Forex can seem like a very complicated concept. This article will explain forex to you in a manner that is so simple and easy to understand that a 5 year old can understand it.
What is forex in simple terms? Legal Steroids Europe
Forex stands for foreign exchange. It is basically buying actual money. Kind of like the stock market on steroids. You can start with as little as $250 yet you are given the power to actually trade with thousands of dollars with that little $250 investment yet you can never lose more that the amount you actually invested (in this specific example $250)
A simple 5th grade explanation of forex
Let us pretend forex currency is about buying and selling apples. You can not buy the apples directly you have to place the order with a broker. He is the guy that has the certification that makes it legal for him to directly make the sale or purchase of the apples. (with forex auto trading this is as simple as clicking a button on your forex software program )
Let us pretend these apples are being sold at $1 each. You have $250 to start with to invest. You buy 250 apples in the hope they will go up in price. When they do you sell and make a profit. The guy buying the apples for you makes his money by getting the first few cents of the appreciated price of the apples. In forex trading this is called the spread. So let us say the spread is 3 cents. (The term used in forex trading is called pips instead of cents) What this means is that if the price of apples goes up to $1.10. That means the price of apples has gone up 10 cents. This is great! Sell now and make some money.
That is 10 cents profit on each apple since we purchased the apples at $1.00 each to start. You make 7 cents profit each apple and the forex broker (apple buyer) makes 3 cents per apple (his spread). Remember you purchased 250 apples so you made 250 x 7 cents or $17.50 and the broker (apple buyer) made 250 x 3 cents or $7.50.
Here is where making money with forex trading becomes really exciting and can make you rich.
When you buy there is a principle called leverage. The leverage that is achievable in the forex market is one of the highest that investors can obtain. Leverage is a loan that is provided to you, the investor by the broker that is handling your forex account. That leverage can be as little as 10 to 1 or even as high as 100 to 1. This means that if you start with $250 you can ACTUALLY trade with $2,500 or even up to $25,000 so you ability to make money is magnified many times over but you can never lose more than what you started with. It is almost as if your given a loan you never have to pay back specifically for the purpose of buying and selling currency pairs.