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When I first started considering passive income generation, the first two things that popped in my mind were real estate and Forex trading. I discovered currency foreign exchange, or Forex when I was traveling, as a few day traders were enjoying the nomadic lifestyle it allowed. As a traveler, I knew a bit more about currencies than stocks, was more aware of current events, and found foreign currencies more attractive than stock and shares. The saying ”invest in what you know” makes sense, and I thought I knew a fair bit about currencies.
The first time I got acquainted with currencies, I was 10 or so, and my older cousin was bragging about going to New York soon, pointing out the dollar was only five francs at the time (0.75€), so one had to take advantage of the opportunity. That was my conception of currencies for the following 10 years. If a currency is weak, you can travel there cheaply and enjoy a bargain. I really had no idea you could actually buy, sell and buy back for a profit (or a loss).
Ten years later, I read a book and did some online research on currency trading. It looked very promising. I learned the jargon, short, long positions, carry trades and the like. And opened a demo account on a trading website. I had $100K play money at my disposal, and did very, very well, turning a profit quite quickly. It was time to go with my own money.
Suddenly, when it is you hard earned cash on the line, you become more cautious. Emotional even. And emotional trading is the best way to make money mistakes. If you are convinced that the dollar will get weaker as I was, but see a temporary strengthening, you start questioning your judgment and take a quick small loss instead of a big one later. Then the market rebounds and you buy again at a higher price, feeling stupid for being emotional earlier on.
It is easy to be a slave to day trading as well, and spend most of the day stuck on your screen watching every little move on the currency. You wake up in the middle of the night when London opens, and go to bed when New York closes. It is exhausting.
After a few bad moves, I decided to automate my trades in order to remove any emotions. I placed a lot of small orders, at different points, with a stop loss that would lose me a few dollars, and a take profit that would earn me a small amount as well. Once a day, I would review my positions, cancel the orders that would probably not be filled and place a few new ones. It is kind of like blogging, when you watch your stats so closely at the beginning and get all fuzzy because 10 people have seen your site, then you just concentrate on your writing, and 500 visits a day doesn’t sound like a big deal.
You have to be careful with Forex trading though. Many companies will offer a big leverage. That means if you have $1,000, you can ”buy” $50,000, and if the rate goes down, when you are losing $800 or so, you will get a margin call and most of your money will be gone. A $800 swing on a $50K trade is nothing. I quickly reduced my margin to limit the risk. And only put a small amount into my account to avoid being tempted of adding more ”because it should get better soon”. You shouldn’t add to a loss. Once I made my first $1,000, I actually withdrew all but the profits, and started taking riskier positions with the ”free money”.
Now that I also have currency needs, and often convert dollars, euros, and British pounds, I use my Forex account. The spread is much smaller than a formal bank and the transfers are very quick. That is a zero margin operation. The only risk that I am taking is a rate fluctuation, since it takes a couple of days for the money to reach my account. If I deposit euros to convert into dollars, I know I will convert them at the daily rate two days from now (better or worse), while the bank would send the wire transfer at today’s rate.
As far as additional income is concerned, Forex is quite a small part of mine. With a very low margin, I can afford to keep my positions even though they are negative at the moment, and wait for the rates to go back up again. The risk is holding losing positions for too long, and exiting with a small profit too early.
If you are in the UK and often travel to the Euro Zone, you could use a Forex account as an hedge against currency fluctuation for your next holiday. Say today the pound buys you 1.23€, and you think by the time you go on holiday this summer, it will be weaker. You put £1,000 on a Forex account and get 1230€. In summer, when the rate is down to 1.15€, you convert back your holiday savings to £1,069, that will still buy you 1230€ when you travel. Doing several trades could bump up your holiday fund.
Be careful tough, it could diminish if you make some wrong moves, any potential reward comes with similar potential risk.
Have you ever tried Forex trading? What is your experience?
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I’ve always been interested in Forex trading, but it seems a bit too speculative for my tastes. I also think (but could very well be wrong) that you’d have to do a lot of research to stay on top of currency moves and stay very current on news and events related to the currencies. Keeping up on my dividend stock portfolio is hard enough.
My Financial Independence Journey recently posted..8 Things To Do Before You Start Investing (or most of personal finance summed up in one post)
It could be a lot of work or a yearly prediction. There are calendars like forex factory that will give you every little economic anoucement and you can take positions accordingly for a few hours. I prefer to rely on a long term projection and not worry about daily swings.
Interesting post! Like MFIJ, it seems too risky and hands on for my liking. I also don’ t have much cash to play with and I wouldn’t want to leverage.
eemusings recently posted..Guest post: Do some volunteer work for your community
Leverage is dangerous. But if you have currency needs for travel, checking when is a good time to buy is a smart move.
I have been trading currencies for year now and I have worked out that I can make a little bit of money, but it is a very volatile way to do so. Great if you have nerves of steel.
Glen @ Monster Piggy Bank recently posted..How Much Does it Cost to Have a Baby?
It can be nerve wracking at times!
I have yet to try and trade currencies. I probably should though being the dollar seems to continue dropping:)
Greg@ClubThrifty recently posted..My Dog Pablo: The Freeloading Genius
As long as you don’t leave the US it’s fine! And the Mexican peso is not too volatile to the dollar either, only a European holiday would be quite costly.
I have never tried forex trading but have been interested in it. I may set up a fake account just to give it a try.
DC @ Young Adult Money recently posted..20 Unexpected Expenses
Demos accounts are fun to learn how to remove emotion and if you are very bad at it you can leave it there.
I’ve never done Forex trading and won’t, because as I taught my clients, it’s important to stick with risks you understand intimately.
I love what you said about play money vs. real money. There have been some great studies done showing that while trading games work to teach you the basics, they don’t create good traders because emotions are SUCH a big part of using real money that you change your decision making.
AverageJoe recently posted..How to Cut Your 2012 Tax Bill Today
I wouldn’t play clients money on that either! Unless they want to go back to a foreign country to retire and have an hedge.
Interesting story! There is no doubt that things are different when you have real money on the line…especially when it’s money you can’t afford to lose.
I’ve never had experience with Forex trading and I really have no interest in it. I believe it’s a great way to lose a lot of money.
Jason @ WSL recently posted..Why I Chose The Debt Avalanche Method To Pay My Debts
it is a zero sum game, if you win, someone loses and vice versa.
Haven’t done it myself, but we are looking at doing some foreign currency hedging at work because we plan a lot of international conferences. We keep losing money on exchange variances, so I hope top learn some corporate finance!
Brian recently posted..Being an effective public speaker
optimizing the foreign exchange costs for a company trading abroad could indeed be a great saving.
You could have seen the volatile nature of Forex from the mild currency chart fluctuations at 2:30pm (GMT+0) today between GBP/USD – currency pairs are usually all over the place on these announcements, I expect tomorrow’s skizzo trading pool to be a biggie with the Non-Farm Employment Change update on its way.
I used to watch the markets every move but had to step back for my sanity. Way too stressful!
@AverageJoe – I get your point but you could say the same about anything that involves speculation really. I don’t understand pensions…maybe I should? Everyone talks about how important they are, but then again everyone says that they aint gonna be around when I get to that age…I should take the time to understand it really I guess. I was in a similar boat RE.the concept of Forex. To tackle the beginning stages alone makes it a vapid journey. A friend showed me around a free platform one day and things began to slowly click, and I actually enjoyed having a play. I probably won’t ever trade Professionally, but it’s nice to understand things and open the doors to new learning.
I really don’t know enough about it to jump in. I have to understand something before getting involved – especially when cash is at stake. Maybe I will learn more about it over summer!
Savvy Scot recently posted..The Life of a Safe Adrenaline Junkie
Like Alison said it has its risks, like stocks or any market product, you need to be very informed before you try.
I stay out of the forex markets. I only have so much time and brain power to dedicate to my investment research, so I stick to what I know and enjoy researching. Maybe when I am an old grey-hair and have more free time I will look at it.
Very wise to stick to what you know!
Forex has always interested me, but I think it is way too volatile. There are too many factors beyond anyone’s control that could cause you to lose each and every time.
Debt Roundup recently posted..The Many Options of Renters Insurance You May Be Missing
true, it is a risky business
I think forex trading is way to volatile and speculative. I have no interest in it myself and I’d default to advising others to stay away as well. I think for the vast majority of people getting involved in forex trading is a recipe for disaster.
The First Million is the Hardest recently posted..Should You File Your Own Taxes Or Hire A Pro?
Like stocks where even great fund managers are often unable to beat the market, it can be very dangerous to get in with insufficient information.
Forex is interesting as a process but probably too speculative for me. If I were going to do it, I would use high frequency trading approaches and a lot of analysis with stop-losses and other insurances to keep my position from collapsing.
I guess you have to keep a handle on what is happening round the world. At the moment the Euro is rising because the Greece issue seems to have gone away. I don’t think it has so perhaps I should be buying Euros on the rise and ditch when some political event occurs. To do FX properly you really have to keep an eye on world politics and be aware of what is a temporary blip or a major issue.
And beware excessive leverage – this is what got the banks into trouble as leverage to the average punter is like capitalisation to banks except the government won’t bail you out!
John@MoneyPrinciple recently posted..Take charge of your finances: focus on ‘wants’ rather than ‘needs’
EUR and GBP are the ones I track most. When I started working in the UK the pound was still strong and I asked to be paid in euros since we had euro paying clients and the company was converting the euros anyway, but they said no. A year later, the pound was worth 30% less against the euro and my euro holidays were quite expensive… You do have to take into account a LOT of info, especially for euro since so many countries can impact the rate.
Last fall I wrote a similar article about Forex and as I did my research I found it very intriguing. I would love to give it a try one day. Right now we are monitoring the US dollar on a daily basis because we are primarily paid in US funds and the US dollar sucks compared to Canada, has for the past 12 months, so we always look for the best day to move our money.
Tackling Our Debt recently posted..It’s Raining Money $1,000 Cash Giveaway Event!
I hope you also have a bank that offers a good rate. Shopping around can offer big savings.
I know next to nothing about foreign currencies. One more thing I should put on my list to learn more about.
Kim@Eyesonthedollar recently posted..Reformed Spenders Adjust to Life on a Budget
If you get stocks, it is pretty similar, except instead of firing a CEO impacting events can include elections, shutting down a national airline or printing too much new money. Most things you won’t know until they happen, unfortunately.
Personally, I don’t think I’d ever try Forex, I have a pretty low risk tolerance. I don’t even like stock trading!
Edward Antrobus recently posted..Using Dedicated Income Streams for Debt Payments
Stock trading is not a favorite of mine, but at least if you get an index tracker, you should see it rise over time (maybe a very long time) whereas with forex there is no guarantee the currency will go back to where it once was.
You could make money with currency exchange but the risk of losing is too high for someone like me who does not much about the nitty gritty of currency exchange.
Technical analysis is a technique used to forecast the future direction of prices through the study of historical market data, primarily price, volume and open interest.
I have never actually heard of this before, though I have travelled abroad many times and have gotten a bargain for most (and lost on some). Thanks for sharing!
Amanda L Grossman recently posted..I Have Chosen to Chance the Rapids: Taking My Writing Full-Time
Forex trading can be a good opportunity to get good income of money but like everything it takes to go step by step and getting to know the market
enter currency trading can be a possible solution leg raise money but it takes quite study, knowledge of operations, indicators and strategies