When looking at getting involved with any form of trading, the main thing that you focus on is your ability to make a profit. After all, why else would you be doing all of this work with trying to understand how the entire process works?
Forex is no different from any other type of trading. You want to buy at one price and sell at a higher price. It really is as simple as that.
Of course, the problem is that the idea of buying and selling is this type of trading in its most basic format. There is a whole lot more to the entire idea than just that.
Instead, what you have with Forex are a number of different trading options that may make you a greater profit but come with a higher risk attached. If you are just starting out with the whole Forex trading thing, then tackling these types of trades with a higher risk of losing your cash is not exactly the way to go.
However, after you have managed to get more experience, then the profits you may make can be astonishing.
The Basic Concept of Making Money with Forex.
Buy low and sell high, that is the most basic concept in all of this. You are buying one currency with a different currency in the hope and expectation that the price is going to rise. Of course, this involves you needing to do some research and having a basic understanding of the way in which markets move on a constant basis.
However, we can look at a simple example in order to really show the way in which you can make money with this type of trading.
Say you are looking at buying from a EUR/USD pairing. You want to purchase 10,000 EUR at a rate of 1.18. This means it has cost you $11,800 to get your 10,000 EUR.
A month later, the exchange rate has changed. You now look at selling your EUR back into USD and the exchange rate has changed to 1.25. What that means is you then receive $12,500 for your 10,000 EUR. This leaves you with a profit of $700 for that particular trade.
That is the easiest way to explain how it is possible for you to make money with Forex. It does involve you taking some time to really understand the idea of how the currency markets fluctuate. Also, you need to be in a position whereby you feel confident enough in waiting it out just that little bit longer to see if things continue to rise so you are then able to make even more profit than ever before.
Understanding the Long and Short Concept.
Whenever you are looking at the idea of buying or selling with Forex, you need to understand the long and short concept. This will directly affect the decisions you make and, of course, the amount of profit that you may generate.
With this, you must be aware of whether you want to buy or sell the currency in question. If you wish to buy, then it means you want to use the quote currency in order to get more of the buy currency.
With this combination, you want your base currency to start to rise in price after you purchase it. This would then allow you to sell that base currency with you receiving more money as its value has increased.
In other words, it operates in the same way as buying and selling shares on the stock market. The only difference is that this market can fluctuate wildly and within a short period of time, so more attention must be paid to the different movements.
This type of trade is referred to as ‘going long’ and it basically means you are looking at buying and planning for the future movement.
The other option in how to make money with Forex is going short. This is where your primary focus is on the selling aspect. With this, you want to sell the base currency in order to then receive the quote currency. For this, you are looking for the base currency to fall in value to then allow you to buy it back at a lower price. At this point, you take the short position with a view to then buying and switching to the long position later on.
Understanding the Bid, Ask and Spread.
When looking at this trading sequence, you will notice that there are various numbers being thrown at you. This includes the bid, ask and spread.
The bid price is the value at which the broker is looking at paying for the base currency. This is going to generally be lower in value than the ask price.
The ask price is also known as the offer price, and that refers to best price that you, the broker, is willing to accept for the currency in question. If you are looking at buying something, then you deal with the ask price.
The spread then refers to the difference in value between the two prices. This is where your profit or loss is going to be made. Do be aware that we can be looking at small differences, but when you are buying huge amounts of currency, that difference will then become substantial.
So, that is the basic idea of how to make money with Forex. Treat it as a basic buying and selling option that will then allow you to make a profit. You only have to understand the buying and asking price as well as the movement of the currencies on the market to then make money.
If you are just starting out, then this basic form of trading is the best option available to you. Anything else is for those with more experience due to the potential of losing your cash in a short period of time. Keep things nice and simple and you will be rewarded with a healthy boost to your bank balance courtesy of Forex.