Trading Currencies

Investing or trading currencies using the only available physical cash at hand without the use of leverage or brokers would require a trip to the bank or a local money changer. First you would have to find the best rate possible. Normally, money changers or banks have currency spreads as wide as 5 cents. If your currency is the US dollar and you want to buy foreign currencies, the quotes would look like this.

The quotes are in US dollars. When buying a currency you would always get a higher price than when selling it. Under the column "we sell" is how much US dollars you need to buy one unit of that currency, and under "we buy" is how much US dollars you would receive when you sell one unit of that currency. Let's say you have $5,000 and you wish to buy the Euro at current rate of $1.45 per Euro, you would receive a total 3,448 Euros. (5,000 / 1.45 = 3,448).

A quote that moves further at par or higher than 1 against your base currency or the currency you bought with your US dollar (Euro) is said to be rising in value. For example when you buy Euros (Base currency) with your US dollar (quote currency), it takes $1.45 to buy 1 Euro. When that value strays further from par or is moving away from 1 ($1.45 going to $1.50) then that currency you bought is said to be rising because it now takes more US dollars to buy a single unit of it. Another thing to remember is when the value of the currency you're buying is less than 1 per unit of dollar and is moving towards par then that currency is also rising in value. Looking at our rates from the money changer, we can say that the US dollar is stronger than the Australian Dollar because its rate is less than par, While the UK Pound is stronger than the US dollar because its price is more than a single unit of US dollar. To make things simple, when the quote is higher than 1 then the base currency you're looking at is higher in value.

Back to our trade, you bought 5,000 Dollars worth of Euros at the money changer or a bank at $1.45 per Euro and received 3,448 Euros in March.
Come September and you checked the EUR/USD quote and you can sell at $1.50 per Euro. Since the value strayed away from 1 or from being equal in value with the Euro, that tells you that you have profited already since it now takes more US Dollars to get a single unit of Euro. Doing the reverse, when you sell your Euros at current rate of $1.50, you would now receive more US dollars since it only cost you $1.45 to get 1 Euro in March. Your gain from that trade is $172.

($5000 US dollars / $1.45 per Euro = 3,448 Euros)
 After 6 months we convert the Euros back to US dollars at current quote of $1.50 per Euro.
(3,4448 Euros X $1.50 per Euro = 5,172 US Dollars)
We subtract the principal from our revenue to determine profit.
($5,172 - $5,000 = $172 Profit)

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