The Foreign Exchange Market (Forex) is where currencies are bought and sold, 24 hours a day, 5 days a week. Currencies from all around the world are a vital part of conducting foreign trade and business. Their exchange affects us all, whether you are aware of it or not. To give you an example, when you want to buy a fine wine, made in Italy, either you or the company you purchase it from, has to pay for it in Euros (EUR). As a Canadian with only Canadian Dollars (CAD), you will be required to exchange your dollars for euros in order to purchase the wine. The same rule applies when you are traveling. As a Canadian traveler, heading to Italy, you will have to exchange your dollars for euros, which depending on the current exchange rate, the value will be more or less.
How to Profit From Trading Currencies (Forex)
In this example, imagine you decided to travel to Italy on vacation. You converted $1000 Canadian Dollars in Euros which converted into €820 Euros at the time. During your vacation, you ended up using money on your credit cards and didn’t spend the money you converted. Now, when you travel back to Canada, you need to convert that money you didn’t spend back into Canadian dollars. While you were away on vacation, the Candian dollar depreciated in value and the Euro made some modest gains. Instead of getting back the original $1000, you’re now getting back $1100. In this transaction over the course of a few weeks, you would have made $100 profit.
Now I know you’re thinking this isn’t a whole lot of profit, but in Forex trading with leverage provided by your brokerage, that $1000 transaction could easily turn into upward profits of well over 100 percent.