How to Make Money on Foreign Exchanges

• Step 1

  Find brokers registered to trade in currency, stocks, futures, and in options. Look for proper regulatory approvals and examine the trading platforms for ease of use. Deposit money in the account once you have found a brokerage company you are comfortable with. For leveraged assets like options and currencies and futures, you'll have to open a margin account, in which the broker lends you cash for your purchases.

• Step 2

  Understand that currencies trade in relationship to another specific currency. Buy the Eurodollar futures contract ( with leverage exceeding 20:1) versus the United States dollar. If the Eurodollar rises in value it is only against the United States dollar. Against the Japanese yen it may have declined in value. Every currency trades against only one other currency, not a basket of currencies. There are numerous currency trading strategies.

• Step 3

  Buy exchange traded funds, or ETFs, and avoid leverage. Buy either a foreign currency or a basket of currencies. Use baskets of currencies for hedging or buy a specific currency for speculation. Understand that the long-term factors that affect currency rates are the balance of trade between countries. Short-term trading effects involve the movement of short-term money to places with high relative interest rates.

• Step 4

  Limit risk by buying options on futures. Know that these vary in price and usually have short expiration dates. Options on futures employ great leverage, however. Buy a currency option when it gives a buy signal (such as the moving average of a currency exceeding its 200-day moving average). Sell when the option crosses below its 200-day moving average

• Step 5

  Consider buying multinational stocks such as the components of the Dow Jones industrial average. These stocks derive revenues from around the world and are similar to a basket of currencies.

• Step 6

  Use American Depositary Receipts. ADRs represent foreign stocks that trade on American exchanges. Thus, profits and dividends are denominated in the home country currency but paid in United States dollars. Dividends and capital gains are translated into the exchange currency, implicitly making them a purchase of the home country currency.

• 5
• Practice trading currencies on paper under bull and bear market conditions.
• Practice trading currencies on paper under bull and bear market conditions.
• Understand option theory and futures usage. Leverage can be very costly if you are wrong about the direction of the currency move.
• Understand option theory and futures usage. Leverage can be very costly if you are wrong about the direction of the currency move.

References & Resources

• Basics of Foreign Exchange Trading
• Free Trading Account (registration required)
• Federal Reserve Publication on Trading Currency