Back in July 2005, Erik Herzfeld had a hunch. The currency trader, 32 years old at the time, was well aware that China had been inundating the American marketplace with increasing amounts of toys, computer equipment, and clothing for years. Since this was long before people realized Chinese goods were constructed largely from arsenic-soaked lead, Americans were buying the hell out of the low-priced products, supercharging China’s economy with billions in U.S. capital and making its currency, the renminbi, increasingly valuable. So, if Herz­feld could swap his ever-weakening American cash for Chinese currency before it soared in value—and then trade it back—he could make a fortune overnight.

There was just one problem. For two dec­ades, the Chinese government had prevented the value of the renminbi, from moving at all. Logic told Herzfeld that buying the currency would be a waste of time and money. But he was a good trader, so he did his homework.

Via the Bloomberg message system, an online service that allows users to track e-communications between financial institutions, Herzfeld noticed increased activity by the People’s Bank of China and the Chinese State Administration of Foreign Exchange. “They started working very late,” he says. “I knew something was brewing.” Herzfeld leveraged big, essential­ly taking out a high-risk loan, and used $80,000 to speculate on $200 million in renminbi. Six days later Beijing announced that the Chinese had let the renminbi rise to its true market value—2.2 percent higher than when Herzfeld bought it. In other words, his $80,000 investment had just netted him $5 million.

“You don’t need to go to a fancy school to trade currencies,” he explains. “No one is right 90 percent of the time. But you can make money—a lot of it—if you’re right 60 percent of the time.”


The Iron Is Hot
Since the first opening bell of 2008, the stock market has been plagued by darkening economic forecasts. Combine that with the fact that the dollar is in the toilet—last year alone, the greenback’s value fell an average of 10 percent compared to other world currencies—and it’s easy to see why skittish investors are bringing their business to the currency market. Right now, more and more amateurs are exchanging weak U.S. dollars for cash with more muscle.

While currency trading used to be the sole domain of big banks and credit institutions, over the past few years retail brokerage houses have set up shops for any would-be trader with an Internet connection and a healthy checking account. It’s the Wild West of investing—all online trades are anonymous, and the market is open for business 24/7. The result is a market that’s exploding with activity. In 2003, Foreign Exchange (FOREX) brokers held $170 million in customer funds; by 2007, that figure had grown to more than $1 billion. And since 2000, the number of individual traders registered with one major online currency trading firm, FXCM.com, has ballooned from 100 to 100,000.

But it’s far from a sure thing. “I learned about it three years ago from a client,” says George
Bacardi, a 39-year-old CPA who earns about $85,000 a year trading currency on the side. “I gave it a shot, lost all my money, and was still hooked. My best day, I’ve made $7,000; on my worst, I probably lost as much as 10 grand.”


Mastering the Market
There are two ways to make money. The first is just like Herzfeld’s China play: You buy a currency you think will increase in value, then sell it back when it’s worth more than the U.S. dollars that you bought it with. But you can also earn a fortune by betting a currency will tank. Financier George Soros speculated back in 1992 that the British pound was about to take a plunge, and banked $1.1 billion in one day’s time when he turned out to be right.

Of course, there’s a catch. These markets move violently, and if the currency you sold goes up instead of down, you pay the difference. To avoid disaster, you must be a financial news junkie. Read The Economist, check international newspaper headlines online, and sign up for a currency trading newsletter. “An FX trader doesn’t sleep,” says Robert Paulson, 35, founder of currency trading firm First Lenox. “You may rest your eyes, but you don’t sleep.”

Lee Martin, 45-year-old owner of a countertop installation company in Georgia, has been trading for 10 years and admits the lifestyle can be hectic. “London gets going at 2 a.m., so I’ll get up at 1 or 2 and see what’s happening. Then I’ll take a catnap and check again at 4. The Far East is active from about 7 p.m. to midnight, so you want to pay attention then. From 12 to 1:30 you can take a break.” But there is a payoff to the sleepless nights. Martin earns about $30,000 a year on top of his regular income.

What sort of information should you be looking for? Omens that an economy is getting worse—widespread unemployment, evil dictators, disasters; all can drag a currency’s value down. Positive economic indicators—optimistic consumers, robust spending, low inflation—indicate a currency will go up.

“Prices form classical patterns,” says Marc Prosser, chief marketing officer at FXCM. “Things that are rising continue rising, and things that are falling continue falling.” Sites like Prosser’s—Forex.com, FXStreet.com, and HotspotFX.com are three others—provide users with performance charts of dozens of currencies. They’ll show a currency’s “support level,” the price at which it stops falling and begins to rise; and its “resistance level,” the ceiling at which it will stop rising. Also take note of oscillators, which measure the speed of a trend. “You want to buy when the momentum is strong and in your favor,” Prosser explains. “When the trend gets slower, it’s losing steam.”