Currency Exchange?

[Mr Pickles]

Can someone explain how people make money off of exchanging currencies? Not the e-currency exchange thing, I want to know how people simply trade made and make money off of the return, and how it could actually be profitable for someone like me?

Here's how I understand it: If I have $1000 US and convert it into a different currency when their exchange rate is low, I wait until that exchange rate goes up and then change it back? Is that right?

I'm clueless in this subject but think its interesting. Mainly because it doesn't sound like I have to do anything.

 

[meltdown75]

it's really not that hard to understand. you answered your own question.

 

[BrokenVisage]

"Oh I think we'll go straight to the withdraw" - Die Hard With A Vengence, the BEST DH movie of the 3.. that's right Mr. Mac, just 3.

 

[CrazyLazy]

Problem is the fees most banks charge you for exchanges currencies make it hard to turn a profit.

 

[spidey07]

Hi. I have this currency that you want. Give me your currency and I'll give you this one. Oh, and I'll take my 8% cut as well.

There's your profit.

 

[Martin]

Too add a few things...

- you always trade 'instruments' like "EUR/USD" or "USD/CAD". Unlike stocks, these are invertible so buying and selling are essentially equivalent. If you think the USD will go up, then you want to 'go long' on the USD. You can do this buy buying "USD/CAD" or selling "EUR/USD".

- you have bid/ask prices, the difference between two is called the "spread" and its how brokers/market makers make their money. For example, you can buy (go long) on the higher (bid) price, while you sell/go short on lower (ask) price. An example would be the EUR/USD having prices of 1.31040/1.31049.

- much like stocks, you can trade either news/fundamentals or using technical analysis. The driving forces behind the two are different though - for example, if the price of oil goes up and is slated to continue to do so, CAD (being a bit of a 'petrodollar') will also go up. Central bank Interest rates and jobs data are some of the biggest forex market movers.

- its quite hard to make money. Most online market makers have insanely slow spreads (like 9 100000th's of a cent), but also offer massive leverage (like 50-1) so its each to make and lose.

 

[Mr Pickles]

Originally posted by: Martin
Too add a few things...

- you always trade 'instruments' like "EUR/USD" or "USD/CAD". Unlike stocks, these are invertible so buying and selling are essentially equivalent. If you think the USD will go up, then you want to 'go long' on the USD. You can do this buy buying "USD/CAD" or selling "EUR/USD".

- you have bid/ask prices, the difference between two is called the "spread" and its how brokers/market makers make their money. For example, you can buy (go long) on the higher (bid) price, while you sell/go short on lower (ask) price. An example would be the EUR/USD having prices of 1.31040/1.31049.

- much like stocks, you can trade either news/fundamentals or using technical analysis. The driving forces behind the two are different though - for example, if the price of oil goes up and is slated to continue to do so, CAD (being a bit of a 'petrodollar') will also go up. Central bank Interest rates and jobs data are some of the biggest forex market movers.

- its quite hard to make money. Most online market makers have insanely slow spreads (like 9 100000th's of a cent), but also offer massive leverage (like 50-1) so its each to make and lose.

That was the best answer I've ever gotten from ATOT regarding anything. Thank you so very much.

 

[imported_Lothar]

It's pretty much tough to make money trough currency exchange and forex...unless your name is Western Union of course.

I wish you good luck.

 

[waffleironhead]

Consider this. Last year when i went to iceland the conversion rate was $1us to .67kroner, now it is the exact opposite. It is $1us to 1.6 kroner. So if i was to pick up some kroner at that rate and wait for their economy to turn around, which I feel it will, then i will profit.

 

[Mark R]

Originally posted by: Mr Pickles
Can someone explain how people make money off of exchanging currencies? Not the e-currency exchange thing, I want to know how people simply trade made and make money off of the return, and how it could actually be profitable for someone like me?

Two ways:

1. You change 1 currency (e.g. USD) into a different currency (e.g. GB pounds) when the exchange rate is low (e.g. $1.5 = £1). Wait until it goes up (e.g. $2 = £1), and then change back, keeping the profit.

2. You borrow money in 1 currency (e.g. Japan Yen) where interest rates are very low (Japan base rate has been 0.5% for years). Change the money for a currency with a high interest rate (e.g. NZ $ where interest rates have been 8.5%), and invest the money in a high yield account. You then keep the difference in interest payments between your loan and the return on investment.

Number 2 is known as "carry trade" and over the last 5-10 years, it's been amazingly popular between the Asian currencies - as Japan has had virtually 0 interest rates, and Australia/NZ have had sky high rates - however, people have played this against the USD and GBP as well.

Because of the ability to earn different rates of interest in different currencies, this makes interest rates an important factor influencing exchange rates - a lot of currency traders will watch the central banks and economies carefully, and make their investments based upon what they think will happen. The fact that Japan has had virtually 0 interest rates for a decade has seriously weakened the Yen - people borrow Yen, then have to change it for other currencies, pushing the exchange rate up. Meanwhile, no one wants to convert money to Yen to invest, because the return they get is virtually 0.

Most currency brokers offer ready made derivatives that contain a built in loan and investment in your chosen currencies. You simply "buy" "JPY-EUR", and the product offered contains a built in loan in EUR, and savings in JPY, and the appropriate currency conversion. You can then buy and sell as required, depending on how you want to bet. The fact that you get a built in loan, means you can bet big - deposit $10k in your account as security, and you could play with converting $1 million worth of whatever currency you want (not that this is a good idea).

By all means have a play - most brokers have free online trading demo that you can play with real price data, but fake money. (I found the demo from Oanda.com the best, it's unlimited duration and real time data too). But be aware, that it's damn near impossible to make money, and unless you know basic ground rules about risk manaement in gambling then you will get absolutely killed. Because the derivatives offered to you contain built in loans, you are betting with borrowed money - and you can easily lose a lot more money than your original security deposit - and unlike gambling debts, these debts are fully collectible.

No, I don't trade currencies. Thankfully, I found out using a demo that I sucked.

 

[Martin]

Originally posted by: Mark R

Originally posted by: Mr Pickles
Can someone explain how people make money off of exchanging currencies? Not the e-currency exchange thing, I want to know how people simply trade made and make money off of the return, and how it could actually be profitable for someone like me?

Two ways:

1. You change 1 currency (e.g. USD) into a different currency (e.g. GB pounds) when the exchange rate is low (e.g. $1.5 = £1). Wait until it goes up (e.g. $2 = £1), and then change back, keeping the profit.

2. You borrow money in 1 currency (e.g. Japan Yen) where interest rates are very low (Japan base rate has been 0.5% for years). Change the money for a currency with a high interest rate (e.g. NZ $ where interest rates have been 8.5%), and invest the money in a high yield account. You then keep the difference in interest payments between your loan and the return on investment.

Number 2 is known as "carry trade" and over the last 5-10 years, it's been amazingly popular between the Asian currencies - as Japan has had virtually 0 interest rates, and Australia/NZ have had sky high rates - however, people have played this against the USD and GBP as well.

Because of the ability to earn different rates of interest in different currencies, this makes interest rates an important factor influencing exchange rates - a lot of currency traders will watch the central banks and economies carefully, and make their investments based upon what they think will happen. The fact that Japan has had virtually 0 interest rates for a decade has seriously weakened the Yen - people borrow Yen, then have to change it for other currencies, pushing the exchange rate up. Meanwhile, no one wants to convert money to Yen to invest, because the return they get is virtually 0.

Most currency brokers offer ready made derivatives that contain a built in loan and investment in your chosen currencies. You simply "buy" "JPY-EUR", and the product offered contains a built in loan in EUR, and savings in JPY, and the appropriate currency conversion. You can then buy and sell as required, depending on how you want to bet. The fact that you get a built in loan, means you can bet big - deposit $10k in your account as security, and you could play with converting $1 million worth of whatever currency you want (not that this is a good idea).

By all means have a play - most brokers have free online trading demo that you can play with real price data, but fake money. (I found the demo from Oanda.com the best, it's unlimited duration and real time data too). But be aware, that it's damn near impossible to make money, and unless you know basic ground rules about risk manaement in gambling then you will get absolutely killed. Because the derivatives offered to you contain built in loans, you are betting with borrowed money - and you can easily lose a lot more money than your original security deposit - and unlike gambling debts, these debts are fully collectible.

No, I don't trade currencies. Thankfully, I found out using a demo that I sucked.

Also very good info. Unfortunately, I don't think #2 is available to small fish like us and the oft-quoted number for #1 is that 90% lose money, 5% break even and 5% make a profit.

I think one thing that definitely helps sink a lot of greed. When you're leveraged 50-1 and trading EUR/USD, a movement of 1.2 eurocents against your position will cost you 50% of your money, but the same movement in your favour will also yield like ~35% profit.

But OANDA is a very good way to try it out and definitely the best one out there - I know this because I spend my days writing software for them.

 

[Mark R]

Originally posted by: Martin

Also very good info. Unfortunately, I don't think #2 is available to small fish like us

It's a standard feature of all leveraged currency trading. Certainly every account I've tried will pay/charge you interest depending on the difference in interest rates of the two currencies. Most pay/charge the interest daily - however, oanda will pay/charge in real time - second by second if needs be.

and the oft-quoted number for #1 is that 90% lose money, 5% break even and 5% make a profit.

Definitely. Success with any form of gambling/speculation/whatever you want to call it, requires skillful risk management, and this can be highly counter to instincts and emotions. If you succumb to greed or fear, you lose.

 

[Martin]

Originally posted by: Mark R

Originally posted by: Martin

Also very good info. Unfortunately, I don't think #2 is available to small fish like us

It's a standard feature of all leveraged currency trading. Certainly every account I've tried will pay/charge you interest depending on the difference in interest rates of the two currencies. Most pay/charge the interest daily - however, oanda will pay/charge in real time - second by second if needs be.

I know they pay interest, but what I meant is, you cannot easily convert between currencies in response to interest rate changes. For example, if I have an AUD account and suddenly the UK raises their rates, there are expenses associated with converting that account to GBP.