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Forex currency trading guides for beginners - How do you make money in forex?

How you make money in forex trading

In the example given below, you'll learn how to apply fundamental analysis in deciding whether you shuold buy or sell a currency pair. We shall discuss what fundamental analysis is in another lesson.

EUR/USD

The EUR here is the base currency and therefore the basis for our buy/sell trades.

If you expect the United States economy to get weak in the near future, which means you expect the U.S dollar to weaken, you will enter a EUR/USD BUY order. Therefore you are buying EUR, expecting it to rise against the USD.

If you expect the United States Economy to grow stronger in the near future, which means you expect the EUR to weaken against the USD, you'll enter a EUR/USD SELL order. Therefore, you will be selling EUR, expecting that it will fall against the USD.

You can apply the above example to other currency pair trades such as the USD/JPY, GBP/USD, USD/CHF etc. Just remember that the base currency is always the basis of the trade. In a BUY order, you are buying the base currency and selling the quote currency. In a SELL order, you are selling the base currency and buying the quote currency.

Trading on Margin

When you visit your local supermarket and wants to buy an egg, it won't make sense for them to just sell you a single egg. Theey are only available in "lots" of 12.

In the same way, currencies also come in "lots" 1000 units (micro), 10,000 units (Mini) and 100,000 (Standard). The lot size depends on your broker and your account type (we'll talke about lots later).

So you might be wondering, "I can't afford to by 10,000 euros worth of currencies. How can I still trade?"

This is where margin trading comes in.

In trading terms, margin trading is trading with borrowed money. This how you'll be able to open a position of $1,250 or $50,000 with only $25 or $1000. With margins, you are able to afford very large trades with very little money of your own.

Let's look deeper into this.

You should try and understand this because it's very essential that you do.

  1. You analyze your data and you think that the GBP will rise versus the USD.
  2. You initiate a standard lot (100,000 units GBP/USD). You buy the GBP at 2% margin and wait for the price movement to go your way. if the exchange rate at which you buy is 1.50000, then buying one standard lot(100,000 units of GBP/USD) means that you are buying 100,000 GBP, which is worth US$150,000. Obviously you don't have $150,000 starting capital.
  3. At 2% margin, this trade will only cost you US$3000 instead of US$150,000. (2% of 150,000 is 3,000).

We shall discuss margins more later but I hope you are able to grab the basic concept here.

Later in the day/week/month, your analysis proves right and the exchange rate rises to 1.50500. You'll close the position and your profit is $500. The table below explains it.

Trading on margin

After you close a position, the money that you use to open the position is given back to you. Your profit or loss is then calaculated and credited to your trading account.

You'll find a few forex brokers who offer custom lots.

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