What is the Best Way to Make Money Trading Forex?

You can easily place a trade in the currency exchange market. The trade mechanics are very similar to those found in the stock exchange market. If you have any experience in trading, you can easily invest in the foreign currency market.

May 27, 2022 - 11:10 AM 459 views

What is the Best Way to Make Money Trading Forex?

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What is Forex (FX) trading?

It is nothing but the buying and selling of currencies.

You can easily place a trade in the currency exchange market. The trade mechanics are very similar to those found in the stock exchange market. If you have any experience in trading, you can easily invest in the foreign currency market.

But don’t worry, if you have zero knowledge of trading, you can slowly pick it up with our Forex trading articles.

The main objective of Forex trading (FX) is to exchange one country’s currency in relation to another country’s currency with an expectation of a boost in prices.

 Here is an example:

In the EUR/USD currency pair, if you have purchased 10,000 Euros (+10,000), which is equivalent to 11,800 USD (-11,800). But, after two weeks, you would like to exchange the 10,000 Euros back to the US dollar, and then the exchange rate is 1.2500 (+12,500). Hence, you earn a profit of 700 US dollars (+700).

Here Example:

 

 

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 *1.18 = US $11,800

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

An exchange rate is simply defined as the ratio of one country’s currency value against another country’s currency.

For example, the USD/AUD exchange rate indicates how many US dollars can buy one Australian dollar or how many Australian dollars you need to purchase one US dollar.

How to Read FX Quote

In general, currencies are always quoted in pairs, such as EUR/USD, USD/AUD, USD/JPY etc.

The main reason why currencies are quoted in pairs is that in every foreign currency exchange transaction, you are concurrently purchasing and selling one currency for another.

But, how exactly do you know which currency you are planning to purchase and which currency you are going to sell?

It’s an excellent question. From here onwards, the concept of base and quote currencies arrives.

Base and Quote Currency

In the foreign currency exchange market, you always exchange one currency for another currency.

Here is a simple example of the Great Britain Pound (GBP) versus the US dollar (USD).

GBP/USD = 1.21228

Here, GBP is called the Base Currency (the first listed currency to the left of the Slash (/)).

The USD is called as the Quote or Counter Currency (the second listed currency to the right of the slash (/)).

The base currency is also known as the reference element for the exchange rate of the currency pair. It always has the same value.

When purchasing, the exchange rate indicates how much you need to pay in units of the quote currency in order to purchase one unit of the base currency.

In the above example of the GBP/USD currency pair, you need to pay 1.21228 US dollars to purchase one British pound.

When selling, the exchange rate indicates how many quote currency units you need to sell for one unit of the base currency.

Similarly, from the above example of the GBP/USD currency pair, when you sell 1 British pound, you will receive 1.21228 US dollars.

The Base Currency means how many units of quote currency are required for you to get one unit of the base currency.

If you purchase the EUR/USD currency pair, it means you are purchasing the base currency and simultaneously selling the quote currency.

In terms of Caveman talk, purchase EUR/sell USD.

You will purchase the EUR/USD pair only if you believe the base currency (EUR) will appreciate (gain value) corresponding to the quote currency.

You will only sell the EUR/USD pair only if you think the base currency (EUR) will depreciate (lose value) corresponding to the quote currency.

In the Forex market (FX), there are so many currency pairs to be traded, then how do the forex brokers decide which currency to list as the base currency and which to be listed as the quote currency?

However, there is a standard way to quote the currency pairs in the Forex market (FX).

Prior, you must have noticed that the currencies quoted as currency pairs are usually separated with a slash (/) character.

But, there are some forex traders who quote the currency pairs with a period or as a dash (for example, the EUR/USD pair is always quoted as EUR-USD or just EURUSD.)

“Long” and “Short”

When you enter the Forex world, you must determine whether you want to buy or sell the currency.

 If you want to purchase (It actually means you are purchasing the base currency and selling off the Quote Currency), however you want the base currency to increase in its value and then you will sell it back at a higher price.

Whereas in trader’s talk, this is referred as “going long” or taking a“ long position.”  But, just remember long = buy.

If you wish to sell (It actually means selling off the base currency and purchasing the quote currency) however you want the base currency to decrease in its value and then you would purchase it back at the reduced cost.

This is referred as “Going short” or taking a “Short position.”

But, just remember, short = sell.

Flat or Square

You are termed to be "flat" or "square" if you have no available positions.

"Squaring up" is another term for closing a position.

The Bid, Ask and Spread 

What is Bid and Ask Price?       See Video    

All forex market quotes are termed as

·         The Bid Price

·         The Sell Price


However, the bid value is lesser in comparison with the ask price

What is Bid?

Your broker's bid is the price at which he'll buy the base currency in return for the quote currency.

This means the bid is the best price possible for you (the trader) to sell to the market.

The broker will buy anything from you at the bid price if you want to sell it.

What is Ask?

Your broker's ask is the price at which the base currency will be sold in exchange for the quote currency.

This indicates that the ask price is the lowest price at which you can buy something on the market.

The offer price is another term for ask.

The broker will sell (or offer) you something at the requested price if you want to buy it.

What is Spread?

The SPREAD is the difference between the bid and the ask price.

The bid price on the EUR/USD rate above is 1.34568, while the ask price is 1.34588. Take a look at how easy it is for you to exchange your money with this broker.

If you want to sell EUR, you can do so by clicking "Sell" and selling Euros at 1.34568.

If you wish to buy EUR, click "Buy" and you'll get 1.34588 Euros.

Here's a diagram that summarizes everything's we've discussed in this article:


Read More Article:

How to invest in Foreign Exchange Market (FX) Step by step in 2022

How to make an investment in foreign exchange market?

How to invest in forex market in 2022

When to Buy and When to Sell a Currency Pair

In Detail, What Is The Forex Market (FX)?

In the Forex Market, What is actually traded?

What is a pip in forex trading?

Currency Pairs: Buying and Selling

In the Forex Market (FX), What Is A Lot?

The Different Types Of Forex Trading

Forex Market (FX): It’s Size and Liquidity

Forex Trading For Beginners: A Guide To Making Profits From Currency Trading

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