How to Make Money Trading Forex
What is Forex Trading?
Forex, short for “foreign exchange,” is a global marketplace where individuals and institutions speculate on currency prices. Think of it as the world’s biggest financial market.
How Does It Work?
In forex trading, you’re betting on one currency’s value compared to another. For example, you might think the US dollar will become more valuable than the euro. If you’re right, you make a profit.
Trading in forex is a lot like trading stocks. If you’ve ever bought or sold stocks, you’ll find forex trading familiar. If not, don’t worry! You can learn.
Making Money in Forex
The main goal is to buy a currency and sell it at a higher price. Here’s a simple example:
- You buy 10,000 euros for $11,800.
- Two weeks later, the value of the euro rises, and you sell your euros for $12,500.
- You’ve just made a $700 profit.
Reading Forex Quotes
Currencies are always paired, like GBP/USD or USD/JPY. This pairing shows how much of one currency (the second one listed) it takes to buy the other (the first one listed).
For instance, if GBP/USD is quoted at 1.21228, it means you need $1.21228 to buy one British pound.
Base and Quote Currency
In the GBP/USD pair:
- GBP is the “base” currency. It’s our reference point and always has a value of one.
- USD is the “quote” or “counter” currency. It tells us how much of the quote currency we need to buy one of the base currency.
Long and Short
In trader lingo:
- “Going long” means buying, hoping the base currency’s value will go up.
- “Going short” means selling, hoping it will go down.
If you don’t have any open trades, you’re “flat” or “square.”
Bid, Ask, and Spread
Every currency pair has two prices:
- The “bid” is what the broker will pay to buy the currency from you.
- The “ask” is what the broker will charge you to sell the currency.
The difference between these two prices is the “spread.” For instance, if the bid is 1.34568 and the ask is 1.34588, the spread is the difference between them.
In simple terms, forex trading is about predicting currency value changes and making a profit from those predictions. Just like any other form of investment, it’s essential to do your research and understand the market before diving in.
This graphic summarizes all the key points we’ve discussed in this tutorial.