In the Forex market, placing a trade is very simple: the transaction mechanism is similar to those of the stock market. Even if you don’t have trading experience, you should be able to figure it out pretty quickly. Here we give you an overview and examples of the trading process and tips on how profit can be made by trading foreign currencies.
Profit while trading Forex – basics
Your aim at Forex trading is to make a profit by exchanging one currency for another, assuming the price will change so that the currency purchased will rise against the currency you have sold.
Let’s take, for example, the currency pair GBP/USD at the rate of 1. 51258. The currency left of the “slash” (“/”) is called the “base currency”, while the second to the right is the “quote currency.”
When buying, the exchange rate indicates the amount to be paid in quote units to purchase one base currency unit. In our example above, you will need to pay US $ 1.51258 to buy 1 British Pound.
You will buy the pair if you think the base currency will gain in value against the quote currency. Also, you sell the pair if you believe the base currency will depreciate (lose value) against the quote currency.
To make sure of your choice of currency pair, research the market trends and use fundamental analysis.
Fundamental analysis to help to trade profitably in Forex
One of the most successful traders of all time Bill Lipschutz says the focus point of all investors while trading should be fundamental analysis. Suppose you’ve skipped economics, no worries! With fundamental analysis, you can research the elements that make it possible to understand some of the factors affecting a currency’s price. This analysis can help you better understand the true value of a currency.
Let’s suppose that you choose a USD JPY pair. If you are sure the Japanese government will continue to weaken its currency to facilitate exports, you execute a buy order on USD / JPY. In doing so, you buy US dollars with the expectation that they will strengthen against the Japanese yen.
If you think Japanese investors are pulling money out of the US financial markets and converting their currencies back to yen to hit the US dollar, you execute a sell order on USD / JPY. In doing so, you are selling US dollars with the expectation that they will weaken against the Japanese yen.
Long and short trading
First of all, make a trading decision depending on whether you want to sell or buy.
If you want to buy (which means buying the base currency and selling the quote currency), the base currency needs to increase in price so that you can sell it back at a higher price. In trading terms, this is called “long term” or taking a “long position”.
To sell, the base currency must depreciate to be able to buy it back at a lower price. It’s called “short term” or taking a “short position”.
All Forex quotes are represented as follows: supply (“bid”) and demand (“ask”). Most often, the bid price is lower than that of the ask.
The bid represents the price at which your broker can buy the base currency in exchange for the quote currency. It means that the bid represents the best available price at which you, the trader, will sell in the market.
The ask represents the price at which your broker is willing to sell the base currency in exchange for the quoted currency, meaning that this “ask” price is the best available price that you will buy in the market. “Ask” does mean “offer price.”
Let’s suppose you have on a trading screen the following situation: EUR / USD sell at 1.34568, buy at 1.34588
On the EUR / USD quote, the bid price is 1.34568, and the asking price is 1.34588. See how easy this brokerage system makes trading. If you are about to sell EUR, click “Sell.” You will sell EUR for 1.34568. In case you want to buy EUR, click “Buy,” and you will buy EUR for 1.34588.
