How to Buy and Sell Foreign Exchange

Currently, the market allows intermediate investors to trade a variety of currencies from around the world. Most transactions are done via foreign exchange – the online forex market – which operates five days a week, 24 hours a day. With sufficient knowledge of the market and a bit of luck, you can trade foreign currency and make a profit.

Check the exchange rate of the currency you want to buy against the currency you want to sell. Observe the fluctuations of this currency pair over time.

• Exchange rates are quoted for each currency pair. Based on the exchange rate, you can calculate how many units of currency you will receive from the one you wish to sell. For example, if the USD/EUR exchange rate is 0.91, it means that by selling 1 USD, you will get 0.91 EUR.
• Currency values fluctuate frequently. Any political instability or natural disasters can cause fluctuations in currencies. You need to understand that the exchange rate between currencies is constantly changing.

Develop a business strategy. To make a profit from trading, you buy a currency that you predict will increase in value (the quote currency) using the currency you predict will decrease in value (the base currency). For example, if currency A is currently at 1.50 USD and you believe it will rise, you can purchase a 'call contract' with a specified investment amount. If currency A increases to 1.75 USD, you will make a profit.

• Assess the potential for large fluctuations in currency values. The stronger the economy of a country, the more likely its currency will remain stable or appreciate against other currencies.
• Factors influencing currency values include interest rates, inflation rates, public debt, and political stability.
• Economic changes such as the Consumer Price Index (CPI) and the Purchasing Managers' Index (PMI) of a country can signal shifts in that country's currency.
• For more information, you can visit the Trade Forex website.

Be aware of risks. Buying and selling foreign currency is a high-risk activity, even for professional investors. Many investors use financial leverage, borrowing money to purchase additional currencies. For instance, if you want to exchange 10,000 USD, you may be able to borrow with a leverage ratio of 200:1. You could deposit a minimum of 100 USD in your margin account. However, if you incur losses, you could lose more than just your capital and owe your broker significantly more than in stocks or futures trading.

• Additionally, determining how much currency to buy or sell, and when to execute trades, can be challenging. Currency values can fluctuate rapidly, sometimes within a matter of hours.
• For example, in 2011, the US dollar fell by 4% to a record low against the Japanese yen within 24 hours, then reversed and increased by 7.5%.
• As a result, only about 30% of 'retail' trades—the type of currency transactions made by individual investors—are profitable.

Register for a demo account and practice a few trades to understand how trading works.

• Some websites like FXCM allow you to experiment with real investments using virtual money and practice trading currencies.
• Only engage in real market trades once you consistently make profits on your demo account.

Exchange cash for your local currency. You need cash to convert into another currency.

• You can obtain cash by selling other assets. Consider selling stocks, bonds, or mutual funds, or withdrawing money from a savings or checking account.

Find a forex brokerage company. Most individual investors use brokerage services to place foreign exchange trades.

• The online brokerage firm OANDA typically offers a user-friendly retail platform called fxUnity, designed for beginners in currency trading.
• Other online brokers such as Forex.com and TDAmeritrade also enable forex trading.

Choose a brokerage firm with a low spread between buy and sell prices. Forex brokers do not charge commissions or other fees. Instead, they profit from the spread—the difference between the buy and sell prices of currencies.

• The larger the spread, the more you will pay the broker. For example, if a broker buys 1 USD for 0.8 EUR and sells 1 USD for 0.95 EUR, the spread is 0.15 EUR.
• Before registering with a broker, you should check their website or the parent company's site and make sure the broker is registered with the Commodity Futures Trading Commission and regulated by the Commodity Futures Trading Commission (if based in the U.S.).

Start placing currency trades with the brokerage firm. You will be able to track your investment progress through a visual software or other resources. Don't 'overbuy' currencies at once. Experts recommend investing only 5% to 10% of your total account balance in any single forex trade.

• Pay attention to interest rate trends before making a trade. You have a better chance of making money if you trade with the trend rather than against the interest rate trend.
• For example, if the value of the US dollar is steadily increasing against the euro, unless you have a good reason, you should only consider selling the euro and buying the US dollar.

Set up automatic sell orders. An automatic sell order is a crucial part of currency trading. This order will automatically exit a position—meaning it will sell when a set price level is reached. With this order, you can limit your losses if the currency you're buying begins to decline in value.

• For example, if you buy Japanese yen with US dollars, and 1 USD equals 120 ¥, you could set an automatic sell order at a specific price level, such as when 1 USD only buys 115 ¥.
• Contrasting with the automatic sell order is the 'take profit' order, which is set to automatically sell when you achieve a certain profit. For instance, you could set a 'take profit' order to withdraw funds when 1 USD hits 125 ¥. This order ensures you lock in your profits at that point.

Keep track of profits in your trades. In many countries, you must record this information for annual income tax filings.

• Note the price you paid for the currency, the price at which you sold it, and the dates you bought and sold the currency.
• Most major brokerage firms will send you an annual report with this information if you don’t keep it yourself.

Avoid overinvesting. Due to the high risk involved in currency trading, experts generally recommend limiting the amount you invest in forex trading. The amount you invest should only make up a small portion of your overall investment portfolio.

• If you fail—like around 70% of individual forex traders—limiting your investment size and the proportion of forex trades within your portfolio will help minimize your losses.

• Avoid trading based on unfounded or unrealistic expectations about the collapse of any particular currency. If you have reliable information about future trends, it could help you develop a strategy to buy or sell currencies for profit. However, traders who rely on gut feelings or emotions often end up with losses.
• Never invest more in forex trading than you can afford to lose. Remember, the foreign exchange market is a gamble, even if you have great information and a solid investment strategy. No one can predict with certainty how the market will unfold.