By Steven Hart
Despite what some people think those involved in Forex trading are not actually buying and selling various currencies. Instead Forex traders are borrowing money through a margin account to buy and sell contracts to buy and sell currencies.
The idea behind this is to generate enough income from the trades to pay off the money they borrowed and make a profit. This method allows a person to leverage his or her funds and make far greater trades than he or she normally would. The danger from this is obvious, a person can easily borrow more than he or she can pay back.
How Forex is Supposed to Work
A Forex trader uses a special computer program and brokerage accounts to access the international currency market and place trades. The trades are actually made and financed by the brokerage. The brokerage makes its money by charging fees for this and when the money lent to cover the costs of the trades is paid back.
The trader is supposed to be able to make enough money off the trades to cover his costs and make a profit. The profits are generated from the differences between the values of the currencies involved. In theory a person should be able to make a profit by anticipating the differences. If the US dollar is worth $1.25 in Canadian dollars the trader should be able to make 25 cents by converting the US to Canadian dollars.
Traders try to determine when they can make the most money by making a transaction. Since the market is completely computerized the speculators can make instant transactions and earn an instant profit. Many Forex enthusiasts try to automate their trading with computer programs called trading robots. These automatically buy and sell contracts when the market hits a certain level. Some people believe these programs will generate an automatic stream of income.
How It Really Works
It is possible to make a lot of money through Forex trading but it is also possible to lose a large amount of money. Using a margin account a person with $1,000 deposited can make trades of $10,000 or more. If the trades work properly he could increase his funds ten times. If the trades fail he could end up owing $10,000 or more.
Instead of investing this is a form of speculation similar to speculation in the stock market. The trader is trying to generate income from the trades themselves rather than the investments. Brokerages encourage this because they make money from every one of those transactions. The more transactions made the more money the brokerage makes.
Investors should definitely avoid Forex trading because only a handful of the people that engage in it actually make money. Most traders lose money which is why brokerage firms are constantly advertising their products. It is also why they make trading software and margin accounts available to investors for little or no money.
Like gambling casinos they are trying to get people hooked on such trading so they can make money. Like a casino the Forex firms need a constant stream of speculators to generate enough income to stay in business. Just as casinos encourage systems betting that encourages people to dump large amounts at the table. Forex firms encourage people system or bot trading because it gets people to spend more money.
The idea behind this is to generate enough income from the trades to pay off the money they borrowed and make a profit. This method allows a person to leverage his or her funds and make far greater trades than he or she normally would. The danger from this is obvious, a person can easily borrow more than he or she can pay back.
How Forex is Supposed to Work
A Forex trader uses a special computer program and brokerage accounts to access the international currency market and place trades. The trades are actually made and financed by the brokerage. The brokerage makes its money by charging fees for this and when the money lent to cover the costs of the trades is paid back.
The trader is supposed to be able to make enough money off the trades to cover his costs and make a profit. The profits are generated from the differences between the values of the currencies involved. In theory a person should be able to make a profit by anticipating the differences. If the US dollar is worth $1.25 in Canadian dollars the trader should be able to make 25 cents by converting the US to Canadian dollars.
Traders try to determine when they can make the most money by making a transaction. Since the market is completely computerized the speculators can make instant transactions and earn an instant profit. Many Forex enthusiasts try to automate their trading with computer programs called trading robots. These automatically buy and sell contracts when the market hits a certain level. Some people believe these programs will generate an automatic stream of income.
How It Really Works
It is possible to make a lot of money through Forex trading but it is also possible to lose a large amount of money. Using a margin account a person with $1,000 deposited can make trades of $10,000 or more. If the trades work properly he could increase his funds ten times. If the trades fail he could end up owing $10,000 or more.
Instead of investing this is a form of speculation similar to speculation in the stock market. The trader is trying to generate income from the trades themselves rather than the investments. Brokerages encourage this because they make money from every one of those transactions. The more transactions made the more money the brokerage makes.
Investors should definitely avoid Forex trading because only a handful of the people that engage in it actually make money. Most traders lose money which is why brokerage firms are constantly advertising their products. It is also why they make trading software and margin accounts available to investors for little or no money.
Like gambling casinos they are trying to get people hooked on such trading so they can make money. Like a casino the Forex firms need a constant stream of speculators to generate enough income to stay in business. Just as casinos encourage systems betting that encourages people to dump large amounts at the table. Forex firms encourage people system or bot trading because it gets people to spend more money.
Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Annuity Definition, Annuity Rate, and Best Annuity Rates.
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