How to Make Money in
“Forex” is a shorthand way of referring to the foreign currency exchange. It’s the market where currencies from different countries are traded. Investors trade in forex for the same reason that they trade in any other market, because they believe that the value of certain currencies will go up or down over time. Remember, currencies are commodities. On some days they’ll go up in value and on other days they’ll go down in value. You can use forex to take advantage of the fluctuation in foreign currency prices to make money.
What is Forex trading?
Forex trading, also known as FX trading or Currency trading refers to buying and selling of international currency pairs. Forex market is the largest financial market globally, where the investors, speculators, and corporates are involved in cross-border Forex trade. Unlike other financial markets, the Forex markets do not operate through a physical location but via an electronic network of corporations, banks and individuals, trading one currency for another. This makes it convenient for forex markets to operate 24 hours round the clock across time zones and financial centres for 5-days a week.
Understand currency price quotes
In the forex market, prices are quoted in terms of other currencies. This is because there is no measure of value that is not another currency. However, the US Dollar is used as a base currency for determining the values of other currencies.
- For example, the price of the Euro (EUR) is quoted as (price quote number) USD/EUR.
- Currency quotes are listed to four decimal places.
Understand leveraged trades
Traders, often very good ones, are often only left with a few points of arbitrage differences or trading gains. To counter these lows return percentages, the traders must make trades with large amounts of money. To increase the money available to them, traders often use leverage, which is essentially trading with borrowed money. Compared to other securities types, trades made in the forex markets can be made with incredibly large amounts of leverage, with typical trading systems allowing for 100:1 margin requirements.
- The 100:1 requirement means that you only need to actually deposit 1/100th of what you are investing in the currency. The deposit is known as the margin and protects you against future currency-trading losses.
- Trades using leverage magnify both potential gains and potential losses, so be careful when making these types of trades.
Best Way to Value a Currency
To understand this, we need to look at fundamental analysis. This is where we consider a variety of economic variables to determine the supply and demand of a currency. Simply, how much money is there in circulation in the economy. Each currency is backed by an economic region or country. Therefore, what we want to do is take a deep look into how well that economic region is doing to decide whether we want to buy or sell their currency. A lot of traders use things like a macro currency strength meter to do this for them, as it’s not an easy task to do alone. This is a much better question and can be answered by analyzing the below factors for every country/ economic region. There are 6 key factors to consider:
2. Money supply
3. Interest rates
6. Balance Sheets & cash flow of the central authorities