions are a relatively small percentage of the overall market, and can alter prices only slightly, and in the short term.

Foreign exchange trading is built on variations in basis points, where the basis point is one tenth of a cent (or one tenth of the smallest unit of currency being traded). For example, if Euros are $1.60 each, every $32 you put into Euros will net 20 of them. If Euros rise to $1.80 each, your 20 Euros will be worth $36.00.

The chief strategy for foreign exchange trading is watching the closing times of the major trading venues, which are London, the Asian markets and New York. A lot of banks will try to close out their positions at those times, which will cause the market to fluctuate.

Foreign exchange trading, like day trading in stocks, can result in an adrenaline rush mentality, and there's a lot of money to be made in small shifts in exchange rates. However, to make foreign exchange trading work for you as a day trader, you need to live the life and adjust your sleep schedule to be awake when the markets are open to capitalize on shifts.

You can also take a long term strategy on foreign exchange trading. This is where you're looking for long term trends rather than trying to run the races each day on daily shifts.

Key factors to keep in mind in terms of foreign exchange trading are the international news. In particular, any moves the Federal Reserve makes will change the exchange rates. Interest rate increases make the dollar more valuable (because holding investments in dollars that earn interest mean they accrue faster). Anything related to international conflict will drive the dollar down, and make other currencies more valuable.

A related type of foreign exchange trading is holding foreign bonds. This is how most foreign traders hold dollars, they buy US Treasury T-bills. A variation on this strategy is to hold foreign certificates of deposit. Basically anything rated in a foreign currency that's accumulating interest on a short term basis (or using a ladder strategy or options strategy) can be used to double dip foreign exchange processes, getting both the relative movement of currencies and the interest accrued.

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