The Forex market is like any other market, but people here trade currencies instead of goods and services.
What is a Forex Broker?
Anyone can trade forex, but this is only available through private parties called brokers. In practice, the broker is your “door” to Forex, which enables you to enter the market.
What is a currency pair?
Currencies are traded in the market in pairs – for example, the euro and the US dollar. Do you want to buy the euro against the US dollar? Open the EUR / USD position and click on “Buy”. Do you want to buy the US dollar against the euro? Do the same and select “Sell”. It’s simple – just remember that what you are doing applies to the first currency of the pair.
How to earn money in Forex?
A person buys the currency pair at a lower price and sells it at a higher price, so the income is the difference between the buy and sell prices. The broker gets a small commission from your transactions, called: the spread.
Suppose you have $ 100 in your trading account, and you want to trade the EUR / USD pair. The exchange rate for the pair: 1.25, which means that you get 1.25 US dollars for every 1 euro. The exchange rate is the same as the price tag you find in all stores – the only difference is that the price in forex changes all the time.
Then, you make the prediction. For example, you believe that the euro will rise against the US dollar.
So you buy 80 euros with the $ 100 you own, and wait for the exchange rate to change.
Suppose it rose from 1.25 to 1.35 – this means that you are in a profitable position, and therefore you can close the position at this point. Now you can transfer the 80 euros that you have for 108 US dollars, and thus get a profit of 8 $.
If you think that this amount is not worth the effort, here is the great news: Your broker can help you make a lot of money through a special tool called leverage. Leverage is an amount that you borrow from your broker to double your deposit.
For example, if you used the leverage of 1: 3000 with FBS – from a similar deal to the one mentioned in our previous example, you will get $ 2400 from only one trade. That is, you invest $ 100 and trade $ 300,000! Not bad, right?
Just remember: bigger profits involve more risk, so risk management is an important component of trading!
How do you make predictions?
Final question: How do traders determine which currency pairs to trade, and when to buy or sell them?
The exchange rate depends on supply and demand, which change according to the country’s economic situation (gross domestic product, level of inflation, the current situation of the labor market, etc.). Therefore, the political, economic and social factors that affect the local economy also affect exchange rates. Knowing how these factors affect profitability is key to Forex trading.
There are two main tools that help define the best buying and selling moments.
It is about following economic news in different countries.
For example: if the unemployment rate in Canada falls, then this means that the Canadian dollar will rise. Sell USD / CAD, and wait!
It happened like this on January 5, 2018 – the unemployment rate in Canada fell, and the US dollar fell against the Canadian dollar from 1,250 to 1,236. Thus, by trading $ 100 with a leverage of 1: 3000, the trader was able to make a profit of $ 3398.
Graphic Analytics (Technical)
You can use price charts to make forecasts – the pattern helps the chart to know what to do. Let’s preview the simplest and most popular pattern – the “head and shoulders” pattern.
The pattern consists of 3 peaks, representing the ‘head’ and ‘shoulders’.
When all three tops have formed, draw the neckline across the bottoms formed by the three tops. Next, measure the distance between the top of the “head” and the neckline. It is an approximate distance the pair will go down from the neckline. The “head and shoulders” pattern is a strong selling signal.
Fortunately, you don’t need to have a financial science degree to master it! FBS has a special section on analysis and education explaining how to act when the price rises or falls, in a clear and simple way.