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How to Make Money Trading Currencies

How to Make Money Trading Currencies
April 01
23:59 2011

Currency markets used to be the exclusive realm of major financial institutions and global businesses that used the market to hedge against potential losses.

However because of the growing popularity of on-line trading, more and more day traders are turning to the forex market for investment and trading opportunities. Similar to the futures market, traders are able to use leverage to increase their investment and the market is open 24 hours a day/five days a week.

As always when dealing with margin trading, a move can amplify any profits or losses so investors should use these tools carefully.

What also is attracting is the variety of products traders can trade; however, unlike future or equities traders actually buy and sell forex pairs. For example in the last few months the Australian economy has been red hot.

One popular trade has been to go long AUD/USD, which means that the trader buys Australian dollars and sells (or shorts USD).  Another popular trade was the AUD/JYP, which is where traders buy Australian dollars and short the Japanese Yen.

Although the Australian dollar has been strong, some traders think the move is only short-term strength and it will only be a matter of time before the U.S. dollar moves up. These traders have been looking for opportunities to short AUD/USD, which means selling Australian dollars and buying U.S. dollars.

It is important to realize that although the position has changed the product has remained the same.

The Canadian dollar has also been red hot since it broke above parity with the U.S. dollar. Many traders are looking for opportunities to short (sell) USD/CAD, (which means buying the Canadian dollar). There are rising expectations that the Bank of Canada could soon raise interest rates, which is adding momentum to the “loonie” (the name of the Canadian dollar).

The fact that there are two sides to the trade is important because a day trader needs to decide what currencies have the most potential together.

EUR/GBP has been stuck in a fairly static range and although there is some potential to make money up and down, the risks might not be worth the reward. But both of these currencies have been making some decent gains against the U.S. dollar and there could be better potential for longer-term gains.

When looking for trading opportunities, investors need to pay attention to liquidity. There may be some pairs that look attractive but because of low liquidity and day traders run the risk of being trapping in a position that is quickly running against them.

One popular currency product that day traders are jumping onto is the U.S. dollar index. What makes this product different is that although it is a currency, it is actually a futures product. The index is weighted against a basket of currencies and is traded on the IntercontinentalExchange (ICE).

This future has a quarterly expirations which are: June, September, December and March and the contract is settled on the Third Wednesday of each month. A 0.010 move in the index equals a $10 move per contract.

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