Trading FOREX involves high leverage/high risk whereby you borrow a certain amount of a particular currency and uses those borrowed money to exchange them with another currency which you think might go up. For example, if you were to think that the value of Euros (EUR) is going to go up against the Dollar (USD). You would want to borrow money in DOLLAR amounts and buy EUROS with those dollars.

Lets say the current exchange rate is 1 USD = 2 EUROS. And you borrow USD1million from the bank/exchange broker. Then, you change those USD1million into EUROS…..you would get EUR2million. Being the currency genius that you are, the value of Euros moves in your favour and appreciates against the dollar to 1USD = 1EUR. Now, when you change back your 2million Euros in hand , youll get USD2million instead of 1million. Minus the amount you borrowed from the bank (which was USD1mil), you just made a handsome profit of USD1million.

buying outright cash is basically the same thing without borrowing the money from the Bank. Instead you use your own money to buy other currencies.

some conglomerate companies also have made money through the difference of interest rates you get from borrowing and buying different currencies. for example, by borrowing USD, the current Annual interest rate you would have to pay is about 0.25%. But if you buy Australian Dollars, you would earn an interest rate of up to 4% (currently). The difference is you would profit 3.75%. This scheme is called “The Carry Trade”. But due to the credit crisis, the popularity of carry has waned because central banks across the world have slashed their own interest rates in order to save their asses!

If you would like to learn more about FOREX, go to masakmerah