Forex: How to Make Money, Buy & Sell
Forex market is the globally run market for trading different currencies. It is open 24 hours a day and offers great liquidity making it a good opportunity for its various players, which includes banks, large financial institutions and companies to small retail investors like us.
The objective of forex traders is to make money by buying and selling these currencies which are traded in pairs, i.e. one currency is traded against another. E.g. EUR/USD, EUR/GBP, UDS/JPY, AUD/NZD,….
Is this a new concept?
No. Forex trading is not a new way of making profits. Because currencies have been traded ever since money came into existence.
The difference now is that money/currency can be traded by investors irrespective of their location. Only things required is the internet, computer, tablet or mobile phone and of course money.
With advancements in digital technologies, making money trading Forex from home either as full-time professional traders or just spending a few minutes a day locating trading opportunities and opening, monitoring and closing their positions.
A large number of online brokers have also emerged allowing traders to buy and sell the different currency pairs (and other instruments such as stocks, indices, precious metals, raw materials, etc.) through their trading platforms in exchange for the payment of a small commission, called spread, which is based on an applied differential between the purchase price and the sale price of each currency pair.
How to Start?
Remember that you cannot directly start trading Forex. You have to go through a broker and open a trading account with them and deposit money.
Demo Forex Account for Starters
Most online brokers usually offer a demo account that comes loaded with a fictitious balance for you to test, with the same conditions of a real account, but without risking your money.
Traders can use this demo account to learn and develop their own trading system. And as soon as they are ready they can open live account and deposit funds to start buying and selling the different currency pairs.
The money you earn will be added to your account balance and you will be able to withdraw it as and when needed.
What currencies you can trade?
As mentioned above, the trader buys or sells currency pairs. There are a range of currency pairs that can be traded, which according to their trading volume are often referred to as larger, smaller and exotic.
Some examples of major currency pairs are GBP/USD (British Pound vs. US Dollar), EUR/USD (Euro vs. US Dollar), USD/JPY (US Dollar vs. Japanese Yen) or USD/CHF (US Dollar vs. Swiss Franc). Major currency pairs have a higher trading volume and the spreads offered by brokers tend to be much tighter than those of smaller or exotic pairs which in turn tend to have higher volatility.
If you choose the GBP/USD pair and open a buying position, you would be buying British Pounds against the US Dollar. It doesn’t matter which currency you have deposited funds in your trading account as the platform automatically converts the deposited currency.
So how do you make money in the Forex market?
In Forex, you can make money from the price fluctuations of different currency pairs and you can do so either if the price goes up or down as you can opt for 2 different options when opening a position:
- Go long: Open a buy position, if you think the price is going to go up and then close the position with a sell order.
- Go short: Open a sell position, if you think the price is going to go down and then close the position with a buy order.
Buy cheap and sell expensive or sell expensive and buy cheap is the ultimate goal of the millions of investors.
When is the best time to buy or sell?
There are two methods to try to predict the optimal time to buy and sell in Forex: Technical Analysis and Fundamental Analysis.
- Technical Analysis:
It tries to predict the direction of the price by analyzing its evolution and using graphs with the different values it has been taking, looking for formations, signs of continuation or change of trends and can use a series of indicators based on mathematical formulas, statistics, …
Technical analysis may seem a bit complicated at first but it’s really a lot easier than you think.
If you want to make money trading you must learn technical analysis properly. If you are a serious and disciplined person you can learn in a few months.
On the Internet there is a lot of free documentation to learn technical analysis and the most important thing is practice. You can also find some paid online courses to learn forex trading. Whatever learning option you choose, remember to trade cautiously, avoid unnecessary mistakes and keep control over the greed.
- Fundamental Analysis:
It also tries to predict the direction and future price movements by analyzing the economic and political situation that may affect each of the currency pairs.
The fundamental analysis is usually used by investors who operate in Forex generally in the long term but it can also be used by traders who want to take advantage of moments of high volatility to make money. These moments of volatility usually occur after the appearance of important economic news and represent a good opportunity to make profits in a short period of time.
For example, important news about the situation in a country such as the United States can cause significant changes in the prices of currency pairs with the presence of the USD (US dollar). A good economic data of unemployment, an increase of exports, the announcement of a measure of economic stimulus of the federal reserve,… can make the USD become stronger and therefore that the investors can buy and thus increasing its value against other currencies. And opposite scenario will happen, if bad economic data appears.
So keeping a track of economy is a good option to be aware of these news, focusing especially on the most important ones. Because there are many throughout the day that will have little impact on prices.
Professional or experienced traders use Forex trading opportunities using technical analysis and fundamental analysis although most use technical analysis. It is important that you learn how to perform technical analysis correctly and that you gain practice and experience from the very first moment. Over time, technical analysis will be your greatest ally in detecting trading opportunities and making money on Forex.
Learning in any facet of life always requires discipline and effort but also represents the path to success and achieving results.
Forex trading can allow you to make a lot of money and does not require absolute dedication. You can combine your learning with your current professional activity. Trading can eventually turn into a full-time job but it is highly recommended that at least in the beginning you have another source of income and that you invest only a small amount of money that you can afford to lose.
Trading as a desperate measure to get money or wanting to go too fast will lead you to take too many risks without being prepared and will cause you to lose your money much faster than you think.
To drive a car you must first learn the basics, start step by step with caution and practice. You will make mistakes that you must learn from and sometimes you may find yourself overwhelmed or uncomfortable. There are people who become insecure or afraid of driving and give up and others with the experience that only gives the effort for a while and practice because it ends up enjoying driving and even makes it their passion.
Something similar happens in trading. You can start without the need to learn, assuming that it is going to be very simple, not make mistakes.
Forex can be a very profitable investment, provided you are ready to take risk, know how the market works, trade in a right way and are disciplined and consistent.