Forex is the worldwide market for currency trading. It is open 24 hours a day and offers great liquidity so it becomes a good opportunity for its participants, which can be from banks, large financial institutions, and companies to small retail investors. Forex traders have the objective of making money by buying and selling these currencies that are negotiated in pairs, which means crosses of some currencies against others (EUR/USD, EUR/GBP, UDS/JPY, AUD/NZD,…).
Foreign exchange trading is not a new way to make profits that have emerged recently as currencies have been traded throughout history since the very appearance of money. What is much more recent is the facility to trade Forex from anywhere in the world via the Internet from a computer, tablet, or mobile phone and the accessibility for retail investors. Today there are many people who are making money trading Forex from home either as full-time professional traders or simply spending a few minutes a day locating trading opportunities and opening, monitoring, and closing their positions.
There are also a number of online brokers that allow traders to buy and sell different currency pairs (and other instruments such as stocks, indices, precious metals, commodities, energy, …) through their trading platforms in exchange for the payment of a small commission, called a spread, which is based on a differential applied between the bid and offer price of each currency pair.
The first thing you need to do when trading on Forex is to find a reliable broker and open a trading account.
Most online brokers usually offer a demo account that comes loaded with a fictitious balance so you can test it, with the same conditions as a real account, but without putting your money at risk. You can take advantage of this demo account to learn and develop your own trading system and as soon as you are ready you can open your real 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 whenever you want.
What currencies can I trade?
As mentioned above, the trader is responsible for buying or selling currency pairs. There are many currency pairs, which according to their trading volume are often referred to as major, minor, 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 are usually much tighter than those of smaller or exotic pairs which in turn tend to have higher volatility.
In each of the currency pairs, the first currency works as the “merchandise” to be bought or sold and the second currency works as the money. For example, if you choose the GBP/USD pair and open a buy position, you would be buying Sterling against the US Dollar. It doesn’t matter what currency you have deposited funds in your trading account, as the platform automatically transforms the amounts.
How do you make money in the Forex market?
In Forex you can make money from the price fluctuations of the different currency pairs and you can do this whether the price goes up or down as you can choose 2 different options when opening a position:
Go long: open a buy position if you think the price will go up and then close the position with a sell order.
Go short: open a sell position if you think the price will go down and then close the position with a buy order.
Buying cheap and selling expensive or selling expensive and buying cheap is the goal of millions of Forex market participants. But, the million-dollar question is:
How do you know when is the best time to buy or sell?
There are two methods for trying to predict the optimal time to buy and sell on 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, signals of continuation or change of trends, and being able to use a series of indicators based on mathematical formulas, statistics,…
The technical analysis may seem a little complicated at first but it’s really much 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 find some useful paying courses but most of them will make you lose your money without having learned practically anything.
- 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.
Fundamental analysis is often used by investors who trade Forex generally for the long term but can also be employed by traders who want to take advantage of highly volatile times to make money. These moments of volatility usually follow 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 like the United States can cause important changes in the price of currency pairs with the presence of the USD (American Dollar). A good economic data of unemployment, an increase of exports, the announcement of an economic stimulus measure from the Federal Reserve,… can make the USD stronger and therefore investors can buy it increasing its value against other currencies, as well as the opposite situation, can occur against a bad data.
Having an economic calendar at hand is a good option to be aware of this news, focusing especially on the most important as there are many throughout the day that will hardly have an impact on prices.
Professional or experienced traders can spot 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 get to practice and experience from the beginning. Over time, technical analysis will be your greatest ally in spotting trading opportunities and making money on Forex.
Learning in any facet of life always requires discipline and effort but it also represents the path to success and the achievement of results.
Forex trading can allow you to earn a lot of money and does not require absolute dedication. You can combine your learning with your current professional activity. Trading can eventually become your 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 make you lose your money much faster than you think.
To drive a car you must first learn the basics, start cautiously step by step and practice. You will make mistakes that you need to learn from and sometimes you may feel overwhelmed or uncomfortable. There are people who become insecure or afraid of driving and give up, and others with experience who only give the effort for a while and practice because they end up enjoying driving and even make it their passion. In trading, something similar happens. If you want, you think you can start without learning, if you think it’s going to be very simple if you don’t accept that you’re going to make mistakes and you’re not willing to learn from them if you risk too much,… you have all the options of losing the money you invest, thinking that trading is not for you and looking for excuses.
Forex can be a very profitable investment, after some time of learning and practice, if you act in the right way and if you manage to be disciplined and consistent.