How to Make Money Trading Forex
In the forex market, you buy or sell currencies.
Placing a trade in the foreign exchange market is simple: the mechanics of a trade are very similar to those found in other markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.
The object of forex trading is to exchange one currency for another in the expectation that the price will change.
More specifically, that the currency you bought will increase in value compared to the one you sold.
*EUR 10,000 x 1.18 = US $11,800
** EUR 10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency.
For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
How to Read a Forex Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because, in every foreign exchange transaction, you are simultaneously buying one currency and selling another.
Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:
The first listed currency to the left of the slash (“/”) is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency.
In the example above, you will receive 1.51258 U.S. dollars when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. In caveman talk, “buy EUR, sell USD.”
- You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency.
- You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price.
In trader’s talk, this is called “going long” or taking a “long position.” Just remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price.
This is called “going short” or taking a “short position”. Just remember: short = sell.
The Bid, Ask and Spread
All forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is lower than the ask price.
The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) will sell to the market.
The ask is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you will buy from the market. Another word for ask is the offer price.
The difference between the bid and the ask price is popularly known as the SPREAD.
On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.
- If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568.
- If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588.
Here’s an illustration that puts together everything we’ve covered in this lesson:
How To Make Money Trading Forex
How do Forex Traders Make Money?
A forex trade works like this: You purchase 10,000 euros when the pair is quoted at EUR/USD = 1.1800. The value of the euro rises, and the pair is worth 1.2500. You earn $700.
What might make you think that the euro will rise against the dollar? There might be the obvious reason that the European Central Bank has announced that it intends to raise interest rates, but that doesn’t happen very often.
What usually happens is that the euro falls to a point, and then stops falling. It reaches what traders call a “support floor,” a point at which traders think the price is low enough.
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When a currency hits a support floor, it often climbs back from it to a new level, as part of a trading pattern. Traders will have observed the drop to the support floor, will begin acquiring the euro at that point, and the currency will rise to its new level until it hits “resistance,” the point at which there is a kind of consensus that the price is high enough.
The trick, in any trading strategy, is to buy at the support floor, and sell at the resistance.
Traders judge these from experience, long-observed trading patterns, and a wealth of other formulas that they apply.
Traders also use a number of different indicators, usually available on most trading platforms, to help in making judgements. These indicators can be plugged into the charts on which you make your trades.
Successful forex trading is based on strategies. When you first learn to trade forex, you have to learn about the different strategies, and choose the ones that you find most useful. Obviously, one of the things traders think about the most is when to enter and when to exit.
Experience counts for a lot. Observing a single currency pair over a few months, one begins to spot regular patterns apart from those that one reads about in the manuals. It is this combination of experience and learning that makes a consistent trader.
Once you have discovered patterns that repeat themselves, once you have a good sense of the market for a given currency pair and you know what to expect it might do, you will find that you begin making money consistently on the forex market.
If you remain prudent, cautious, disciplined, and if you adhere to what you have learned, you will continue to make money.
Proceed with caution, but don’t be afraid. Control the risks as much as possible. You will lose on some trades. It is important to accept that, and move on.
Psychologists tell us that it is very hard to accept losing on a trade, but it is important not to try to salvage a bad trade – that is a sure way to lose a lot of money.
Take your small loss and make a new trade. And keep going.
How to Make Money in Currency Trading? – An Essential Guide
Currency trading a.k.a. Forex trading is all about buying and selling currency. Sounds ironical right? Well, that’s the world of Forex trading and if you learn the core basics and have great analytical skills, then yes, you can make money in currency trading. If you are new to currency trading, then don’t worry as we will guide you through the whole process and help you understand how to make money with Forex trading. Trading currency is no different than trading in stock market. You simply need to trade currencies instead of stocks when it comes to Forex trading. By the end of this article, we assure you that you will learn the basics of how to make money on Foreign Exchange market.
Currency trading is exchanging one currency for another to make a profit based on market trends. Just like the stocks, even currency rates differ and change based on varied reasons. Hence, if you are good with your analytical skills, you will know how and when to exchange currency in order to make a good profit out of it.
Make Money in Currency Trading
#The Basics of Making Money in Currency Trading
Before you start anything new, you must learn the basics. In the trading business, basics are the key as you will discover a whole new universe out there when it comes to Forex trading. You must learn about the keywords, the right phrases to understand the whole concept and trends in the currency market.
Starting with the basics, the basic definition of Forex trading is exchanging one currency for another. The word “Forex” is also the short form of Foreign Exchange. As simple as it may sound, exchanging currency from one form to another has different dimensions. The Forex rates constantly change on a daily basis and it is very unlikely that you will buy and sell a particular currency at the same rates.
Hence, you need to understand the trading concept and analyze market trends properly. Do not, and I repeat, do not invest a lot of money in currency trading that you can’t afford to lose. The basic idea behind Forex trading is to buy the foreign currency and sell them at the right time to make a profit out of it.
And, that’s how you can make money in currency trading.
Let’s consider an example of EUR/USD exchange.
Assume that the currency rate for 1 Euro is 1.18 USD and you buy 10,000 Euros spending 11,800 USD. After a while, you decide to sell your 10,000 Euros when the currency rate spikes and stands at 1.25 USD for 1 Euro.
You will get 12,500 USD and earn a profit of $700. Well, that’s just an example of profit. If you sell Euro at a rate below than when you bought them, you will end up making a loss.
Hence, it is necessary to monitor the trends and analyze when to buy and when to sell the currency. While learning how to make money on forex trading, it is also very important to understand Forex quote.
#Understanding Forex Quote
Forex Quote is an important term in Forex trading. You need to learn about it thoroughly before making any kind of trades. When it comes to currency trading, the exchange rates are often quoted in pairs.
For example, the rates of GBP in exchange for USD will be quoted as GBP/USD. In short, USD/INR represents the exchange rate of USD for INR.
Here, the currency that comes before the forward slash (/) is known as the base currency, whereas the currency after the slash is called counter or quote currency.
In short, you have to pay in units of quote currency to buy 1 unit of base currency. If the Forex quote for GBP/USD is 1.67281, then you must pay 1.67281 U.S. dollars to buy 1 British Pound.
In terms of selling, you will receive 1.67281 U.S. dollars when you sell 1 British Pound for the same example above.
Well, as you dig deep into Forex trading, you will learn about some more complex things and terms of the business. However, we would advise you to strengthen your basics about currency trading before jumping to more complex things.
Making money with forex trading gets simpler when you stop relying on things to happen and rather work on making things happen by proper analysis and research.
#How to Make Money on Foreign Exchange Market?
Well, if you ask us, trading of any sort is kind of a gamble where you buy in something expecting it to add some value in the future so you could sell it and earn a profit. In that scenario, Forex trading is a gamble but not based entirely on luck.
While luck plays its part, the one thing that would yield better returns in Forex trading is your analytical skills and understanding of different currency markets. The best way to learn the trade secrets of Forex trading is experiencing it yourself. You may find tons of guides and trading systems all over the internet. While each guide or the trading system may serve its purpose but there’s nothing as great as self-learning.
Unless and until you experience the market changes in real, there’s no way you can understand the basic trading technique required for making money in Foreign Exchange. It’s important to stick on to one simple strategy followed by a lot of in-depth analysis and backtesting.
Instead of falling for the modern day over-hyped trading systems, we would advise you stick to the simpler methods such as price action trading and Forex backtesting. With the price action trading system, you simply need to monitor the market prices over a period of time. Such past market trends are displayed in the form of a price chart which is simple to understand and lets you decide the right time to buy currency or sell it.
You can begin with one price action trading system and try to master it by focusing entirely on that particular system. The currency rates are mostly affected due to market changes and hence concentrating on a single price action trading system will help you keep focused rather than causing distractions because of so much happening in the finance industry. Also, price action trading setup will help you understand the market trends better without any need for keeping an eye on the global trends and news updates.
Warren Buffet once said, “Profitable Traders do nothing 99% of the time”. It simply means that once you opt for a particular strategy, you must give it some time to work and simply keep regular watch every now and then or set price alerts instead of hovering around it for 24 hours.
With modern day technologies and internet at our service, making money on Forex was never as easy as it is today.
#How to Make Money with Forex Trading?
To begin Forex trading, you need a Forex account. Just like equity trading requires you to open a trading account, similarly, Forex trading also requires a trading account. Each trading account will differ from one another in terms of services and commission rates. Hence, choose the right broker to open a Forex trading account.
Here are the two important factors you must consider while opening a trading account.
If you don’t understand what leverage stands for in the trading industry, then let us explain it to you. In simple returns, as the leverage goes higher, the risk involved gets higher too. Hence, you need to choose the right leverage or else you end up losing large chunks of money.
Leverage basically means that broker will lend funds to the trader based on the leverage factor. If the leverage factor is 50:1 and the trader invests $1000 in the trading account, then the broker will lend $50,000 extra to trade in the market. You may find leverage ratio ranging from 50:1 to as high as 250:1. Most traders opt for 50:1 as it reduces the risk factor.
Leverage may seem to be a handy deal when the odds are in your favor but at the same time, it can be a curse if things are going downside as you may end up owing large sums of money to the broker. Hence, it is advisable to choose the right leverage ratio when opening a trading account and invest wisely based on trends and planning rather than impulse.
Unlike equity trading, there are no commission or broker fee on each trade. As there are no other parties like broker involved directly in Forex trading but you trade directly with market makers, there’s no purpose of setting up a commission fee of any kind.
This is because the market makers are already making money for each time you trade because of the spread value of ask and bid price. Hence, you must always choose the trading firm that is reputable and reliable.
With more research and experience in this business, you will eventually learn how to make money in forex trading.
Over to you!
We hope that now the concept of Forex trading will be much clearer. Remember to stick with the basics and focus on the simple strategies of the trade. It’s not important to follow the others but to analyze the Foreign Exchange rates yourself.
Look for the past performance and try to estimate the rise and fall of the currency rates you are planning to trade and play wisely. Try experimenting with small chunks of money that you can afford to lose and try to make some profit.
With the focused and detailed planning, you will be able to make money in currency trading quite easily.