Making money with forex trading is just about the same with other forms of money making except that you buy and sell currencies with the hope of making a profit at the end of each transaction. This article is aimed at describing how foreign exchange trading work and how you too can make money using it.
It is quite easy to place a trade in foreign exchange markets. As stated above, the object of this sort of trading is to exchange one currency for another with the hope that the exchange rate/ price will change, such that the currency you bought will increase in value in comparison to the one you sold; i.e. a drop in the currency you sold compared to an increase in the one you bought means profit for you.
For example: Let say you bought 10,000 Euros at 1.1800 EUR/USD exchange rates (i.e. +10,000 EUR and -11,800 USD). Assuming, two weeks later, you return to exchange the 10,000 EUR back into U.S. dollar at a slightly higher exchange rate of 1.2500 (i.e. +10,000 EUR and -12,500 USD). At the end of this particular transaction, you’d have made about $700 in profit.
That being said, do keep in mind that the phrase exchange rate is used to describe the ratio of one currency’s value against another. For example, the EUR/USD exchange rate used in the example above indicates how many Euros a forex trader would need to buy one U.S. dollar, or vice versa – that is, how many U.S. dollar you’d need to but one euro.
Before we go any further, you should know that currencies are always quoted in pairs as seen above. This is because in every foreign exchange trading action, you are simultaneously buying one currency and selling the other.
Read also: Through the Eyes of a Trader – Navigating Major, Minor, and Exotic Currency Pairs
In order to start making money with forex trading, another thing you need to understand is the terminologies in this quoting. Look at the EUR/USD pair above once again. The EUR is referred to as the base currency while the USD is called the quote currency. The base currency represents the basis for buying and selling these currencies. When buying, the exchange rate tells you how much units of the quote currency you will need to change for one unit of the base currency. In the example above, you’ll need 1.1800 units of USD to buy one euro.
On the other hand, when selling, the exchange rate tells you how many units of the quote currency you get in exchange for one unit of the base currency. In the same example as above, you will receive 1.1800 U.S. dollars when you sell 1 British pound.
Read also: Forex Scalping – Is Your System Covering The Risk Of Scalping?
In the first part of this article, we talked about the basics of making money with forex trading. We also discussed how currencies in the trading market are quoted in pairs and the terms used to describe them – that is base and quote currencies. If you missed it, click to read A Guide to Making Money with Forex Trading – Part 1.
With that out of the way, in this part, we will look at other basic things you need to understand when it comes to foreign exchange trading. These includes the terminology such as Long/ Short and Bid/ Ask. However, before we go any further, remember (from part 1) that the base currency is the “basis” for buying or selling in forex trading and if you buy EUR/USD it simply means that you are buying the base currency and simultaneously selling the quote currency. And, the best time to buy a pair is if you believe the base currency will appreciate in value relative to the quote currency; and you would sell the pair when you think the base currency will depreciate relative to the quote currency.
Long / Short
Keeping the points made earlier in mind, the term “Long” or “Long Position” is used to describe when a trader buys a base currency with an anticipation that he/ she would sell it back at a higher price in future. To remember this strategy, it is easier to use “long = buy”.
On the other hand, the term “Short” or “Short Position” is used to describe when a forex trader chooses to sell off (i.e. sell the base currency and buy the quote currency) when the base currency falls in value; all with the hope that he/ she would buy it back at a lower price later. Contrary to the Long, this one can easily be remember as short = sell.
Read also: Benefits Of Flooring Traders
Bid / Ask
All forex trading quotes are made with two prices, namely: Bid and Bsk. Most often than not, the Bid price is lower than the Ask price. The bid is the price at which your foreign exchange broker is willing to buy the base currency in exchange for the quote currency. This is the best available prices at which traders like you will sell to the market. On the other hand, the Ask (otherwise known as the Offer Price) is the price at which the forex broker will exchange the base currency for the quote currency. To you, this is the best available price at which you can buy from the market.
The difference between the bid and the ask price is popularly known as the Spread.
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