The following frugal feature is a guest post: In just about every travel agent’s window, you can see exchange rates for just about every major currency, but did you know that you could trade on the fluctuations in their value? Forex trading involves trading one currency against another e.g. Pound Sterling against the US Dollar and trading on whether one currency will rise or fall in value against the other from a starting price agreed over the counter. It can be done at any time, and you have a range of currency pairs to choose from. For more information, City Index does a great explanation of how to trade forex on its website.
To trade, simply select a currency pair and decide whether one currency of that pair will rise or fall in its value compared to the other.
For each currency pair, there is a base currency and a counter currency. The base currency is the first currency of the pair and the counter is the secondary currency. So in the example of euro/ US dollar, euro is the base currency and the US dollar the counter currency. If you go long on the currency pair, you are buying Euro’s and selling dollars, expecting the currency rate to increase in value. If you go short, you effectively sell Euro’s and buy dollars, expecting the currency rate to fall.
You stand to net a profit for every point the price movement of the currency pair goes in your favour past your opening price. Alternatively, you net a loss if prices move against you. As forex trading is a leveraged product, you can make losses that exceed your initial deposit. Please understand the risks involved. Forex trading providers enable you to utilise risk management tools such as stop losses to help you to keep losses at acceptable levels should the markets move against you.
One of the main features of trading forex is 24-hour trading. As the forex markets are open 24hrs a day from Sunday night to Friday evening (London time), there are opportunities to trade at times of the day which can be better suited to your lifestyle e.g. on an evening when you’re home from work. Also, you can trade using specialist mobile phone apps and websites. This is unlike regular stock markets which are only open at set times during the day.
As for helping your personal finances, if you get the hang of forex trading straight away and know what to do (a combination of caution, research and analysis of recent trends will help), you could make sizeable profits from your trading activity. This could help to pay off personal debts, pay for a holiday or for home improvements. However, if you’re new to trading forex, you should start off slowly, then once you’re ready trade more often. Remember that as a leverage product, you could encounter a loss that exceeds your initial deposit so trade with risk management in mind.