Forex (Foreign exchange market) is the largest market in the world in terms of capitalization, open 24/24, in which large and small investors converge supply and demand for the purchase and sale of currency.
Also referred to as an “over the counter” (OTC) market, Forex is a virtual and non-physical place where one speculates on the value of one currency over another.
Whoever carries out Forex trading activities, therefore, is the one who buys or sells a certain amount of money, trying to make a profit from the performance of the latter.
How Can You Make Money Trading Forex?
In terms absolutely understandable to anyone, earning with Forex means investing money on a certain amount of currency in the hope that it will increase its value compared to another.
A sort of “head to head” between two coins, in which we buy or sell ( Long or Short ) a coin to earn its higher or lower value.
To give an easy example of how it is possible to make money with trading, let’s take the Eur / Usd currency pair, traded on the markets at a hypothetical exchange rate of 1.24.
We decide to invest 500,000 Euros for the purchase of 620,000 Dollars (current exchange rate at 1.24).
Our expectation is that the European currency will gain ground against the dollar, and gain from the price change of its exchange rate.
In simple terms, assuming that the exchange rate went from the current 1.24 to 1.28, here we could resell our 500,000 Euros and get 640,000 Dollars in exchange (net gain of 20,000).
The net gain, as we can see, is given by the increase in value of the European currency against the American one (from 1.24 to 1.30), which will be worth a profit of 20,000 Dollars.
How to start earning with Forex
In the context of online trading, Forex trading and CFD trading are the two financial activities most practiced by those who decide to invest their savings independently.
Every day, every hour, every single minute of the day, thousands of traders from all over the world invest money in the Forex market.
Making money with Forex trading is not easy, it takes a lot of learning, a lot of concentration, dedication, clarity, and above all a long time. Trading on Forex as online trading, in general, is a real profession, is also not suitable for everyone, so our advice is to open a free demo account to practice without running the risk of investing random money.
Although Forex trading is often advertised as an easy-to-learn “trade” with which you can quickly make a lot of money, the reality is a little different.
It is true that many people manage to make money with Forex, but it is equally true that many others lose.
Forex platforms or brokers
The Internet and new technologies allow us to operate directly on the forex market through trading platforms.
These platforms, also known by the term Broker, provide a structure and an organization to carry out the online trading activity in the best possible conditions.
To make any kind of operation trading on the Forex is essential, therefore, open an account at one of the many regulated brokers that offer this service brokerage.
How Can You Make Money Trading Forex – The Skills You Need
- Be calm and rational, because forex trading is a particularly rational activity in which they require a good dose of cold blood.
- Being stubborn and optimistic in achieving your goals. While business may not go well over a period of time, you need to be able to have a positive attitude and recover and learn from past mistakes.
- Be prudent, that is , you need to have a sense of risk. Forex trading is a highly speculative financial activity where you can lose some or all of your investment, so you should always pay close attention, assessing the risks, and trying to minimize them as much as possible.
As we will see, with Forex you earn both in the hypothesis that one currency increases in price compared to the other ( Long ), and on the contrary, if it falls ( Short ). That is why Forex trading currencies are always quoted in pairs ( cross ) and not individually.
In financial terminology, we speak of ” base currency ” and ” counter currency “. Taking for example the “cross” Eur / Usd, we will have the Euro as the “base currency”, and the Dollar as the “quoted currency”. If we decide to buy the first of the two currencies (base currency) and sell the second (quoted currency) it would mean “going long ”.
In the reverse hypothesis, ie if we buy the “quoted currency” (Dollar) and sell the “base currency” (Euro) it would mean “go short “.
In the first case, buying the EUR / USD “Cross” would mean buying “Euros” and at the same time selling “Dollars”.
If, on the other hand, we go “ short ”, it would mean buying Dollars (quoted currency) and selling Euros (base currency).
Understanding basic Forex terminology
The currency you are buying is called the quote currency. In forex trading, you sell 1 type of currency to buy another. The exchange rate tells you how much you have to spend in quote currency to purchase a base currency.
For example, if you want to buy a few dollars with British pounds, you can see an exchange rate that looks like this: GBP / USD = 1,589. This rate means $ 1,589 will be spent on 1 British pound.
A long position means that you want to buy the base currency and sell the quote currency. In our example above, you want to sell dollars to purchase British pounds.
A short position means that you want to buy quote currency and sell the base currency. In other words, you should be selling British pounds and buying dollars.
The offer price is the price at which your broker is willing to buy the base currency in exchange for the quote currency. The offer is the best price at which you are willing to sell the currency at the market price.
The asking price, or offer price, is the price at which your broker will sell the base currency in exchange for the quote currency. The asking price is the best available price at which you are willing to buy from the market.
The spread in forex trading is the difference between the bid price and the asking price.
Decide which currency you want to buy and sell
You have to make economic forecasts.
If you believe the US economy will continue to weaken, which is bad for the US dollar, then you probably have to sell dollars for a currency in a country where the economy is strong.
Look at a country’s trading position. If a country has a lot of goods that are in demand, that country will likely export a lot of goods. This, to relaunch the country’s economy, thus increasing the value of its currency.
Consider politics. If a country is under political elections, then the country’s currency will appreciate if the winner of the election has a fiscally responsible agenda. Also, if a country’s government loosens the rules for economic growth, the currency is bound to increase in value.
Reading of economic reports.
Reports on a country’s GDP, for example, or reports on other economic factors, such as employment and inflation, will have an effect on the value of the country’s currency.
How much and how can you make money trading Forex?
Learn how to calculate profits
A pip measures the change in value between the 2 currencies. Usually, 1 pip equals 0.0001 of a change in value. For example, if the value of the trading EUR / USD moves from 1.546 to 1.547, the value of the coin has increased by 10 pips.
Research different brokers
Look for a broker in the market with at least ten years of experience. Experience indicates that the company has been in the market for so long because they are trustworthy and because they care about customers.
Verify that the broker is always regulated and certified.
See how many products the broker offers to its clients and if the broker also trades in stocks and commodities.
Read the reviews, but pay attention. Sometimes, unscrupulous brokers release reviews to competitors to diminish their reputation or vice versa.
Visit the broker’s website. The website should look professional, and the links should all be active. If the site has phrases like ” Coming Soon ” or other unprofessional announcements, avoid that broker.
Request information on opening an account
You can open a personal account or you can choose a managed account.
With a personal account, you can perform transactions manually.
With a managed account, the broker will transact for you.
You can request the documentation by post or download it, usually in the form of a PDF file. Be sure to check the costs of transferring money from your bank account to your brokerage account. Taxes can severely cut your profits.
Usually, the broker will send you an email containing a link to activate your account. Click on the link and follow the instructions to get started with the trade.
Analyze the market
You can try several methods:
Technical analysis: The ‘ Technical analysis involves reviewing charts or historical data to predict how the coin will move based on events. You can usually get the charts from your broker or use a popular platform like Metatrader 4.
Fundamental Analysis: This type of analysis involves looking at a country’s economic fundamentals and using this information to influence your trading decisions.
Sentiment Analysis: This type of analysis is largely subjective. Basically, you try to analyze the mood of the market to understand if it is “bearish” or “bullish”. While you can’t always put the cat in the sack, you can often make a good guess that it can affect your trade.
Determine the margin
Depending on your broker’s criteria, it is possible to invest a little money, but still, carry out relevant trades in the market. For example, if you want to trade 100,000 units with a 1% margin, the broker requires you to lock in $ 1,000 in cash in an escrow account.
For this reason, a good rule of thumb is to invest only 2% of your capital in a particular currency pair.
How Can You Make Money Trading Forex – Conclusion
Forex trading is something that ideally takes a long time to master. The best way to make money is to have a combination of experience, a cool head, and optimism. Also, a bit of luck doesn’t hurt.
Make sure you do your research, stay informed, and protect your investment in any way possible.
Start by choosing a reliable broker, and not taking unnecessary risks.
To your success!