Investing in a variety of products and securities can be a strong, balanced approach to growing your wealth. For some investors, this involves the risky field of foreign exchange, or Forex, markets. Forex markets allow investors to make short-term currency trades that can pay off quickly compared to other investments but can also result in significant losses just as fast.
What Currency Trades Mean
Short-term currency trades are different from other investments because they always involve two currencies, one of which is being traded for another at the current exchange rate. Just as investors trade U.S. dollars for stocks or bonds, they can also trade those same dollars for euros, British pounds, Swiss francs, Japanese yen or any number of other world currencies. Investors from other countries make short-term currency trades without ever using dollars. Trading dollars for euros, for example, indicates that you expect the value of the euro to rise against the value of the dollar, before the opposite occurs. If the euro does rise, you can quickly sell your euros for more dollars than you originally spent, resulting in a quick profit.
How to Trade
Currency values fluctuate daily and even hour to hour within the same day. You need immediate access to both current exchange rates and the ability to make trades to succeed at short-term currency trading. Currency brokers provide this information and execute trades for fees, which may be flat rates per trade or based on a percentage of the value of each trade. To make the right trades at the right time, you need knowledge of international monetary policies and the latest news that will affect how investors value each currency compared to all the others.
Short-term currency trading is very risky and highly volatile. Currency values change based on economic news and government fiscal policies in the country that uses the currency. When a nation's economy is strong, the value of its currency is high. Fears involving debt, trade deficits and political instability can all cause a currency to crash. This means that many different factors can affect short-term currency values, causing them to shoot up and crash back down rapidly.
Short-term currency trading has some distinct benefits over other investments. As a volatile investment, currency can rise in value quickly, resulting in gains that would take months or years to earn in more conservative investments. The higher risk also means faster results and less waiting to see whether a given investment gamble will pay off. Currency trading complements a conservative investment portfolio filled with low-volatility securities.
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