Make Money Online

Forex trading is a term which means sale and purchase of foreign currencies. You earn money when you buy a currency at a rate lower than which you sell it at. Foreign exchange means the price of one currency in terms of another. For example, if the Yen is tradig at Rs. 100 for the rupee, it means that for every rupee, you’ll get 100 yen.

I gave you the example of Rupee Vs Yen, likewise almost all currencies of the world are traded in the forex market. The most popular currency traded is the dollar which is traded in a little more than 89% of all forex markets.

The INR vs Dollar trading isn’t all that popular, taking place mostly in the subcontinent and USA itself. India and USA follow a floating exchange rate system. This means that the rate of the dollar vs the rupee keeps on changing according to the demand-supply situation in the global economy. Naturally, this means that the rate fluctuates a lot over time.

At the end of 2007, the rupee was trading at approximately Rs 40 for the dollar. This appreciated to Rs 39 in the next month or so. After that, the rupee started depreciating till it reached levels of Rs. 48-50 in the last few months. It currently trades at around Rs. 48 to the dollar. Now, you will wonder, how will this make you money?

Let’s take a hypothetical situation in which you bought $10,000 when the dollar was trading at Rs 40 for Rs 400,000. As I tolf you, the rupee is now trading at Rs 48 for the dollar. Lets say you sold those $10,000 right now. That means you will get 480,000 in cash. That’s a profit of Rs 80,000 in less than a year, and just from ONE transaction.

All this might seem very cool and you might be thinking this is a great get rich quick scheme. Well, sorry to burst your bubble, but it isn’t. The forex market is a highly volatile market and you need to be well versed in the forces shaping the market to even think of making a profit here. Changes in foreign policy, changes in domestic policy, interbank rate changes, everything can send the forex rate shooting north or south on a daily basis.

Another factor affecting US/INR trading are the stock markets. It is often seen that a positive change in the SENSEX induces a favourable change in the forex rate and a negative one has an adverse impact on the forex rate. People have been trying to predict the stock market for years, and well, no one has really cracked the formula. So be prepared to lose money in the forex market.

One way to stay alive in the forex market is not to go for long term investments. You cannot predict which way the currency will go in the coming years. You might buy at a rate which you think is attractive, but it might never even come close to that rate again. In such a situation, you can try levereged short term trading. Leverage refers to debt. So basically levered short term trading means you borrow money and invest it in the forex market and then exit it the same day to make a decent profit provided you invested a large amount. The losses will never be huge in one day and you can still recover even if you do make a loss. It isn’t advisable to trade long term on a leverage. As I said before, long term prospects of a currency cannot be predicted and leverage tends to magnify losses and profits in the long run, hence you can end up losing a huge amount of money. The chance of huge profits doesn’t justify the risk.

This entry was posted on Wednesday, January 14th, 2009 at 4:24 am and is filed under Forex. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.