This post is also available in: Deutsch
The very first question you should ask yourself before entering the world of (Forex) Trading is:
Why am I interested in Forex and Trading?
Potential answers may include:
- You want to make money
- You want more time to spend with friends and family
- You want more time to focus on other business opportunities
- You want more money to invest to make more money
- You want more money to buy things you’ve always wanted
- You want more money to being able to be more generous
- You’re in for the thrill.
Introduction to Forex
Forex is an everyday occurrence everybody does.
This statement may come as a surprise but it is based on the truth that some people knowingly trade, while others do so unknowingly/unconsciously.
Forex is about different financial instruments which rise and fall in terms of their value. We call these instruments currencies. The thing with Forex is, we can choose to invest in these moves, believing a currency may rise or fall.
The more a currency moves in your favour, the more money you make.
The whole concept of trading is something most people do all the time in their life. Smart people look to buy things at a low price and sell them for a profit to others.
Let’s dive deeper into how trading Forex is like shopping.
Forex Is Like Shopping
As a consumer, when is the best time to buy something?
When things are “on Sale”, right?
When companies lower the prices of their products, it gives us an opportunity to buy what we like at a lower price.
We also know: the bigger the price drop, the better offer we are getting.
Another way we judge price drops is by looking at last years’ sales. Comparing back in time may enable us to predict a similar scenario in the future.
Now think about currencies. If we know a Sale is about to happen, we hold out from buying any currency until the sale is in full motion. Then we buy the currency at the cheapest price possible.
After you bought “for cheap” you may be wondering when you can make profit.
Imagine two days after buying a product on sale, the sale is over. People still want the product but can’t get the price you did during sale. They still want the product though.
Now is the time for you to sell them the product you bought earlier and usually you can sell it for a higher price than the previous retail price because after sales, you usually find price increases.
All of this means you bought below retail and sold it to someone over retail price. The difference between your buying price and the price you sell, is the amount of money you make.
Forex is like Selling Something
The previous example is probably fairly easy to understand but some people struggle with the second concept: As well as buying and selling things for profit, you can also sell things first and buy them back later.
Think about how we went through “Forex is like shopping at sale time”, this is the complete opposite.
Now the question you may be wondering: “how and when do I sell in Forex?”
Think about this price cycle:
- Prices rise
- Prices drop as sale comes into motion
- Prices rises after sale
- Price tails off
At point 1 and 3 are opportunities for you to sell.
When prices drop in Forex, you can buy back this product at a lower price. Like buying, the difference is the profit.
What does Forex Stand for?
Forex comes from two words – Foreign Exchange
Some well traded currency pairs are for example:
An easy way to understand this is by thinking about going on a holiday.
When people go on holiday they convert their money from one currency to another and the way you make money in Forex is by the difference in price/value of those different currencies.
If you decided that the Euro was going to increase in strength against the US Dollar you would buy Euros at a lower price and when you believe the currency has peaked, you would then sell the Euros back to US Dollars for an increased value and therefore making a profit.
There are many different markets to trade as well as currencies. There are, for example:
- Commodities and precious metals
- Cryptocurrencies, etc.
There are various markets we can trade on a daily basis. The reason we focus on Forex is because it usually is the most profitable.
Let’s look at an example of trading the Euro against the Dollar.
Let’s say the current price of conversion from Euros to Dollars is 1.3050 and you expect the Euro to gain considerable strength against the US Dollar. You would then buy at 1.3050.
If the price then moves to 1.3060, the price has moved by ten pips. And you have made ten pips profit.
For currency pairs displayed to 4 decimal places, one pip = 0.0001
Pips are how we analyse number movements. Since the movement was from 50 to 60 pips in our previous example, we speak of a 10 pips in movement.
If you then chose to sell your Euros at a higher price (after the sale), you will make 10 pips profit.
The amount of money you make from trading depends on the amount you put on each pip movement. Let’s say for example you decided to trade $10 on each pip movement, you would have just made $100.
Forex is a low cost way to gain control of much larger pieces of money, with small capital investment.
You can both buy and sell and need not invest the entire value of the asset up front (before you would need millions – now only a few hundred can make you decent money).
In some countries, you pay no capital gains tax, income tax or stamp duty (the UK for example).
Trading the Forex markets is pretty cheap as you pay nothing except a small fee called a spread or a commission. Spreads and commissions depend on the brokers you trade through.
Our website is dedicated to helping you find the best brokers and therefore best spreads, commissions, trading conditions, etc.
The great thing about Forex is that there is no “central home”. This means it is harder to manipulate the market but it does by no means mean that manipulation does not occur at all.
Cross-border regulation is non-existent but most leading countries have the necessary laws in place for protection. We also highlight these regulatory authorities and which brokers are approved by them.
There is no single exchange rate as you would know from travelling. Different people offer different prices. As this is the case, different companies (brokers) offer different prices (and spreads, commissions, etc.).
In general, most companies (brokers) are competitive and give traders the best prices available.
Exchange rates are really determined by actual events. For example, companies needing to pay employees in different countries will need to convert their money. This is an example of where prices would fluctuate.
How Forex Markets Rise and Fall
Even though it can be an advantage to stay up-to-date, read the news and be informed about the markets, you don’t need to know exactly why currencies are moving to make money.
It is not every time we take a position that we know exactly why the market has moved.
We obviously should be doing our analysis but even if prices move in our favour, we cannot say it was 100% because of our analysis.
There are many factors which can make the market move. At the end of the day, you just need to be on the right side and all the information on these pages are designed to assist you in gaining knowledge.
Many people fear losing money so they never really make money. In order to make money in Forex you need to trade, risk your capital and have positions in the market.
How to Get Started in Forex
You may be thinking now: “how do I even get started in Forex?”
First and foremost you need to want to do it. Then, as for every other skill, you need to learn the rules (learn how the game is played), practice and apply the skills you developed and continue to develop over time.
Broken down in a few bullet points, these are the steps you should take:
- Raising capital
- Partitioning capital
- Building an education
- Practicing your knowledge (for example with a Demo Account)
- Trading live (the real markets)
These are the main steps you need to take if you want to learn how to make money in Forex consistently, but you should also consider a few other aspects.
We cannot repeat often enough that you should only trade money you are willing to lose – don’t invest money you will need tomorrow, next week or month. This needs to be money you don’t need.
After trading on a Demo Account and being satisfied with your results, starting off with smaller amounts in a Live Account and trading small amounts is often the best way to progress.
Once you have gained a better understanding on “how the game works” and “what your risk tolerance is”, you can risk larger amounts. Of course, it all really depends on you as an individual, your capital and the risks you want to take.