Idea of Forex.
Forex means simply that you change currency to another. For example 10euros to us dollars. You get 12 dollars for that. Now value of dollar compared to euro rises 10% and you change those dollars back to euros. You get 11,44€ which means you made profit of 1,44€
Ten percent changes in forex market are quite rare, and requires a long amount of time. Luckily forex brokers offer a tool that is called “leverage” which allows you to use way bigger amounts than 10€ to trade with. More about leverage at the bottom of this page.
Currencies are always traded on pairs, like euro/dollar or dollar/pound. You can make profit in rising (buy currency pair) and falling (sell currency pair) markets.
Where does the money come from?
Money comes from movements in currencies values. Just like stock markets. When you predict that movement right, you get profit. If you predict it wrong, you make loss.
Is it honest?
Sure! Forex is made by everyone from central banks to big companies and individuals.
For companies and banks it is made in protection purposes, but individuals may use it to make profit.
Remember, that trading is investing, and You may need to pay taxes on your winnings.
What makes forex trading so interesting is a tool called “leverage”. Since movements of currencies are smallish, would trading without leverage be slow, and would require huge amounts of money.
What leverage means?
Let´s assume that broker you use offer 400x leverage. You have deposit 200€ to your trading account. You may now use 400×200€ (80 000€) to trade with.
You buy euro/dollar pair for that amount, and it rises again 1%. Value of you investment is now 80 000€*1,01=80 800€ so you made profit of 800€
Now you have 1000€ on your account.
Unfortunately leverage works against you as well. If value of currency would have fallen, your balance goes to zero quickly. That´s why you need to set stop loss value before making trade,and never trade too big amounts compared to your bankroll.
Anyway, leverage gives you great change to make good profits with smaller bankroll.
Example calculation of three successful trades.
This calculation show you the potential of forex trading with leverage. You won´t make profit every time, but let´s assume you hit three times in a row.
You deposit 200€ and use 400x leverage.
First trade as in example above… You have now 1000€
Now you assume euro/dollar to fall for 1% and that happens. You invest that 1000€ you have with 400x leverage, so you trade with 400 000€. One percent change, and value of your investment is 404000€ which gives you 4000€ profit. Your balance is now 5000€
Third time you trade again the same pair. Now you assume it to rise again 1%.
You invest 5000€ with 400x leverage. So your investment is 2 000 000€ One percent rise to currency pair, and value of your investment is 2 020 000. Do profit would be nice 20 000€ and your balance is 25 000€.
From 200€ to 25 000€ with three successful trades. You buy a new car, and start to look for next opportunity. However, it is highly unlikely and never recommended to risk such a big amounts of your bankroll to one trade.
You should first learn how currencies move and which are the right times to trade.
How do brokers make money?
Between buying and selling prices, there is always a small gap. That gap is called spread. Brokers make their living from that tiny gap, but when 10 000 people make trades with leverage, it ends up to be a good amount of money. So unlike casinos or betting pages, brokers want you to success and keep on trading.
There are thousands of automated forex robots. They usually follow some kind of technical analysis to predict currency movements. Using a robot is highly risky, since relying only on technical analysis doesn´t look for news or other unpredictable aspects. What I do recommend, if you don´t want to trade yourself is eToro social trading. You may put your account to “autopilot” and copy trades from successful traders of your choice. Click banner below to try it out.