WHAT IS FOREX?
Forex market is just like any other market where instead of foods and goods people trade currencies.
WHAT IS FOREX BROKER?
Anyone can trade on Forex, but it is only accessible through mediators called brokers. Basically, broker is your “hands” on Forex which provides you with the access to the market.
WHAT IS A CURRENCY PAIR?
Currencies on the market are traded in pairs – for example, the euro and the U.S. dollar (EUR/USD). Want to buy Euro for dollars? Open the EUR/USD trade and press “Buy”. Want to buy dollars for Euro? Do the same and choose “Sell”. It’s simple, just remember that your action always refers to the first currency of the pair.
HOW TO MAKE MONEY ON FOREX?
People would buy a currency pair at a lower price and sell it at a higher price, and their income is the difference between the Buy and the Sell price. Broker gets a tiny commission from your trades called Spread.
Let’s assume that you have $100 on your trading account and want to trade EUR/USD. Its exchange rate is 1.25, which means that for 1 euro you get 1.25 US dollars. Exchange rate is like a price tag at the grocery store – the only difference is that the price tags on Forex are changing all the time.
Then, you make a forecast – for example, you believe that Euro will rise versus the US Dollar.
Next, you buy 80 euros for your $100 and wait for the exchange rate to change.
Let’s imagine it rose from 1.25 to 1.35 – it is a profitable situation for you, so you can close the trade at this point. Now, you can exchange your 80 euros back to 108 dollars, and get your profit of $8.
If you think this amount of money isn’t worth bothering, there’s great news: your broker can help you make much more money with a special tool called leverage. Leverage is funds you borrow from your broker to multiply your deposit.
For example, if you used the leverage of 1:3000 at FBS for a similar trade from the previous example, you would get $2400 with just one trade. So, you invest $100 and trade $300 000! Not bad, right?
Just remember: higher profit involves higher risk, so risk management is an important part of trading!
HOW TO MAKE FORECASTS?
The last question is: how do traders know what currency pairs to trade and when to buy or sell them?
Currency rate depends on its supply and demand, which may change depending on the economic situation of the country (GDP, inflation, the labor market situation, etc.). This is why political, economic and social phenomena that influence local economy also influence currency rates. Learning HOW these factors influence profitability is the key to Forex trading.
There are 2 major tools that indicate the best moment to buy or sell.
It is all about following economic news in different countries.
For example: you see that Canadian unemployment rate declined, which means that the CAD will rise. Sell USD/CAD and just wait!
A thing like that happened on January 5th, 2018 – Canadian unemployment rate fell, and USD fell to CAD from 1.250 to 1.236. Trading $100 with 1:3000 leverage, a trader could have made a profit of $3398.
You can use currency rate charts to make forecasts – the pattern on the graph can tell you what to do. Let’s review the simplest and most popular “Head and Shoulders” pattern.
It consists of three peaks that make a “head” and two “shoulders”.
When all three peaks are formed, draw a neckline through the lows that were formed by all three peaks. After that, measure a distance from the “head” peak to the neckline. It is an approximate distance that the pair will go down from the neckline. The “Head and Shoulders” pattern is a strong signal to sell.
Luckily, you don’t need to have a degree in finance to master it! FBS broker has an exceptional section of educational and analytical materials explaining how to act when prices go up or down in simple terms.
Find more tutorials and classes on our website!