Basically, forex trading is the exchange of one currency type for another currency type on a global financial market. When a person uses a particular currency, such as US dollars, they can trade those dollars for someone else’s currency, such as the Chinese Yuan or British Pound, at the going rate. This rate is known as the Exchange Rate.
Every country’s currency has a value which is based on the strength of its domestic economy, as well as its strength when compared to those economies of every other country in the world. For example, if the US has a fantastic year domestically but China has a terrible year in its domestic economy, then the US dollar will be able to purchase more Chinese Yuan per dollar.
So, why would any investor like to engage in forex trading? Well, it offers an opportunity to make a great profit if someone predicts the market correctly. Using the same example above–the US market has had a wonderful year, which makes Chinese Yuan cheap relative to the US dollar, which is expensive in comparison. However, I, the investor, believe that China’s economy will have a great year next year. Therefore, if I buy many of the Chinese Yuan while they are “cheap”, then I can sell them next year when they are strong.”
However, forex trading is incredibly risky and not suited to many investors. Truly magnificent predictions require massive knowledge of the inner workings of many factors going on in the world presently and which may occur in the near and long-term future. Most retail investors simply don’t possess this kind of information, and they are prone to making highly emotional decisions based on market swings rather than on logic.
Still, understanding how to make money with forex trading allows the traditional investor an alternative option with which to diversify a small part of his or her portfolio of investments. As always, diversification is key, and large bets on currency markets are more likely to leave any investor destitute and depressed than rich. Therefore, please see a professional investment advisor before initiating any kind of forex trades.
**Please note that this article does not advocate specific, actionable advice, but it rather seeks to explain how an investor could potentially make money with Forex trading. The goal of this article is to explain the process of forex investing to a new learner.