Currency trading (otherwise known as forex trading) is the art of making a profit from exchanging foreign currencies. It is a popular type of trading because it can be done by amateurs anywhere in the world from a smartphone.
Moreover, there is a relatively low barrier to entry regarding prior knowledge or the amount of money you can invest, which makes it enticing for beginners. However, you might not know that there is more than one way to make money from currency trading.
This is a positive because it means you can find a variant of currency trading that suits your skill set and interests and helps you to build an edge with your trades.
However, before you learn about these different variants, you should be aware of the realities of currency trading. It is, ultimately, an informed bet against a particular currency. This makes it a speculative risk and carries with it the very real chance that you will be wrong.
What’s more, you have to be an active trader to reap the benefits of forex trading. If you hope to become a passive trader, reclining on a beach somewhere, you are in for a nasty surprise.
With that said, this is what you need to know about making money from currency conversion.
Trading currency pairs
A currency pair is the price quote of the exchange rate for two different currencies, essentially comparing the value of the two currencies. This quote is centered upon the bid price (the purchase price) and the asking price (the selling price).
As you can probably guess, the bid price is what a buyer is willing to pay in exchange for the counter currency, while the asking price is what a trader is willing to sell the base currency for.
If you were to request an order for a currency pair, the base currency (the first listed currency) is purchased, while the second currency is sold. For those looking to trade currency pairs, get started with a Currency Converter API.
Using broker’s leverage
You can enhance your trade using leverage. Essentially, leverage is when you use borrowed funds to improve your trading position. This is useful if you are convinced about the wisdom of a certain trade but don’t have enough of your own money to make the most of it.
By using leverage, you can put more money down in one go, potentially earning you more profit in the process.
Of course, leverage should only be used sparingly. It goes without saying that while it can make your successes more spectacular, it can make your losses catastrophic. Therefore, don’t treat it as a license to print money, and instead, use it as the tool it is if and when you need it.
Contracts for difference
Lastly, you have CFDs, which stands for Contracts for Difference. They are a type of derivative which allow you to speculate on the price of foreign currencies. Unlike other forms of forex trading, you don’t own the currency pairs themselves and simply make a profit from the price movement instead.
