Want to make money with Forex? This is the guide that you need to read.
Investors interested in Forex can trade almost any currency. If you want to make money with Forex, you need to realize that you are taking a speculative risk. In other words, you are betting that the value of a particular currency will increase relative to another currency.
The return that you expect from trading a currency pair is the same as the money market and less than stocks or bonds. However, you can increase the returns and risk by making use of leverage.
In this guide, we will consider the different ways through which you can make money with Forex.
What is Forex?
Forex trading (also referred to as foreign exchange trading) is not as difficult as many people think. It refers to the action where people buy or sell currencies; an activity that we’ve done at least once in our lives.
Irrespective of the activities you got involved in; whether going on a vacation, depositing money in the bank, or buying items from the grocery shop, you have participated in the Forex market. You are buying and selling currencies directly or indirectly.
The main aim of trading Forex is to make money.
Here’s how it works…
The idea behind Forex trading is to sell a currency at a higher price than the price you bought it. The issue with currencies that makes them trickier is that currencies are quoted in pairs.
In the next section, we will take a look at some of the ways that you can use to make money with Forex.
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How To Make Money Trading Forex
1. Learn the basics of Forex
You can learn the basics of Forex trading by acquiring knowledge of the terminologies in Forex to adapt to the geopolitical and economic factors that affect the currencies you trade. You need to be well informed in the following terms if you want to make money with Forex:
Currency Pairs
In Forex, currencies are traded in pairs. For instance, USD/JPY, GBP/USD, etc. The three types of currency pairs include:
- Major pairs: They are currency pairs that involve USD (US Dollar). For example USD/EUR, USD/JPY, etc.
- Minor pairs: They are currency pairs that do not involve USD. These pairs peg major currencies against each other. For example EUR/GBP, JPY/EUR, etc.
- Exotic pairs: They are currency pairs that include one major and one minor currency. An example includes USD/HKD (US Dollar/Hong Kong Dollar).
Price in point (PIP)
This refers to the difference in the valuations of a currency pair. For example, if the GBP/USD rate is 0.7001 and was 0.7004 yesterday, the PIP is .003.
Base currency and quote currency
The currency on the left side of the pair is the base currency while the currency on the right side is the quote currency (or counter). For instance, in the pair EUR/USD, EUR is the base currency while USD is the quote currency.
The base currency acts as the reference element in the pair. It has a value of 1 and shows the amount of quote currency that is needed to buy a unit of the base currency.
For instance, if we are buying the example I gave earlier (i.e. EUR/USD), it implies that we are buying EUR and selling USD.
In other words, the trader would buy a pair if he or she believes that the base currency will increase in value relative to the quote currency. On the other hand, the trader would sell a pair if he or she believes that the base currency is likely to reduce in value relative to the quote currency.
Bid and ask price
The Bid price refers to the price for buying the base currency while the Ask price is the price for selling the base currency.
For instance, if GBP/USD is quoted as 0.7580/0.7540, then the Bid price to buy 1 GBP would be USD 0.7540 while the Ask price to sell 1 GBP would be USD 0.7580.
Spread
Spread refers to the difference between the Bid Price and Ask Price.
Lots
Forex trading takes place in lots. There are 3 different types of lots based on the units. They include Micro (1,000 units), Mini (10,000 units), and Standard (100,000 units).
Apart from these terms, it is important to research and study the Forex markets; there are works in progress. Be ready to adapt to the ever-evolving market scenarios and events around the world.
A systematic way to make money with Forex involves developing a robust trading plan to analyze and examine the different investment options based on how much risk you’re willing to take, in line with your investment objectives.
2. Use the right Forex broker
Ensure that the broker you decide to use adheres to the existing regulations that preserve the integrity of the Forex markets.
Investors usually fall prey to fraudulent traders that claim to be pros in Forex trading. There are many cases where traders shut down their operations once the cost of transaction increases and investors start losing money.
So, be mindful of fraudsters that use manipulative and abusive methods to lure unsuspecting traders.
If you find a broker or trading platform, ensure you check their reviews online to see the experience people had with them. You should also ensure that the brokerage offers the currency pairs you intend to trade and that they offer a competitive rate for the commission that you would pay per trade.
3. Start practicing with a demo account
Most trading platforms offer a practice platform that traders can use to practice trading without spending their money. It is a good idea to make good use of such opportunities so that you don’t waste your money while learning.
While practicing, you will learn from your mistakes so that you do not repeat them when trading with real money.
4. Use small investments
When you start trading with your hard-earned money, start using a small amount of money. Using a huge amount during your first trade might be risky because you will be forced to take impulsive decisions that can make you lose money.
5. Maintain a trading record
It is important to maintain a journal where you will record your trades (both the successful and unsuccessful ones) for future purposes. This helps you to remember your past mistakes and thus avoid repeating them.
6. Use a broker’s leverage
You must have noticed that most brokers offer some levels of leverage for your trades. A broker can offer you leverages of 1:30, 1:50, 1:100, and lots more depending on some specific factors.
Although leverage is not a way to make money, it goes a long way in increasing your profits. It can also increase your losses if you don’t use it wisely.
As a result of leverage, traders can make a good profit even if they have only $100 for trading. Let’s assume your broker does not offer leverage and you have just $100 to trade. If the price moves 3% in your favor, it means you will make a $3 profit.
However, if you use a broker that gives you 1:50 leverage, you will open the trade with $5,000 and a 3% move in your predicted direction will earn you a profit of $150.
However, remember that the same way leverage can increase your profits is the same as it can make you lose your money (even more than what you deposited).
7. Trade currency pairs
Trading usually involves buying something at a low price and selling it at a higher price. The difference between the buy price and the sell price is the profit. When we apply this concept to trading currency pairs, we can say that we take a long position.
We also have what we call a ‘short sale’ or when we take a short position. This is a situation whereby we sell something at a high price and buy it later at a lower price. In this case, the profit would be the difference between the sell price and the buy price.
Note that when trading currencies, you can come up with many strategies which could make you profit. One way that you can use to trade currency pairs is trend trading (the process of directly trading currency pairs by opening positions in the same direction as the trend). This means that you will buy the pair in an uptrend and sell it in a downtrend.
8. Trade Forex binary options
Binary options are another means through which you can make money with Forex. They became popular among traders due to their simplicity and the chance of making profits by about 70%; this is why they are referred to as fixed-return profits.
When trading binary options, you are speculating on the direction that the price will move irrespective of the size of the movement when there is a high/low formation.
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FAQs
What is a currency pair?
Currencies on the Forex market are traded in pairs. For instance, the pound and US dollar (GBP/USD). If you want to buy Pound for dollars, simply open the GPB/USD trade and press ‘Buy.’
If you want to buy US Dollars, open the GBP/USD trade and press ‘Sell.’ It’s a simple process. Always remember that the action you take refers to the first currency in the pair.
Which currencies can you pair up?
You will have an option that you can use to sign up for a Forex Broker using any currency of your choice. It is important to note that you should select the base currency that you find convenient and that will be your home currency.
Once you have deposited into your trading account, you can pick any two currencies that you want to put together. You don’t need to use one of the two currencies as your home currency.
So for instance, if you are using a US Dollar trading account, you can pair up any two major currencies like UK Pounds and Euros. This implies that there is no restriction to the number of currency pairs that you can select (unlike what was experienced in the early days of Forex trading).
Is Forex a good way to make money?
Yes, Forex is a good way to make money depending on who you are. Forex trading can make you money if you are a hedge fund with huge capital.
For average retail trades, Forex trading can be a route to huge losses and potential bankruptcy, rather than being an easy route to riches.
Can you trade Forex with $10?
Yes, it is possible to start trading Forex with $10 or even less. Forex brokers have the minimum deposit amounts to open a trading account with them. Some brokers require only $5 or $10 to open a trading account.
Why do Forex traders fail?
Most Forex traders fail because the amount of capital they use is too small compared to the size of trades they open. This is usually due to the greed of making huge amounts of money with just a small amount of capital; an attitude that is found among most Forex traders (especially newbies).
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Conclusion
That brings us to the end of this guide on how you can make money with Forex.
Remember that Forex trading is risky. This means that you need to prepare yourself for the risks ahead before you start trading. You must understand how currency pairs work as well as the factors that influence their values.
Also, it would be helpful if you familiarize yourself with the technical analysis indicators and how you can use them for Forex trading. You should also have a good money management strategy in place so that you don’t risk all your hard-earned money at once.
Thanks for reading.
