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How To Make Money On Forex

How to make money on Forex

The Forex market business model revolves around buying and selling of currencies. Since the Forex and the foreign exchange market is based on using mechanics similar to other liquidity market like the stock market to trade world currencies. Any prospective or aspiring Forex trader will be able to pick up very quickly.

Forex trading involves exchanging a currency for another, either by buying or selling, in the expectation that the price of the currency traded in will change, by appreciating in a proportion that will give its trader profit when deducted from the price and unit traded.

Examples is as follows

Trader’s Action EUR USD
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800 +10,000 -11,800*
Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500 -10,000 +12,500**
You earn a profit of $700 0 +700

*EUR 10,000 x 1.18 = US $11,800

** EUR 10,000 x 1.25 = US $12,500

Note: An exchange rate is simply the ratio of one currency valued against another currency. i.e. USD/EUR exchange indicates how many of the U.S dollars can purchase one European Euro, or how many Euro’s will be required to buy one U.S dollar.

How to Make Money Trading Forex

In the Forex market, Currencies are usually quoted in pairs such as EUR/GBP or USD/CHF. The currencies are paired because every Forex trading transaction requires buying either of the paired currency and selling the other. Below is a graphic illustration of a foreign exchange rate of the British pound against the U.S dollar:

 

GBP/USD forex quote
From the illustration, the first listed currency on the left (GBP) of the slash (“/”) is referred to as the base currency, while the other on the right (USD) after the center slash is referred to as the counter currency. And the third figure is the exchange rate a trader is required to pay in order to be able to trade.

In the process of buying a currency, the exchange rate indicated after the two currencies (1.51258), states how much a trader has to pay in unit of the counter currency (USD) to buy one unit of the base currency (GBP).

On the other hand, when selling a currency, the exchange rate (1.51258) indicates how many units of the counter currency (USD) will be offered for selling one unit of the base currency (GBP).

Concept of trading Forex

The base currency among the paired currencies is the reason for either buying or selling of the currencies on the Forex market. I.e. EUR/JPY implies that you are buying the base currency (EUR) and at the same time selling the counter currency (JPY). Buying or selling the currencies is dependent on few factor explain below.

If you believe that the base currency (EUR) will appreciate or gain value more than its counterpart (JPY), then buying the pair currency is the right move. However, if you believe the base currency (EUR) will depreciate or lose value to the counter currency (JPY), then, selling the pair, is the best option.

Some Terminologies Used in Forex trading

Long/ Short

After deciding on either buying or selling any paired currency using the concept above. Forex traders use the word “Long” or “Going Long” to explain the process of buying a currency pair and holding on it till it base currency rises in value and then selling back to the market at a high price. In other word, “Long” means, “buy”.

The term “Short” is also used to refer to selling any paired currency after the base currency has depreciated or loosed value to its counter currency. In Forex, it’s usually referred to as either “going short” or taking a short position. In this case, “Short” simply means, “Sell”

Bid/Ask

EUR/USD forex quote
“How come I keep getting quoted with two prices?”
In the Forex market, they’re always quoted in two prices, the bid and the ask prices and for the most part, the bid prices are always quoted lower than the ask price.

The “bid” price is always referred to as the amount a trader’s broker is willing to buy the base currency in exchange for its counter currency. The quoted bid prices are usually the best available prices that a trader can sell their currency in the Forex market.

However, the ask price is the amount that a trader’s broker is willing to sell the base currency in exchange for the counter currency. This quoted ask prices are usually the best available prices that a trader can buy from the Forex market.

The Spread

This is a term used to describe the differences between the quoted bid prices and the quoted ask prices respectively. i.e from the graphical illustration of the EUR/USD pair quoted above, the bid price is quoted as 1.34568 while the ask price is quoted as 1.34588.

When trading Forex, a broker expects it traders that want to sell the EUR, to click on Sell, and then sell the euro at 1.34568 per unit. In the case of buying the EUR currency, click on “BUY” and buy the euro at 1.34588.

 

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