Foreign Exchange Investing

How to make money in forex

The objective of currency trading is to exchange one currency for another, with the expectation that the currency you are buying to increase in value relative to the currency you bought with.

How to make money in forex

Note: The exchange rate simply indicates how much of one currency you may get in exchange for another currency.

Example: Making money trading currencies:

  • You buy $10,000 at an exchange rate of USD/EUR 1.3012. This will costs you $13.012 USD (10,000 x 1.3012).

  • One week later you sell, exchange rate is now 1.3801. For this you get 13.801 USD (10,000 x 1.3801).

  • You gain USD $789 (13801-13012).

Base currency and the counter currency

Currency pairs, for example GBPUSD, consists of two currencies. There are almost always two currencies in a currency rate, and it is obvious why: The value of any currency must be compared to anything, and the currency, we compare one currency with another (Exception: currencies can also be compared to commodities such as gold).

Currency pair GBPUSD (british pounds and U.S. dollar) is the USD as the base currency, and GBP is the counter currency.

Always the former currency is the base currency. The latest currency in the currency pair is always counter currency.

If you want to buy GBPUSD, the exchange rate will tell you how much money you have to pay in the counter currency to buy one unit of the base currency.

Base currency is the currency you are buying or selling. If you buy GBPUSD this means you will "buy USD and pay with GBP". If you sell GBPUSD this means "Sell USD and get paid in GBP."

Make money in any market direction

In currency trading you can make money in both rising and falling markets. You most certainly realize now how to make money in a rising market, but how would you go about making money in falling markets?

Well, when you buy GBPUSD (when you buy USD and sell GBP), you want the base currency to rise in value so you can sell it back at a higher price. This is called "going long", or just "long".

However, you can also make money when the market falls. For example, you can sell GBPUSD (when you sell USD and buy GBP). This is called shorting (when you hold a short position). More on this later.

An exchange has two prices: Buy and Sell

Exchange comes with two prizes: buy price (ask price) and sell price (bid price). Purchase price is the price you have to pay for the base currency. Sales Price is the price you can sell the base currency.

Note the difference between the sale and purchase can be very small, ie. 0.002 dollars. This difference is known as the spread (or "spread" that some like to call it).

How to Know What You'll want to buy or sell?

There are many methods for determining what is a good idea to buy or when to sell.

These methods will come back a little later, but for now, let's assume that you use a method called fundamental analysis. This method of analysis is to study the economic conditions. For example, for currency pair GBPUSD, it is important to look at the U.S. economy versus the economy of Britain.

Example:

Let's take the currency pair GBPUSD that as enough once. If you think that the U.S. economy is going to improve markedly in terms of plenty, so you buy GBPUSD.

How do you get to the assumption that the U.S. economy (or another country's economy) will improve, we shall see more later.

If you think that the U.S. economy will weaken compared to the british economy, you should sell GBPUSD.

RISK WARNING: Your capital is at risk! Both CFD-trading and option trading involves significant risk. Read carefully all terms and conditions for any service mentioned on our site before making any investments. CFDs are leveraged product and can result in the loss of your entire deposit. CFD trading and option trading is not suitable for everyone. Make sure you fully understand the risks involved before making any trade.