Most people understand exchanging money, say converting US dollars to Japanese Yen, but they don't understand how you can trade forex to make money.

Misconception #1:

I convert US dollars to Japanese Yen, and then wait for the Yen to rise against the US dollar. When it does, I exchange my Yen back to US dollars, upon which I will have more US dollars then I started with.

Misconception #1a:

But what if I have US dollars, and I want to trade Euros against the Yen. I'd first have to decide if Euros is going to rise against the Yen or vice versa. Let's say I feel that Euros will strengthen against Yen. In this case, I convert my US dollars to Yen. Then convert my Yen to Euros. When the Euros rise, I convert my Euros back to Yen in which case I'll have more Yen. Then I convert Yen back to US dollars (hoping that US dollars has not risen against the Yen during this time) and I should have more US dollars than I started with.

Forex trading doesn't work like misconception 1 or 1a.

In forex trading, you:

Deposit money into your account. The money you deposit can be denominated in US dollars, Euros, Pound Sterling, Yen, etc. Many brokerages accept deposits in different currencies depending upon where you live.

Let's say you deposit money in US dollars.

Then you select a currency pair to trade. For example, EUR/JPY which is the exchange rate of the Euro against the Japanese Yen. If you feel Euros will rise against Yen, you go LONG the pair. If you feel Euros will fall against Yen, you go short the pair. At no time, do you have to exchange your US deposit money into the currencies you want to trade.

If you go LONG and Euros rise against Yen, and you sell, you make a profit. This profit is credited into your account, in the currency of your deposit money which is US dollars.

If you go LONG and Euros falls against Yen, and you sell, you have a loss. This loss is deducted from your account, in the currency of your deposit money which is US dollars.

In this way, you can trade forex without having to convert your money into the currencies you want to trade.

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