Foreign exchange trading is widely known to provide one of the easiest and fastest routes into financial freedom, offering a means of making consistent profits that almost anyone with the desire can pick up and learn. In the forex market, it is entirely possible to make money by buying and selling currencies. To really understand how to make money trading Forex, an aspiring trader needs to understand some basics of the forex market.
Making money in the Forex market is quite simple: the mechanics of a trade is very similar to those found in some other markets like the Stock market. Therefore, if you have any stock trading experience, you should be able to pick it up pretty fast. The main objective of Foreign exchange trading is exchanging one currency for another one with the hope that the price will raise so that the purchased currency will be at a higher value compared to the currency sold. Any two currencies used in forex trade are known as currency pair.
Forex Quotes and Exchange Rates
To make money through forex trading, traders needs to understand how the exchange rate work and how forex is quoted. In foreign exchange trading, the monetary value of currencies is determined based on exchange rates. An exchange rate is simply the ratio of one currency valued against another currency. For example, the EUR/USD exchange rate shows how many Euros can purchase one U.S dollar, or to put it in a different way, how many U.S dollars you needs to purchase one Euro.
Currencies are traded and quoted or priced in pairs within the foreign exchange market, such as EUR/USD or USD/GBP. The main reason they are quoted in pairs is because, in every forex transaction, the trader is simultaneously selling one currency and buying another. For instance, you may have seen a currency quote for EUR/USD pair of 1.2131. In this example, the base currency is the Euro and the U.S dollar is the quote or counter currency. In almost all currency quote cases, the base currency is usually worth one unit, and the quote or counter currency is the total amount of currency that one unit of the base currency can buy. So, in this instance, one euro can purchase 1.2131 U.S dollars. A forex trader makes money when the value of the quoted currency appreciates, or when there is a decrease in value of the base currency.
All Forex quotes come with two prices, the ‘ask’ and the ‘bid’. Most time, the bid is lower than the ask price. The bid is the price at which a broker is willing to buy the base currency in exchange for the quote currency. The simply means that the bid is the best available price at which the investor will sell to the market.
On the other hand, the ask price is the price at which the broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which the trader will buy from the market. The difference between the bid price and the ask price is known as “the spread”.
To make money in forex, you need to determine whether you want to sell or buy. If you intend to buy (which means buying the base currency and selling the quote currency), you want the base currency to rise in value and then sell it back at a higher value. In Foreign exchange trading terms, this is called “going long” or taking a “long position”.
In a situation where you want to sell (which actually means selling base currency and buying quote currency). You want the base currency to depreciate and then buy it back at a lower price. This is referred to as taking a “short position” or “going short”.
Though a lot of people consider making money in the foreign exchange market as complicated, the process and mechanism are quite easy to understand and implement. With a lot of practice, patience, disciple and good money management skills, an investor can make ridiculous amount of money trading forex.
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