How do Forex traders make money?

After seeing advertisements all over the place for Forex trading, you decide to try your hand at it. Before you start investing your money in trading money, there are some basic Forex trading strategies you should understand and some pitfalls you should avoid.

Laying Out The Basics

There are plenty of terms in Forex trading that you will have to get familiar with if you want to make money. A good Forex trading course will walk you through these terms and show you how they are used in actual trades. You can utilize Forex trading courses online to help you understand how trades take place.

Base And Quote Currency

Each Forex trade is made up of two currencies; a base currency and a quote currency. You spend base currency to purchase quote currency. An example of a Forex pair would be EUR/USD. In this pair, you are using euros to buy U.S. dollars.

Base and Quote Currency

Exchange Rate

The exchange rate is how much quote currency you can buy for one base currency. Using our EUR/USD example, let's say that the exchange rate is listed like this:

EUR/USD=1.2344

This exchange rate means that one euro would buy you 1.2344 U.S. dollars. Once you use euros to purchase dollars, you are tying your dollar rate into its performance against the euro. So it is important to keep an eye on the exchange rates and understand how they change when you are getting involved in Forex trading.

The Long And Short Of It

In Forex trading, you do not discuss buying and selling. Instead, you  substitute the word "long" for buying and the word "short" for selling. In a typical Forex trade, you go short on the base currency to go long on the quote currency.

Long and Short - What does it mean?

The Spread

The spread is the difference between what you are willing to buy for and what your broker is willing to sell for. The difference between the bid and asking price is referred to as the spread and it constitutes your broker's commission. While the spread does not have a huge effect on how you make money in Forex, it does take a little piece of your transaction for the broker.

Research Your Buy

How is the euro performing against the U.S. dollar? In Forex trading, the U.S. dollar is the standard by which most currencies are measured and your ability to make or lose money depends on how well you predict the performance of the dollar against various currencies.

Staying with the example above, you will make money if the euro depreciates in value, or the dollar appreciates. A big part of a quality Forex education is understanding how the various global factors affect a trade. For example, if the United States is experiencing a recession while the European Union is remaining stable, then the euro will appreciate in reference to the dollar and your EUR/USD pair is not a good investment.

Before you buy any Forex pair, it is important to understand how political, economic and cultural events can affect the value of currency. When you are putting together your Forex trading strategies, an understanding of how the world works should be a big part of those strategies. Your Forex trading course may not give you insight into researching the cultural issues that affect currency rates, but it is definitely a big part of how a trader makes money in the Forex markets.

Pip Means Profits

In the Forex world, the pip is king. The pip is the smallest incremental amount of value that a currency can change in relation to another currency. In most cases, a  pip is measured at .0001 and Forex traders watch pips like hawks.

Forex - 1 Pip illustrated

In the trade we have been discussing, let's say that the dollar moves to 1.2354 against the Euro. That is a movement of 10 pips and represents a profit for the trader. When you are trading Forex, the pip is your profit. You would take the amount of pips that your account moved and then multiply that by your exchange rate to determine the new value of your Forex account. The amount that your account has increased is your profit.

Take Your Time And Learn As Much As You Can

Trading on the Forex markets is nothing like the stock markets. The Forex markets are unregulated and fortunes can be made or lost in the blink of an eye. If you want to make a measurable profit in Forex trading, then it helps to get started with a large buy-in on your first account.

Choosing Your Broker

While the Forex markets are not regulated, there are some associations that have been created to help monitor Forex brokers. Some of the more popular Forex trading associations are:

A Forex broker does not need to belong to one of these organizations in order to do business in the Forex world, but you can use these associations as your guideline on choosing a broker. If a broker answers to a governing body, then that is probably the broker you want to choose.

It Takes Time

The bottom line with Forex trading is that making a profit takes time. You need to understand how to read the trade information and then you need to develop a way to decide which currencies will perform strong against others. Ease yourself into Forex trading and be sure to use a good Forex trading course to help guide your way to profits on the open currency exchange.

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