In the FX market, you buy or sell currencies. Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.
The object of Forex trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.
Example of making money by buying Euros
| Trader's Action | EUR | USD |
|---|---|---|
| You purchase 10,000 Euros at the EUR/USD exchange rate of 1.18 | +10,000 | -11,800 * |
| Two weeks later, you exchange your 10,000 Euros back into US dollars at the exchange rate of 1.2500 | -10,000 | +12,500 ** |
| You earn a profit of $700 | 0 | +700 |
* EUR $10,000 x 1.18 = US $11,800
** EUR $10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
FOREX Versus Futures
| Advantage | Forex | Futures |
|---|---|---|
| 24-hour trading | YES | NO |
| Commission Free Trading | YES | NO |
| Up to 400:1 Leverage | YES | NO |
| Price Certainty | YES | NO |
| Guaranteed Limited Risk | YES | NO |
