Making Money At Forex Trading
In the Forex Market you will be able buy or sell currencies. The mechanics of making a foreign exchange is simple it is the same with other markets. Your main objective in Forex trading is to exchange one currency to another currency from different countries. The prices vary differently, and as the trader you are expecting to increase of the value you are exchanging.
An example of making money from Foreign Exchange
A trader bought 10,000 euros at an exchange rate of 1.18, EUR/USD. EUR: USD: +10,000 -11,800
After a week the trader again exchange his or her 10,000 euros back to US dollars with an exchange rate of 1.2500 EUR: USD: -10,000 +12,500
The trader earned $700 profit.
Formula: EUR $10,000 x 1.18 = US $11,800 EUR $10,000 x 1.25 = US $12,500 Profit = $700
The ratio of the currency valued against another currency is how the exchange rate is determined. In the example of USD/CHF this means that the amount of U.S. Dollars can be bought one Swiss franc.
Reading a Forex Quote:
Currencies are always quoted in pairs like USD/GBP or JPY/USD. The reason to have quoted pairs is that there is a transaction simultaneously in buying and selling one currency to another.
In buying of currency, the exchange rate will tell the traders how much they have to pay of the currency quote in unit to purchase from the base currency.
In selling of currency, the exchange rate will tell the traders how much of the currency quote in units that they have to sell from the base currency.
The "base currency" is the foundation to determine the buying and the selling value.
The "long" and "short"
Remember: Long means buy If a trader wants to purchase, this actually means that you are buying the base currency and selling the quote currency. In a traders mouth they are saying "taking long position" or "going long".
Remember: Short means sell
If a trader wants to sell, this means that you are selling the base currency and then buying the quote currency. In traders mouth they are saying "taking a short position" or "going short".
The "Bid" and "Ask" Spread
All quote currencies are in two means price, the "bid" and the "ask". The lower of the two is the bid price as compared to the ask price, which is higher.
"Bid" is the price that the dealer is willing to purchase the base currency at the exchange market for the quote of the currency. This time the trader will sell.
"Ask" is the price that the dealer will sell willingly the base currency to exchange for the quote currency. This time the trader will buy.
"Spread" is the difference between the bid and the ask price.