As Forex traders, our ultimate goal of Forex trading is to make money from it. In order to make profits, you need to buy or sell currency pairs at the right time. However, as Forex beginners, do you know how to trade Forex? Well, don’t worry. Today I would like to help you figure out how to trade Forex and make money step by step.
How to trade Forex step No.1: Read Forex quotes
As you can usually see, currencies are always quoted in pairs, such as EUR/USD or USD/JPY. The reason they are quoted in pairs is because in every Forex transaction, it is always that one currency is sold when you buy another currency. In order to trade Forex, the first thing is you need to understand Forex quotes. Here is an example of a foreign exchange rate for the Euro versus the U.S. dollar:
The first listed currency to the left of the slash is known as the base currency (in this example, the US dollar), while the second one on the right is called the quote currency (in this example, the Euro). When buying, the Forex rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 0.7488 Euro to buy 1 US dollar. When selling, the Forex rate indicates how many units of the quote currency you get for selling one unit of the base currency. In the example, you will receive 0.7488 Euro when you sell 1 US dollar. The base currency is the “basis” for the buy or the sell. If you buy USD/EUR this simply means that you are buying the base currency and simultaneously selling the quote currency. In other word, “buy USD, sell EUR.”
How to trade Forex step No.2: Decide go long or go short
After knowing the meaning of Forex quotes, you need to know how to trade Forex next? Well, you need to decide whether to go long or go short of your currency pairs. Generally, you would buy the currency pair (go long) if you believe the base currency will appreciate relative to the quote currency, and then you would sell it back at a higher price. In contrast, you would sell the pair (go short) if you think the base currency will depreciate relative to the quote currency and then you would buy it back at a lower price.
How to trade Forex step No.3: Understand bid/ask price
If you are familiar with Forex trading, you would know all forex quotes are quoted with two prices: the bid and ask. It is more common that the bid price is lower than the ask price. The bid price is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means the bid is the best available price at which you (the trader) will sell to the market. The ask price is the price at which your broker will sell the base currency in exchange for the quote currency. This means the ask price is the best available price at which you will buy from the market. The difference between the bid and the ask price is known as the spread, which is the main source for Forex brokers to earn profits. On the USD/EUR quote above, the bid price is 0.7488 and the ask price is 0.7489. If you want to sell USD you click “Sell” and you will sell USD at 0.7488. If you want to buy USD, you click “Buy” and you will buy USD at 0.7489.
How to trade Forex step No.4: Place your order
It is simple to place an order in Forex market. If you have any experience in trading, you should be able to master it quickly. The main purpose of Forex trading is to exchange one currency for another in the expectation that the price will fluctuate, Forex traders can benefit from the changes when they exit the trade.
For example:
Trader’s Action
|
USD
|
EUR
|
You purchase 10,000 USD at the USD/EUR Forex rate of 0.7488
|
+10,000
|
-7488
|
Three weeks later, you exchange your 10,000 USD back to
Euro at the Forex rate of 0.7988
|
-10,000
|
+7988
|
You earn a profit of $500
|
0
|
+500
|
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