How to make money on Forex?

How to make money on Forex?

On the Forex, the principle is simple, you buy or sell a currency hoping that the price will move in the right direction. If you buy EURO, you hope the euro appreciates. Thus, you make a profit, since you sold your euros more expensive than the price at which you bought them. The principle is the same as in the equity market. There is one important difference, however. On the Forex, one currency is quoted against another currency. We are talking about the exchange rate. It indicates the necessary amount of a certain currency to buy a unit of another currency. It is the evolution of this report that will allow you to make a more or less value. So for EUR / USD, if the exchange rate is 1.20, it means that with 1 euro, we get 1.20 dollars. Now take the example of a trade on EUR / USD by breaking down the operations: operations EUR USD Purchase of 1000 EUR at the exchange rate of 1.20 1000 -1200 (1000 * 1.20) 1000 EUR at exchange rate of 1.30, 1 month later -1000 +1300 (1000 * 1.30) Result 0 +100 USD By buying 1000 EUR and reselling 1 month later, you realized a capital gain of 100 dollars. Indeed, in one month, the EUR has appreciated so you can get more dollars with the same amount of EUR.

Read a quotation

As you have seen before, currencies are always quoted against another currency. This is called a currency pair (EUR / USD, USD / CHF ....). The two currencies are then linked and carrying out an operation on one currency amounts to doing the opposite operation on the other currency. Buying EUR is actually selling USD. Take the example above (a purchase of 1000 EUR at the exchange rate of 1.20). When you do this, you have to pay $ 1.20 for 1 euro. Your account will be charged 1200 USD to get 1000 EUR. If you want to sell EUR, then the opposite is the case. You will have to pay 1000 EUR to get 1200 USD.  As you can see, a quote is presented on Forex  : EUR / USD.  The most left-most currency (here the EUR), is called the basic or domestic currency. It will serve as a basis whether for a purchase or a sale. The USD is the currency or foreign currency. So, you just have to say I buy EUR / USD. This means that you want to buy EUR. There are however two types of quotations , direct and indirect. In a direct listing system, which is the case for most countries, the base currency is the domestic currency. This is the case for the EUR. In indirect quotation, like the United States, the base currency is the foreign currency. This is why the EUR / USD will always appear this way, even if you are in the United States.

spread

All Forex quotes are broken down as follows: An offer (bid): price at which you can sell A request (ask): price at which you can buy Prices vary continuously on the Forex but in any case, the supply is always lower than the price request. The difference between the two prices is what is called the spread. Most of the time, market makers provide supply and demand on the different pairs.  The offer therefore corresponds to the price at which the market maker is ready to buy the base currency in exchange for the listed currency. For you, this is the price at which you can sell the base currency.  The demand, therefore, corresponds to the price at which the market maker is ready to sell the base currency in exchange for the quoted currency. For you, this is the price at which you can buy the base currency. Here is the example of a quote such that you can see them: EUR / USD Offer (Bid) Request (Ask) 1.4058 1.4060 Purchase Sale Here, the offer is 1.4058, which is the price at which you can sell EUR. The request is 1.4060, this is the price at which you can buy EUR. On trading platforms , simply click on Buy to buy EUR or Sell to sell EUR (base currency).

Long / Short

Now that quotations have no more secrets for you, here are two words that you will hear regularly if you trade Forex.  Taking a long position or being long, means that one has bought. In the case of EUR / USD, being long on this pair means that you have bought EUR / USD (bought the base currency EUR). Taking a short position or being short, means that one has sold. In the case of EUR / USD, being short on this pair means that you have sold EUR / USD (sold base currency EUR)

Practical case

A little example now ...  You think the US economy will collapse in the next few months. What are you doing ??  You buy or sell EUR / USD ????  If you answered "purchase", you have everything good !!! Indeed, if the US economy goes into recession, the USD will depreciate against the EUR. The EUR / USD exchange rate will therefore go up. The EUR will gain value against the USD and a EUR will be worth a larger amount of USD.