I posted a few weeks ago about the other trading options that are available to investors and how its not just all about buying stocks through a broker. It makes sense to pick this up now and go into a bit more detail about other ways to trade. Currency trading is becoming more and more popular these days and once you know the basics perhaps it’s something you can add to your financial portfolio? It’s quite simple and very similar to buying stocks. You buy currency at a low price and try to sell it back at a higher price. Whatever you earn in between is pure profit. Pretty straight forward right?

To break it down a little further, foreign currency trades in pairs believe it or not, one currency is put up against another. When one currency goes up it means the corresponding currency is going down in price. As a result, a currency option is always a “call” and a “put” at the same time. For example, if you buy an option for the euro and U.S. dollar with the option to buy euros at an exchange rate of $1.4000 per euro, this would be listed as EUR (call)/USD (put). You will need a broker to do this for you but don’t worry there are lots of them out there who will gladly buy currency options for you for a small fee.

Once you have a broker and an account setup you’re free to trade. Choose a currency that you want to trade in and then choose the strike price which is when you have the right to exercise that option. You can also add in an expiry date if you want to trade for the long term. You then choose if you want to go long or short with the base currency you are trading in. For example if you think the Euro will strengthen against the dollar then go long on the Euro.

As with all trades where brokers are involved, make sure you know how much the service costs before you start trading. A high priced broker can seriously affect the value of your returns and lets face it that’s the whole point of tackling this in the first place! You also have to make sure you know the cost of the option listed by the broker. The response will detail the premium fee of the broker in pips. This is simply the smallest amount the currency pair rate can be traded for. Then it’s time to watch the market and keep your fingers crossed that you make a profit.

Lots of people trade in currency online and it can be a good way to make money. Ensure you have a high quality broker before getting involved as it can make all the difference. Stocks for beginners comes in many forms but currency trading is definitely worth looking at.