Financial markets now allow investors to buy and sell various kinds of foreign currencies. Most of this trading is done through Forex (online foreign exchange financial market) which operates 5 days per week, 24 hours per day. With enough market knowledge and a bit of luck, you can earn quite a bit of profit.
Step
Part 1 of 2: Learning Foreign Exchange Trading
Step 1. Check the foreign exchange you want to buy based on the currency you want to sell
Look at the change in the value of the selected foreign exchange pair over time.
- Foreign exchange foreign exchange is quoted in a currency pair. The exchange rate quote states how many units of currency will be received based on the currency you want to sell. For example, an IDR/USD quote of 0.91 means that you will receive 0.91 US dollars for every rupiah sold.
- Foreign exchange rates fluctuate frequently. Everything from political instability to natural disasters can change the value of foreign exchange. Make sure you understand that the ratio between currencies is constantly changing.
Step 2. Develop a trading strategy
To make your trade profitable, aim for the currency that is expected to increase in value using the currency that is expected to decrease in value (the quote currency or base currency). For example, if you think currency A, whose value is Rp. 15,000 will increase, you can buy a “call contract” for an amount of that currency. If the value increases to IDR 17,500, the profit is in your hands.
- Assess the likelihood of major changes in foreign exchange rates. If a country's economic growth is quite good, it is likely that the value of its currency remains stable or increases relative to other countries.
- Factors such as interest rates, inflation rates, public debt, and political stability can affect the value of a currency.
- Changes in economic factors such as the Consumer Price Index and the Purchasing Managers' Index can indicate the current value of a currency will change.
- For more information, read Trading Forex.
Step 3. Know the risks
Buying and selling foreign currency has risky prospects, even for expert investors. For example, if you want to exchange currency for Rp. 10,000,000, your loan leverage may be 200:1. You can deposit only IDR 100,000 into your margin account. However, if the trade does not go well, you will not only lose money but will owe the broker quite a lot in the future.
- In addition, managing the number of currencies traded at any one time and when to execute is very difficult. Currency values rise and fall rapidly, often within hours.
- For example, in 2011, the US dollar fell 4% against the Japanese yen and then rose 7.5% in a 24-hour period.
- Therefore, only about 30% of “retail” trades (the type of trade foreign exchange investors make) are profitable.
Step 4. Sign up to create a demo account and practice trading foreign exchange
Thus, you can understand the mechanics of foreign exchange transactions.
- Use sites like FXCM to make mock investments in foreign exchange and practice trading foreign exchange with virtual money.
- Don't just trade on the real money markets if you haven't been making consistent profits on your demo account.
Part 2 of 2: Buying and Selling Foreign Exchange
Step 1. Provide cash in local currency
This cash will be converted into foreign currency.
Earn cash by selling your assets. Try selling stocks, bonds, or mutual funds, or taking cash out of a checking or savings account
Step 2. Find a foreign exchange trading broker
In most cases, private investors use the services of a broker to place your foreign exchange transactions.
- The online broker OANDA offers a user-friendly retail program called fxUnity for beginners who want to trade foreign exchange.
- The online brokerage firms Forex.com and TDAmeritrade can also help you trade foreign exchange.
Step 3. Look for a broker that offers low spreads
Forex brokers do not charge fees or commission fees traditionally. Instead, wages are earned by a spread, which is the difference between the amount of currency that can be sold or bought.
- The higher the amount, the more money is paid to the broker. For example, a broker who will buy the rupiah against 0.8 US dollars but sells the rupiah for 0.95 US dollars has a spread of 0.15 US dollars.
- Before creating a brokerage account, check the site or the parent site to make sure the site is listed on the Indonesia Stock Exchange or the Financial Services Authority.
Step 4. Begin foreign exchange transactions with your broker
The progress of your investment should be able to be monitored with visual software or other sources. Don't over-trade, or buy too many currencies at once. Experts recommend investing in the range of 5%-10% of the total account balance on any currency exchange.
- Pay attention to trends in foreign exchange rates before making transactions. You are more likely to make a profit if you trade currencies with opposite trends.
- For example, let's say the value of the US dollar continues to rise against the rupiah. So, you should sell rupiah and buy US dollars, unless you have a good reason not to do it.
Step 5. Set up a top-loss (stop-loss) order
Stop-loss orders are a crucial part of foreign exchange trading. This order will issue a position (eg sell your investment) once the currency value reaches a certain price. This order will limit the amount of losses received if the purchased currency starts to dip down.
- For example, if you bought Japanese yen with rupiah and the current value of the yen is 120, you can set a stop-loss order for a certain price limit, for example Rp. 10,000 against 115.
- The opposite of a stop-loss order is a take-profit, which will automatically set a sale when it reaches a certain profit. For example, you can set up a “take-profit” order to have an automatic sale when Rp10,000 reaches 125. This will guarantee a profit when the value of the yen reaches the desired price point.
Step 6. Record the financing basis of your transaction
In some countries, you will be required to record this information for filing your tax return.
- Record the price paid to buy the currency, the selling price of the currency, the date the currency was purchased, and the date the foreign exchange was sold.
- Most brokerage firms will send you an annual report containing this information in case you don't collect it yourself.
Step 7. Limit the number of currencies traded
In general, foreign exchange trading is very risky, experts recommend that you limit the percentage of the number of foreign exchange trades to a minimum of the entire portfolio.
If your investments are doing poorly (70% of retail foreign exchange trades result in losses), limiting the number of trades and the percentage of foreign exchange trades on the percentage of foreign exchange trades in your overall portfolio will help cushion your losses
Warning
- Avoid trading illegally. If you have information regarding future trends, you can strategize buying and selling foreign exchange to make a profit. You should not trade foreign exchange relying solely on instinct and hunch.
- Don't invest in more pegs than poles. Remember that foreign exchange trading is gambling, even if you have good investment information and strategies. No one can predict the certainty of market behavior.
