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Jul.23,2010Post courtesy of Xtreme Pip Poacher
What’s forex? This is a hard question. You will see it shortened even further to FX or 4X. It involves exchanging different currencies in the hope of making a return when the exchange rates change. An easy example may help to illustrate this. Imagine you were planning to travel overseas. Let’s say you are an American and you are planning a visit to Europe. The currency of most states in Europe is the EUR, so you would wish to exchange USD from your bank for EUR so that you would have some cash to spend while you are there. You could buy $500 worth of EUR 2 weeks before your trip. But then, something comes up at the last moment and you cannot go to Europe after all. So you change the cash back into USD and put it back in your bank. Now, in the 2 weeks you had those euros, the value of the EUR against the dollar will have changed at least a bit. But if the value of the dollar really slipped during that time, or the euro rose by a lot, you could end up getting back more than $500. Then you would have made a nice profit from currency exchange.
So when we look at what’s foreign exchange as a way to earn money, that could be a easy illustration. Nonetheless folk who start foreign exchange trading don’t do it by purchasing foreign currency bills from their bank. They go on the web and, through a broker, become involved in hopeful trading where you can deal in sums a hundred or more times bigger than the amount that you have in your broker account. It is a bit like taking options in shares.
Clearly, this is a dodgy business, but as you can deal in lots that are a hundred, two hundred or perhaps four hundred times your own balance, it has the capability to make you a lot of money. This is what draws most people to currency trading, and why understanding what is currency exchange can be useful in the modern world.
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