The forex trading market is a global financial market that trades in international currencies. Investors buy and sell the currency in the hope that the price of the currency held will increase in the near future allowing them to make money in Forex Trading. It is also referred to as FX trading or Currency trading.
Cross border investors and speculators are involved in the forex trade, where transactions occur through electronic networks. Investors of the forex market can trade twenty- four hours and five days a week.
Thus, traders have the opportunity to trade in different time zones through the forex market.
The trading of currencies is a profitable trade, where investments are made to earn high profits. The market is highly volatile, making it difficult to trade without an understanding of forex trade. Traders can benefit from the forex trade with double their investments. The article discusses all precautions and trade ideas an investor requires to make money in forex trading.
How does forex trading work?
We know what forex trading is; the next thing that crosses my mind is how to make money in forex trading works?
Forex market buys and sells currencies for the trade, and the currencies are exchanged to change the currency’s value. Specifically, the currency purchased by an investor should increase than the one sold.
The process of forex trade is simple to understand. Novice traders of the forex market can easily appreciate the trade and learn to trade with currencies gradually. The basics of trade are significant for becoming a pro, and if that is clear, traders can make huge profits in this trade.
To grab it better, here’s an example, Jancy trades in EUR/USD. She purchases 8000 euros at EUR/USD exchange rate of 9.502, and USD stands at 9502.16. After a week, Jancy exchanges the euros back into US dollars at the exchange rate of 9.802. When we multiply the EUR 8000 by 9.50, we get the US $76000, and when we multiply EUR 8000 by 9.80, we get the US $78,400.
The ratio of the two currencies that are valued against each other is called the exchange rate.
Jancy earns a profit of US $2400. However, there could be high profits as well, depending upon the financial market. Before investing in the forex trade, traders have to keep the market’s currency price and economic conditions in mind.
As I said, the trade is straightforward, but traders have to be alert due to the uncertainty. Losses may also be faced if not taken care of.
Forex market trading involves forex quotes that are quoted in currency pairs in the trading market. The currencies are quoted in pairs due to the trading taking place in pairs, where one currency is purchased and another sold. Thus, the buying and selling of currencies take place simultaneously. The most traded currency pairs are USD/EUR, GBP/USD and USD/JPY etc.
To better trade and know forex quotes, the concept of base and quote currency is important to be understood. Traders open a position in the forex market to trade in various currency pairs. Exchanging one currency for another, where the currencies are quoted in relation to many other forex market currencies.
The base currency is the left-hand side currency mentioned in the currency pairs. These are before the / sign in reference to which the other currency worth is decided for the trade. Thus, base currency always has the value of one. On the other hand, the right-hand side currency after the / sign is the quote or counter currency.
The investors of the forex market trade in these currency pairs. The currencies are purchased; based on the exchange rates, the traders decide the units of the quoted currency to buy the one unit of the base currency.
Similarly, when selling the currency exchange rate tells about the unit of quote currency that traders will get for selling the one unit of the base currency.
The forex market uses a standardised manner to list the pair of currencies for easy trading of the investors. Traders can choose the currency pairs as per their investment plans. The slash signs and difference of base and quote currencies are designed for traders. So, traders can decide easily and differentiate between the currencies.
Forex Market Positions
Forex market traders can hold on for a long period of time and could even choose to go short. To decide this, traders have first to determine whether they want to purchase or sell the currencies. In buying the currency pairs, traders buy the base currency and sell the quote currency.
Traders wish to have a high increase in the base currency for further sale in the forex market. The buying of base currency to sell it at a high price is referred to as going long or long position in the market.
In contrast, the sale of the base currency and purchase of the quote currency. Traders want the base currency price to fall in value so that they can purchase it back at a lower price. This is going short or having a short position.
When a trader has no open position in the market, traders are said to be in a flat position/ square position.
Forex Market Terms
The forex market has some vital terms that are used in market trade. Investors should be aware of their use and how they help in the forex trade. Below discussed are the terms, Bid, Ask and Spreads. The forex market quotes are quoted in the bid and ask prices, where the bid is lower than the ask price.
A bid is the best price available of the currency the traders can sell in the forex market. It is the price that the broker is ready to purchase the base currency for the quote currency. The brokers buy at the bid price.
The ask price is the opposite of the bid price, where the broker sells the base currency in exchange for the quote currency. Hence, the best available price for which traders can purchase the currency. Also referred to as offer price, brokers sell at the ask price.
Spreads is the difference between the bid and ask price. The spreads may also refer to the trading positions that is the gap between the short and long trading positions.
How to make money in forex trading?
Forex markets are the most liquid and uncertain markets of the trade. They are easily accessible with 24 hours availability, low costs, leverage facilities and easy trade. Still, investors of the forex market face losses due to fewer skills and knowledge of the forex market.
Making money by trading forex, investors have to take care of certain points. This paragraph detailed the key areas that would help traders know how they can make money in forex trading. Let’s quickly drive in.
Basic Terminologies and Features
Learning the basics of forex trade is the first step to make money in forex trading. Traders have to be well aware of the geopolitical factors, economic conditions and other factors that affect the trading currencies. The essential terminologies and features of the trade are:
- Currencies are always traded in pairs.
- The major traded currencies of the world are USD/EUR, USD/GBP, JPY/INR etc.
- Exotic pairs of the trade are USD/HKD, AUD/NOK etc. These are the pairs of one strong currency and one weak currency.
- Point in Price (PIP) is the gap in the valuation of the currency pairs. It is part of the spread.
- Base currency and Quote currency
- Bid and Ask price
- Lots: The trading of currencies takes place in lots. Three types of lot sizes are available; Micro, Mini and Standard.
- Regular study and research of the forex market changes
Brokers to Trade
After learning about the market, traders have to go for a broker that will best understand their needs and provide services accordingly. The broker should be regulated and authorised to trade in the forex market. The reputation of the broker is as well important. So, before deciding on the brokers, traders must analyse few points for better trade experience:
- Beware of fraudsters
- Check online reviews of the brokerage firm
- What trading tools are available
- Trading platform
- Currency pairs should be available for trade that investors want to trade with
- Commission and fees
- Spreads and leverage
- Customer support
- Types of accounts and features
- Pros and Cons
- Trading instruments
- Educational and research stuff
Demo or Practice Account
Beginners of the trade or professionals both can go for a demo account before live trading. The facility provided by brokers helps to trade live with virtual money; thus, traders can plan, analyse and formulate strategies. A helpful practice account for novice traders, they can practice trading and before going for live trade can understand and know the market.
The technique saves traders from unnecessary losses. Trying hands on the trading platforms, accounts and other services without losing the hard-earned money. Moreover, traders learn from their mistakes and won’t repeat them while trading live.
Traders should always begin with small investments so that they do not face huge losses. A small profit is ten times the loss. Investors of the forex market go with this wise idea of small investment, and only that much should be invested that traders can handle. Emotional decisions in forex trade could be dangerous. In addition, traders can gradually increase their investments as per the trade experience—a beneficial idea for forex traders to make money in forex trading.
Traders of the forex market should also maintain a journal that records all the profits and losses. This aids traders in future, so they can look back at a situation and how they managed it. For example, if they faced loss, they could try other strategies, and if it was profitable, they could go with the same strategy. Thus, learning from mistakes and not repeating them.
Moreover, more ideas could be generated from record keeping. Thus, traders can handle situations and learn at the same time.
Strategies are an essential part of any trade. Therefore using them while trading in the forex market would be beneficial. Traders should choose a trading strategy that goes with their financial goals. There are several trading strategies that a trader can use. Some of them are:
- Price action trading
- Range trading strategy
- Trend trading strategy
- Position trading strategy
- Day trading strategy
- Scalping strategy
- Swing trading strategy
- Carry trade strategy
How to make money in forex trading without literally trading?
The forex market is a complicated trade if not understood adequately. For the beginners of the trade, they have many terms to be familiar with, and it may take time. But what if we have a shortcut to this. Beginners of the forex trade can enjoy profits by not actually trading. Traders can do this by following a technique called forex copy trading.
Forex copy trading allows traders to replicate the trading pattern of other forex traders. A trend that has been followed since 2000 and has worked effectively for novice traders. It has been referred to with other names like social trading and mirror trading—a simple method to trade with less skills and more brains.
Traders should follow these points to make money in forex trading:
- Choose a good and skilled trader
- Take proper precautions
- Analyse the trader and market
With the trade, investors also have benefits like:
- Gaining trading skills from professional traders
- Transparency of the trade
- Source of passive income
- Requires less knowledge
Some of the best forex trading brokers that we would like to recommend are:
Traders of the forex market have lots of opportunities to make money in forex trading. The forex market is a huge market traded globally; traders can enjoy good profits with adequate knowledge and skills. Although the forex market is quite volatile, investors still make money in forex trading. In the article, we have discussed all the factors that relate to and impact the forex trade.
How the forex market works, the basic terminologies, what practices could be followed for good returns, and the forex market. We have covered every area of the trade. We hope that this article would be useful for beginners of the forex trade and the professionals. Keep trading.