The largest financial market in the world is the foreign exchange, which trades over $5.3 trillion every day. Despite its scale and reach, however, it remains an unknown entity to many ordinary people. They fail to comprehend how it works and how money is made, despite the fact that the concept is really rather simple, and that understanding it could potentially be very lucrative.
The foreign exchange gives investors the opportunity to trade almost any currency from around the world. When this money is traded, it provides the opportunity to speculate on how different currencies will perform. The aim is, simply, for investors to try and increase their capital by betting that the value of one currency will increase or decrease relative to another. If their instinct is correct, they profit; if it isn’t, they lose money. There are many different ways to do this and a company such as FXPro provide many online tools that you could use.
How It Works
In the world of forex, all trades are made using currencies pairs, which are priced against each other. One currency assumes the role of the base currency, and the other is known as the quote currency. The easiest way to understand this is to use examples. Let’s imagine that we have a EUR/USD pair priced at 1.3231. Here, the euro is the base currency, and the US dollar is the quote currency. The former is always worth one unit, and the price that’s written is the equivalent value of the latter. Thus, 1 euro would be worth 1.3231 dollars.
Money can be made in one of two ways: either by an appreciation in value of the quoted currency, or a decrease in value of the base currency.
Long and Short Positions
Another way to view foreign exchange trading is to imagine that the investor is taking a position on each of the currencies in a pair. With regards to the base currency, this would be a short position, because the base currency is being sold to purchase the quoted one. Thus, the latter must automatically assume the role of the long position.
If we take our former example, we can use this to illustrate the point. We know that 1 euro is equivalent in value to 1.3231 dollars. This means that if we want to purchase euros, we have to go short on the dollar so that we can long on the Eurozone currency.
So how could we turn a profit on this trade? In order to make money on our investment, we would have to sell the euros back to the marketplace when their value increased relative to the dollar. If we assume that the euro appreciates to 1.3351 dollars, an investment of $100,000 would mean that we gained by $1,200 if we sold our euros at the exchange rate.
Now that you can see how it’s done, could you make money by trading money?