The fundamental process of any kind of trading regime is to buy low and sell high. The difference between high and low prices on the commodity sold is called the "spread". Forex trading measures this spread in pips, and like any trading system, you're making a bet that the spread will change in the direction you desire.
All of this sounds well and good - and sounds downright lucrative when you realize that 1.7 trillion dollars are moved on the foreign exchange bourses every day. However, there's a catch. Trying to track individual trades for millions of investors would overwhelm the system, so, just like stocks have brokers, foreign exchanges have brokers as well.
Brokers aren't all bad - but there are fees for using them. The primary benefit of a broker is that you can leverage your positions; the broker has the assets to magnify your purchase; typical leverage ratios are 5:1 and 10:1, with some brokers going as high as 20:1, and a few wild cards going as high as 100:1. What this means is that for every dollar you invest, the broker matches with cash reserves at 5:1, 10:1 and so on.
This magnifies the amount of money you make when you pick right; it also magnifies the amount of money you can lose if you pick wrong, and no matter what you pick, the broker gets interest revenue off of fronting you the loan, taken out of your sale order.
The spread on currencies is measured in ten thousands of a unit of currency, and is based on the exchange rate. If you're buying Euros at $1.4527, that means each Euro costs you $1.4527. If the Euro goes up to $1.4900, you've earned about 2.4 cents on each dollar that was put in, multiplied by whatever your leverage ratio was. If the Euro drops in value, you've lost some money - plus the interest on the position you took.
This is a gambler's way to make money, but there are boundary conditions on the risk. First and foremost, unlike stocks (or subprime mortgages), a first world currency in a currency pair will never be written down to zero. In short, you'll own all the currency even in its devalued state.
The drawback of doing spread betting through forex is that you're tied to your screen nearly every hour, seven days a week. You'll need to hone your on hunches as you sift through reams of data each day, trying to find a pair that's moving in the right direction, and it is work. No matter what someone says, this is not an "automatic road to riches" - this is a high paying, high hours job, but it is, in fact, a job.
(There are benefits to automation - but those automation benefits are tied towards giving you accurate information and setting up stop losses. Anyone who tells you that a forex trading account can "run itself" is after your wallet and playing to your ignorance).
An alternative forex strategy is to buy and hold for a position, rather than trying to handle the vagaries of the various closing times and restructuring your sleep schedule around them. This is known as taking a long term hedge; you're betting that long term trends will move the second currency in a pair higher, like buying Euros in 2003 (when they were $0.80) just after the war in Iraq. Wars tend to make investors move their funds to different currencies, because nothing drives inflationary pricing and currency devaluation like a war. This sort of investing still takes effort, but it ceases to be a long day to day grind that has you up at 3 in the morning.
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