How People Make or Lose Money Doing It:
By converting your money into a different currency, you are hoping that the new currency increases in value. When you convert back to your initial currency, ideally you will have more money than you started with.

Let's take a look at an example of how someone can make money from a forex transaction. Suppose you have $1,000 U.S. dollars and you want to exchange them for Canadian Dollars. Assume the current USD/CAD exchange rate is 1.33. This means 1 U.S. Dollar is worth 1.33 Canadian Dollars. For reference, at this point, 1 CAD is worth 0.75 USD (1 divided by 1.33). Converting your $1000 USD to CAD will give you $1,333 Canadian dollars ($1,000 USD x 1.33). One week later, the Canadian Dollar strengthens against the U.S. dollar. Assume the Canadian Dollar is now worth .80 USD rather than the 0.75 from one week ago. This means that 1 U.S. Dollar is now worth 1.25 CAD (1 USD divided by 0.8). Since you hold Canadian dollars and want to convert them to USD, you need to multiply by the CAD/USD rate of 0.8. In summary, you could exchange the $1,333 CAD you have back into U.S. dollars and receive $1,066 USD ($1,333 x .80).

So you started with $1,000 USD, you now have $1,066 USD, a profit of $66 USD.

Your Decision

CAD

USD

You sell your USD to buy CAD. (1 USD = 1.25 CAD)

You buy 1,333 CAD at the
CAD/USD rate of 0.75

+1,333

-1000

A week later, the CAD/USD rises to 0.80 and you exchange your 1,333 CAD back into U.S. dollars

-1,333

+1066

Profit

 

+66

 

Buying And Selling

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