To make money trading Forex, develop a solid trading strategy, manage risk, use technical and fundamental analysis, and stay disciplined. Continuous learning and practice are crucial for consistent profits in the foreign exchange market.
Forex, also known as FX or foreign exchange, refers to the global marketplace where banks, institutions, and individuals engage in speculation on the exchange rate between fiat currencies.
The forex market is the largest financial market in the world.
As a forex trader, you are speculating on whether one currency will rise or fall in price against another currency.
Therefore, "forex trading" can be defined as the process of speculating on currency prices with the aim of making a profit.
The value of a currency is influenced by economic, political, geopolitical events, trade, and financial flows.
Placing a trade in the foreign exchange market is straightforward.
The mechanics of a trade closely resemble those found in other financial markets, such as the stock market. If you have experience in trading, you should be able to grasp it quickly. Even if you don't have prior experience, you can learn through our forex trading course, the School of Pipsology.
The goal of forex trading is to exchange one currency for another with the expectation that the price will change.
More precisely, you anticipate that the currency you bought will increase in value compared to the one you sold.
Here’s an example:
|You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800
|Two weeks later, you exchange your 10,000 euros back into U.S. dollars at the exchange rate of 1.2500
|You earn a profit of $700
An exchange rate is simply the ratio of one currency's value compared to another currency.
For example, the USD/CHF exchange rate indicates how many U.S. dollars are needed to purchase one Swiss franc or how many Swiss francs you require to buy one U.S. dollar.
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY.
The reason for quoting them in pairs is that, in every foreign exchange transaction, you are simultaneously buying one currency and selling another.
How do you determine which currency you are buying and which one you are selling?
That's an excellent question! This is where the concepts of base and quote currencies come into play...
Whenever you have an open position in forex trading, you are exchanging one currency for another.
Currencies are quoted in relation to other currencies.
The first currency listed to the left of the slash ("/") is known as the base currency (in this example, the British pound).
The base currency serves as the reference element for the exchange rate of the currency pair and always has a value of one.
The second currency listed on the right is referred to as the counter or quote currency (in this example, the U.S. dollar).
When buying, the exchange rate indicates how much you need to pay in units of the quote currency to purchase ONE unit of the base currency.
In the example above, you would need to pay 1.21228 U.S. dollars to buy 1 British pound.
When selling, the exchange rate shows how many units of the quote currency you receive for selling ONE unit of the base currency.
In the example above, you would receive 1.21228 U.S. dollars when selling 1 British pound.
If you buy EUR/USD, it simply means you are purchasing the base currency while simultaneously selling the quote currency.
In simpler terms, it's like saying "buy EUR, sell USD."
With numerous currency pairs to trade, how do forex brokers determine which currency to designate as the base currency and the quote currency?
Fortunately, the way currency pairs are quoted in the forex market is standardized.
You may have noticed that currency pairs are often separated by a slash ("/") character.
It's important to note that this is a matter of preference, and the slash may be omitted or replaced by a period, a dash, or nothing at all.
For instance, some traders may write "EUR/USD" as "EUR-USD" or simply "EURUSD." They all convey the same meaning.
First, you need to decide whether you want to buy or sell.
If you intend to buy (which means purchasing the base currency and selling the quote currency), you want the base currency's value to increase, allowing you to sell it back at a higher price.
In trader jargon, this is referred to as "going long" or taking a "long position." To simplify, long = buy.
If you intend to sell (which means selling the base currency and buying the quote currency), you want the base currency to decrease in value, enabling you to repurchase it at a lower price.
This is known as "going short" or taking a "short position." Just remember: short = sell.
If you do not have any open positions, you are considered "flat" or "square."
Closing a position is also referred to as "squaring up."
All forex quotes are presented with two prices: the bid and ask.
Typically, the bid price is lower than the ask price.
The bid represents the price at which your broker is prepared to purchase the base currency in exchange for the quote currency.
In essence, the bid is the best available price at which you (the trader) can sell to the market.
If you wish to sell something, the broker will buy it from you at the bid price.
The ask represents the price at which your broker is willing to sell the base currency in exchange for the quote currency.
In simpler terms, the ask price is the best available price at which you can purchase from the market.
Another term for ask is the "offer price."
If you wish to buy something, the broker will sell (or offer) it to you at the ask price.
The spread is the difference between the bid and the ask price.
In the EUR/USD quote provided above, the bid price is 1.34568, and the ask price is 1.34588. Notice how this broker makes it straightforward for you to engage in currency trading.
If you intend 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 purchase euros at 1.34588.