How You Make Money Trading Forex (Forex Basics) |The Forex Indicators

Wednesday, August 19, 2009

How You Make Money Trading Forex (Forex Basics)

Posted by fenshim at 7:20 PM

The object of forex trading is to exchange one currency on another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.

For example:

If you purchase 10,000 euros at the EUR/USD exchange rate of 1.18 which is +10,000(EUR) and -11,800(USD). Two weeks later, you change your 10,000 euros back into US dollars at the exhange rate of 1.2500 which is -10,000(EUR) and +12,500(USD). You can earn a profit of $700 ($12,500 - $11,800 = $700).

How to read FX Quote

Currencies are always quoted in pairs such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because in every foreign exchange transaction you are simultaneously buying one currency and selling another.

Base & Quote Currency

The first listed currency to the left of the slash ("/") is known as the base currency while the second one on the right is called the counter or quote currency.

The base currency is the "basis" for the buy or the sell. If you buy GBP/USD this simply means that you are buying the base currency and selling the quote currency.

You would buy the pair if you believe the base currency will go up relative to the quote currency. You would sell the pair if you believe the base currency will go down relative to the quote currency.

Example:

GBP/USD
As you can see GBP is the base currency and USD is the quote currency.

Bid/Ask Spread

All Forex quotes include a two-way price, the bid and ask. The bid is always lower than the ask price.

Bid=Sell
Bid is actually the base currency in which the dealer/broker is willing to buy in exchange of the quote currency. (You sell base currency to the dealer).

Ask=Buy
Ask is actually the base currency in which the dealer/broker is willing to sell in exchange of the quote currency. (You buy base currency from the dealer).

Spread

Let's take a look at the picture above:

On this GBP/USD quote, the bid price is 1.7445 and the ask price is 1.7449. The difference between the bid price and the ask price is 1.7449 - 1.7445 = 0.0004 x 10,000 = 4 pips. So if you're asking how the broker/dealer makes money, that is how they make money.

Rollover

Rollover is actually a cut-off time or an interest rate that a trader either pays or earns, depending on established margin and position in the market. If you wish do not want to earn or pay interest on your positions, simply make sure they are all closed before 5pm EST, the established end of the market day.