In times when conservative forms of investment are less and less worthwhile due to the persistently low interest rates, many people wonder whether they could not invest their money more lucratively. Forex trading, i.e. speculating on currencies, promises high profits in a short time but is associated with a certain risk. But is it basically possible to get rich with it? And if so, under what conditions can this work?
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How does currency trading work?
Trading in foreign exchange can take place over the counter or on a foreign exchange such as Euronext and the US IntercontinentalExchange. Participants in forex trading speculate on the price of currency pairs at a certain point in time. The banks themselves as well as large corporations, foreign exchange brokers, brokers, trading houses, and private foreign exchange dealers participate in the foreign exchange market. In addition, providers of so-called trading platforms also offer training courses. In addition, the European Central Bank and the national banks sell currencies in order to keep the exchange rates in balance.
Forex trades can be done in several ways:
- As a foreign exchange spot business (spot). This corresponds to the normal exchange of currencies between a bank and its customers. The transaction takes place within two working days at the current exchange rate.
- As a forward exchange transaction (also called FX-Forward). The two contracting parties negotiate a date on which they will receive the respective foreign exchange. This business is to be paid for immediately. Those involved in international trade carry out forward transactions in order to hedge against a future falling exchange rate of the foreign currency.
- In foreign exchange swaps, the parties involved exchange currencies immediately in order to exchange them later at a previously agreed time. The swaps thus combine a spot and a forward transaction. They also serve to secure the course.
- Anyone who concludes a currency option transaction enters into an agreement with the other contracting party under which the option buyer acquires the right to buy or sell a currency at a fixed point in time or within a period of time as soon as it has reached a certain market value. That means he can, but doesn’t have to do it. A special form of options are futures: Here the buyer must exercise or waive this right immediately after purchasing the option.
In profit-oriented foreign exchange trading, swap and options transactions are common. Speculators often also trade in derivatives. A derivative is a financial tool, the value of which depends on the overall performance of its underlying asset – in this case, the relevant currency. At the same time, it is a payment agreement between the business partners. Also, derivatives can have a term. This is not the case with CFD derivatives, a high-risk form whose value is derived from the price difference.