The foreign exchange market, also called the Forex market, is a cash market that is open 24 hours a day, seven days a week. When people trade currencies, they always do so in pairs. For example, you might buy Euros with U.S. Dollars or trade Canadian Dollars for Japanese Yen. When the currency exchange rate or Forex rate changes, the value of your Forex investment goes up or down. Changes like these can happen at any time and are often caused by events in the economy and government. This article shows you how to figure out your profit and loss in Forex trading by using a fake investment.
Learn how to read a Forex quote to understand how the exchange rate can affect the value of your Forex investment. Quotes in forex are always given in pairs. In the following example, the U.S. Dollar (USD) and the Canadian Dollar (CAD) are your two currencies (CAD). The Forex quote USD/CAD = 170.50 means that one U.S. Dollar is worth 170.50 Canadian Dollars. Base currency is the currency to the left of the slash, which in this case is USD. Its value is always 1. In this case, the currency to the right of the slash (CAD) is called the counter currency. In this case, one USD can buy 170.50 CAD because the USD is stronger than the CAD. The U.S. Dollar is seen as the most important currency on the Forex market, and when it is one of the pairs, it is always listed as the "base" currency.
Let's move on to our made-up Forex investment to show how you can make money or lose money when you trade Forex. In this case, the U.S. Dollar and the Euro are your pair of currencies. On August 26, 2003, the exchange rate for EUR/USD was 1.0857. This means that one U.S. Dollar was worth 1.0857 Euros, and the U.S. Dollar was the weaker of the two currencies. On that date, you would have paid $1,085.70 for 1,000 Euros.
One year later, the exchange rate between the Euro and the US Dollar was 1.2083, which means that the Euro was worth more than the US Dollar. If you had sold the 1,000 Euros a year later, you would have gotten $1,208.30, which is $122.60 more than what you started with a year earlier.
On the other hand, if the exchange rate between the Euro and the U.S. Dollar had been EUR/USD = 1.0576 a year later, the value of the Euro would have gone down in comparison to the U.S. Dollar. At this exchange rate, if you had sold the 1,000 Euros, you would have gotten $1,057.60, which is $28.10 less than what you started with a year ago.
Forex trading has risks, just like stocks and mutual funds. Changes in the currency exchange market are what cause the risk. Usually, investments with low risk, like long-term government bonds, have low returns. Forex trading is an example of an investment with a high level of risk that can also have a high return. To reach your short-term and long-term financial goals, you need to find a good balance between security and risk.
