Trading currencies can be a very lucrative activity and thousands, if not millions of people around the world are learning more about it every day. However, some people may be reluctant to learn more about currency trading because they fear it is too complicated or difficult to understand. In this article, I will briefly explain to you how currency trading works, and how money is made in the Forex market.Currency As A Tradable Object
Whenever we make a purchase, let's say that of a chocolate bar, we trade our money for it. We pay the shop owner a pre-determined price in exchange for the chocolate. The price of the chocolate bar is fixed by the shop keeper, and you can only get it if you pay the price that is set by the shop keeper.
This is what basically happens in the Forex market. Instead of trading money for chocolate, we are trading money for money. And just like in the chocolate example, certain currencies can be bought or sold at a certain price. If you wish to purchase the U.S dollar for example, you will have to pay a certain amount in a different currency for it. This is why currencies are traded in the Forex market as pairs. You cannot buy a certain amount of currency unless you pay for it using a different currency.
If I wish to buy the Euro for example, I may have to pay for it in U.S. Dollars. And just like in the chocolate example, there is a certain price (in U.S. Dollars) that I have to pay for in order to get the amount of Euros that I want. If the price of 1 Euro is 1.5 U.S. Dollars, I have to pay $15,000 in order to get the 10,000 Euros that I want. Thus, the price of this currency pair (denoted by EUR/USD) is 1.5.
But unlike the chocolate example, the price of Euros is not fixed. Indeed, the prices of all tradable currencies around the world are constantly changing. Today, the 1 Euro may be worth 1.5 U.S. Dollars, but next week it may be worth 1.6 U.S. Dollars instead. And this is how profits are made in the Forex market.
If I purchase 1 Euro at 1.5 USD today, I may be able to sell the 1 Euro (that I purchased) to get 1.6 USD back next week! In these two transactions, I would have made a 0.1 USD profit!
This is the gist of how money is made in the Forex market. It's really not that hard once you learn how it's done!
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Harold Hsu is the owner of ForexSystemProfits.com where he provides premium Forex trading tips and resources.
