HOW DO YOU MAKE MONEY ON FOREX?

HOW DO YOU MAKE MONEY ON FOREX?

In Forex, one sells or buys currencies. Making a transaction in the foreign exchange market is simple: the mechanics of an operation are very similar to those we can find in other markets, such as the stock market, so if you have previous experience in another market, it will be even easier to learn To do Forex trading.

The goal in Forex is to exchange one currency for another, with the expectation that the price will change, hoping that the price of the currency that one bought is appreciated with respect to the one that was sold.

Example of how to make money buying Euros.

Acción del Inversor	EUR	USD
Compra 10.000 euros a una tasa del EURUSD de 1.300	+10,000	-13,000*
Dos semanas más tarde decide vender y la tasa del EUR/USD está a 1.400	-10,000	+14,000**
El beneficio es de $1000.	0	+1000

The exchange rate is simply the value of one currency with respect to another currency. For example, the USD / CHF exchange rate indicates how many dollars a Swiss franc can buy or how many Swiss francs it takes to buy a dollar.

How to Interpret Currency Prices

Forex currencies are always expressed in pairs, as in GBP / USD or USD / JPY. The reason is that in each transaction, one is simultaneously buying one currency and selling another. An example of a currency exchange between the pound sterling and the dollar.

GBP / USD = 1.7500

The first currency on the left is known as the base currency, in this case GBP. While the second currency on the right is known as the quoted currency. In this case the US dollar.

When we buy, the exchange rate tells us how much we have to pay in units of the quoted currency to buy a unit of the base currency. In the example above, we would have to pay 1.75 dollars to buy 1.0 pound sterling.

When we sell, the exchange rate indicates how many units of the quoted currency are obtained by selling a unit of the base currency. In the example above, we receive $ 1.75 if you sell 1.0 pound sterling.

The base currency indicates the address when buying or selling. When you buy EURUSD, this simply means that I am buying the base currency (EUR) and selling the quoted currency (USD) at the same time.

We would buy the pair, for example EURUSD, if we think that the base currency is going to appreciate (rise) with respect to the quoted currency. On the contrary, we would sell the pair if we think that the base currency will depreciate (decrease) with respect to the quoted currency.

In long / short

First, you need to determine if you want to buy or sell.

If you want to buy (which means buying the base currency and selling the quoted currency), you will expect the base currency to increase its value and then sell it at a higher price. The terminology used by Forex traders is to indicate that I have a "long" position (opening a buy position is called "going long").

If you want to sell (which means to sell the base currency and buy the quoted currency), you will expect the base currency to lose value and then buy it at a lower price. This is known as opening a "short" or "short" position.

Bid / Ask Spread

All quotes in Forex include two prices, bid (bid) and ask (demand).

The bid is the price at which the broker is willing to buy the base currency in exchange for the quoted currency. This means that bid is the price at which you, the investor, can sell.

The ask is the price at which the broker is willing to sell the base currency in exchange for the quoted currency. This means that ask is the price at which you will buy. The difference between the bid and the ask is popularly known as the spread that is the commission applied by the broker.

Let's look at an example of a quote taken from a Forex trading platform:

Forex forex quote

In this example of the GBP / USD pair, the bid price is 1.7445 and the ask price is 1.7449. With a simple click you have the possibility to sell or buy.

If you want to sell GBP, you will click on 'Sell' and you will sell GBP 1.7445.

If you want to buy GBP, you will click on "Buy" and buy pounds at 1.7449.

In the following examples, we will use fundamental analysis to help us determine whether we should buy or sell a particular currency. If you do not know much about economics, do not worry. Later we will review the fundamental analysis among other things in more detail.

EUR / USD

In this example, the Euro is the base currency, in other words, the basis for selling or buying.

If you think that the US economy will continue to weaken, which is bad for the dollar, you would execute a EUR / USD purchase order. Doing so will have bought euros with the expectation that these will rise against the dollar.

If you think the US economy is strong and the euro will weaken against the dollar, then you would execute a EUR / USD sell order. Doing so will have sold euros with the expectation that these will fall against the US dollar.

USD / JPY

In this example The US dollar is the base currency.If you think that the Japanese Government is going to weaken the Yen to improve its exporting industry, it would execute a USD / JPY purchase order. Doing so will have bought US dollars with the expectation that these will be appreciated against the Yen. If you think Japanese investors are pulling their money out of the US financial markets and turning that money back into the Yen, which would hurt the Dollar, then you would execute a USD / JPY sale order. In doing so you will have sold US dollars with the expectation that they will depreciate against the Yen

GBP / USD

In this example GBP is the base currency and the dollar the quoted currency. If you think that the British economy will continue to do better than the American in terms of Growth, you would execute a GBP / USD purchase order. In this case you are betting that the pound appreciates against the dollar. If you think that the British economy is contracting while the United States remains strong, you would execute a GBP / USD sales order. In doing so, you sold sterling in the hope that it will depreciate against the US dollar.

USD/CHF

In this example, the dollar is the base currency, ie the basis for purchases or sales. If you think the Swiss Franc Is over-rated, you would execute a USD / CHF purchase order. In doing so, you will have bought US dollars with the expectation that they will appreciate against the Swiss Franc. If you think that the bubble in the US housing market will hurt future growth your economy, you would run a USD / CHF sale, waiting The depreciation of the dollar against the Swiss Franc.

I do not have enough money to buy 1 lot of 10,000 euros. Can I still trade Forex?

Yes, this is possible thanks to the use of leverage. Investing with leverage is simply a way of indicating that you are operating with money borrowed by the online broker. In this way it is possible to open positions of $ 10,000 or $ 100,000 with very low initial capital eg at a level of leverage 1: 200 would require $ 50 to trade $ 10,000 or $ 500 to trade $ 100,000. This is one of the great attractions of the Forex market: being able to handle relatively large transactions, quickly and cheaply, with very small initial capital.

Forex positions are quantified in "lots". In the following article of this course we will discuss in more depth. For now, a lot is the minimum amount you should buy or sell a currency. It is similar to buying eggs at a supermarket. They sell them by the dozen. In Forex it does not make sense to buy only one euro for example. Therefore, they sell them in "lots" of 100,000 units (Standard lot) or in some cases in quantities less than 10,000 units (Mini Lots) or 1,000 units (Micro Lots) depending on the type of account you have with the online broker with The one we work on.

For example:

• You think some data are indicating that the British Pound (GBP) will rise against the US dollar (USD).
• You open a position of a lot (100,000 units), buying Pounds Sterling and waiting for the price to rise. When you buy a lot (100,000 units) of GBP / USD at a price of 1.5000, you are buying 100,000 pounds, which is the equivalent of $ 150,000 (100,000 GBP units * 1.50).
• If the leverage offered by the broker is for example 1: 100, then you will need to have at least $ 1500 free in your trading account to complete the transaction. Now you control 100,000 pounds with only $ 1,500. Imagine that you were successful, and you decide to sell.
• You close the position at 1.5050. He earned 50 pips or about $ 500. (A pip is the minimum variation in the price of a currency)
• When you decide to close a position, the margin or capital required to open the transaction is returned to the available balance of your trading account, plus any gains or losses accrued by the transaction.
• The margin concept will be discussed in more detail in the next lesson, but we hope you now have a sense of how the leverage / margin required works.

Rollover

When you have open positions overnight, the online broker usually charges or pays a small interest to the account, depending on the leverage and position in the market.

If you do not want to win or lose any interest in your positions, just be sure to close them before the close of the current day.

Each foreign exchange transaction involves borrowing one currency to buy another. An interest must be paid on the currency that is lent, and a payment is received on the currency that was purchased.

Generally, brokers use the interest rates of the central banks of the country of each currency to determine the percentages. If a customer buys a currency whose interest rate is higher than the one it is selling, the net difference will be positive, and the customer will receive funds. The impertes to pay or to receive varies depending on the broker. For more details, it is best to check directly with your online broker.

Demo Platforms

You can open a demo account for free at most Forex brokers.

This is a fundamental tool to learn how to invest in Forex. This demo account has all the features of a real account, except that the money is virtual. Before you start investing in real money, we recommend that you familiarize yourself first with the trading platform and do test operations on a demo account. So you can learn about Forex and its tools without incurring risks.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.