What is Forex Trading? | Mentor Tips

What is Forex Trading?

There are a number of currencies in use around the world. These currencies can be exchanged for one another. However, the rates at which these currencies can be exchanged for are constantly fluctuating. The Foreign Exchange (“Forex”) Market is where these currencies are bought, sold, and exchanged. This market is open 24 hours a day, 5 days a week.

The ability to exchange currencies for one another is an important aspect of conducting foreign business and trade. Although many of us might not be aware of the impact that foreign currency exchange has on us, the exchange of foreign currencies affects us all. For example, if you wanted to buy a luxury Italian car that is made in Italy, you would either need to purchase it directly from the manufacturer in Euros (EUR), or the company you purchase it from would have needed to buy the car in Euros. If you only had Canadian Dollars (CAD), you would be required to exchange your Canadian Dollars (CAD) for Euros (EUR) in order to purchase the car.

 

How to Profit From Trading Currencies (Forex)

Likewise, whenever Canadians travel to Europe, they also need to exchange their Canadian Dollars (CAD) for Euros (EUR). The amount of Euros (EUR) they receive for their Canadian Dollars (CAD) depends on the current exchange rate. As the currency exchange rates constantly fluctuate, individuals could profit from currency exchange fluctuations should they plan accordingly. For example, a Canadian might go on a vacation in Italy, and exchanged $1000.00 Canadian Dollars (CAD) for €660.00 at the beginning of their trip. If they did not spend any money during their trip and upon returning to Canada they decided to exchange their funds from Euros (EUR) back to Canadian Dollars (CAD), they would make money if the Canadian Dollar (CAD) depreciated against the Euro (EUR). They might get back $1100.00 Canadian Dollars (CAN) instead of $1000.00 Canadian Dollars (CAD). As a result of this fluctuation in the exchange rates of the currencies, the individual would have made a profit of $100.00.. Although this profit seems relatively small, Forex trading provides the ability to leverage currency trading. Leverage allows traders to multiply gains and losses, meaning this $100.00 profit could potentially have been turned into a $1000.00 profit.