Currency exchange & forex trading, explained!

Most of us have exchanged one currency for another at some point in our lives. We usually do this when we go on holiday or move abroad. The process is then carried out in reverse if we return home with some leftover foreign currency. Depending on the currency exchange rates at the time, and how strong one currency is versus the other, you may make or lose a little money each time. In this way, we are all “forex traders” in our own right – particularly if we travel a lot or are expats living abroad. It can be quite profitable if you take advantage of these fluctuations, but you’ll need to do some research to know when the time is right.

Tips for exchanging money

When is the best time?

There are various factors that influence the best time to exchange money.

• Avoid exchanging money during the weekends because foreign exchange markets are closed. Moneychangers will use the last available quote they received on Friday, so you could miss out getting a lower rate if you waited until Monday.
• Try and monitor currencies over time. You can do this through forex and trading apps such as Tickmill that offer real-time analytics. It’s recommended that you look over a period of about six months to get a good idea of the best time to exchange your money.

Are online or physical exchanges better?

There are benefits to both. Do your research and find out what works best for your needs. For instance, you can conveniently exchange your money online through a multi-currency bank account or mobile wallet. In this way, you can directly charge foreign currency to your debit card if you’re overseas.

There are also different platforms online where you can compare the best exchange rates so you know when’s a good time to do an exchange.

Essential terms

Whether you’re an expat, travelling or planning to trade currencies for a profit, here are a few terms you need to know:

• Currency pair: Forex trading and foreign currency exchange operates using pairs of currencies that you trade one for another. For example, you might trade pound sterling and US dollars (GBP/USD), with the first currency being the “base currency” and the second one being the “quote currency”.
• Bid price: The price at which a broker will buy a unit of currency from you.
• Ask price: The price at which you can buy a unit of currency.
• Spot rate: The rate at which banks and other financial institutions are currently buying and selling currency.
• Spread: The difference between the bid price and ask price.

How about forex trading?

Foreign currency exchange is the term used to describe the general act of exchanging one currency to another. There’s a substantial difference between exchanging currencies for everyday purposes, and carrying out forex trading.

First of all, forex trading generally involves larger sums of money being exchanged speculatively in order to profit from exchange rate swings. Forex trading refers to the buying and selling of currencies based on their price movements; it’s done with the intention of making a profit rather than acquiring a particular currency for a specific purpose such as travelling. While fluctuations in price can be relatively small, when you’re trading in large amounts, the resulting profits can be substantial.

So, while the two concepts are related, the overall purposes and the elements that need to be considered are quite different. When exchanging currencies for practical purposes, the only things you really need to consider are what currency you need and any factors that might affect the exchange rate at that time. With forex trading, on the other hand, there are many more things to consider. These may affect the decisions you make in choosing which currencies to buy and sell, and when.

What affects exchange rates?

There are many fundamental factors that can affect the value of currency and therefore the exchange rates between different currencies. These include:

• Interest rates set by central banks
• Economic stability of the countries in question
• Amount of international trade taking place (favourable terms of trade can increase the value of a currency)
• Amount of government debt (high levels can cause inflation and currency devaluation)
• Major worldwide global and political events (for example, Brexit)

If you’re planning to give forex trading a go, spend time getting to understand the different factors and how they can affect your trades.

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