Have you ever invested?
Are you interested in trading currencies?
If so, here’s how to make money from Forex…
Contents
What Is Forex?
The term ‘Forex’ is a simplified combination of the words ‘foreign currency exchange’ and is an online market in which currencies are traded from different countries.
It’s common knowledge that currencies fluctuate in value, just as the value of the pound dropped significantly the moment Britain’s Brexit bill passed.
As with the stock market, this fluctuation opens many doors for entrepreneurs to begin trading and earning money from these changes in value.
One day, the pound may be of a lower value and cheaper to buy and the next day it may rise higher, becoming sellable for a profit if purchased the day before.
In the Forex market, currencies are traded for other currencies.
Dollars may be purchased in exchange for pounds for example, and pounds for euros.
Because of this, currencies are priced based on others – a pound may be worth 0.7 dollars for instance.
It is through identifying these price differences and making predictions about rises and falls in currency values that investors can make a profit by trading currencies.
US Dollars VS The Market
US Dollars are used as a base comparison for virtually all other currencies.
A pound, for example, would be valued in relation to USD – just as Euros and Yen would be too.
- Quotes for currency values are always listed to four decimal places, 0.0090 Yen to the Dollar, for example.
- A typical currency quote would appear as 0.9400 EUR/USD, for example.
Arbitrage is the term given to the process of making a profit from price differences between markets, ie. buying stocks low in one place and selling them high in another.
Generally, this occurs between just two markets – buying in one and selling in another.
However, in the Forex market, three different trades are used to make a profit.
It involves buying from one currency into another, buying from this into yet another, and then reverting back to the original currency in the final transaction.
For example, a trader may purchase Mexican Pesos with USD, use those Pesos to then buy Brazilian Reals and finally buying your dollars back with these Reals.
Even the most skilled traders don’t earn a great deal of money through arbitrage alone, or at least not through every single transaction.
Thus, to earn a decent amount, traders must trade with large sums of money otherwise their profits will return in very small amounts.
Leverage, a sort of borrowed money, is a way to get around this.
Traders no longer need to invest all of their own cash and can instead use borrowed cash to trade with.
A leveraged trade involves borrowing money, making a trade and then paying back the initial amount, keeping any profits you make.
Many trading systems allow 100:1 margins which essentially means that you can trade with up to 100x the amount of money you actually own, only needing to have 1/100th of it in the first place.
Of course, you’ll need to pay back this amount after you’re finished with it – but any profits made belong to you and you only.
However, if you borrow far more money than you own and suffer a huge loss, you are still required to pay back the initial amount.
Broker/Brokerage Service
Before you’re ready to start making trades in the Forex market, you’re going to need to find a broker.
A broker is simply an experienced trader whose services you can use for a fee.
They’ll assist you in making trades in the Forex market and oversee any exchanges you make, ensuring that your decisions are in line with your goals/risk tolerance.
Brokerage fees will detract from your profits, and you can conduct trades independently using a brokerage platform such as Vanguard or Scottrade if you’re new to trading and want to minimise your risks. You may also want to consider a brokerage that accepts credit cards so you can cash in on airline and credit card points
Getting Started With Forex
First of all, you should go into this with an entirely open and patient mindset.
Don’t enter with unrealistic expectations of being a millionaire by the time the new year rolls around – or even by the time the next four new years roll around for that matter.
If you’re not prepared to put in the time educating yourself, investing in yourself, you will never succeed as a Forex trader.
However, if you do read up and get to know the market, really trying hard to succeed, you certainly will.
Investing Your Time & Money
Investing your money isn’t where the game ends here – you need to invest your time as well.
If you enter the Forex market with unrealistic expectations, you can expect to fail pretty quickly.
Not only will you be perceiving the market completely wrong, seeing trading opportunities here there and everywhere – everywhere they’re not – you’re going to think you command the market when you do not.
The forex market is not in anybody’s control, it can fluctuate and change and do whatever it pleases so don’t expect to have full control, or any control for that matter.
Entering with unrealistic expectations will also cause you to put more pressure on yourself financially, making any losses far more excruciating than they need to be.
A loss shouldn’t debilitate your success or your positive attitude, thus it’s vital to enter the market with a realistic sense of optimism rather than with unfounded hopes of sailing the Med Sea on a superyacht whilst on a throne engraved ‘Forex Master’ before the clocks go back again.
Mindset
Even before I give you the first step on earning as a Forex trader, I want to add that your mindset is everything.
Making money through Forex is going to require sheer grit and dedication – not collapsing into a ball of despair when you trip and graze your knee after the first hurdle.
You need to focus solely on the journey, on the path you’ll take as a trader, rather than just the money involved.
The money comes second.
This is a lifestyle – it’s the dedicated understanding of the world’s economy and building the confidence to shrug off any financial pitfalls you encounter.
With that being said, let’s get into some of the best ways to make money with Forex.
Analysis
Firstly, before making any Forex trade, you need to analyse the market thoroughly.
This analysis can be broken down into two key parts: technical and fundamental analysis.
Technical analysis is the process of reviewing date – charts and graphs – to make predictions on how the value of currency will change in the future based on its history.
Your broker will usually have this information handy, however there are a number of online sources you can use to find it.
Technical analysis involves looking at the prices of shares themselves and the patterns of other investors to determine how values may change in the future.
Fundamental analysis involves looking deeper into the company, figuring out how much the share is intrinsically worth based on the company itself rather than based on the patterns of other buyers.
Margins
Next, you need to determine your margin.
This is very similar to leveraging and will depend on the policies of your broker.
Your broker may allow you to trade at a 1/100 margin, for example, only requiring you to put in a 100th of the value that you’re actually trading with.
You need to determine your margin before actually making any trades to figure out how much money you actually have to trade with.
Order
Then, place your order.
If you choose to make a market order, you’ll be telling your broker to either purchase or sell currency at the current market rate.
Alternatively, you could execute a limit order in which you instruct your broke to trade at a limited price determined by you – only buying/selling currency when it reaches a predetermined price
eg. instructing them only to buy stocks when they fall low enough or selling them when they’re high enough.
Finally, stop orders involve choosing to buy a currency for more than the market value, or selling for lower than it, in anticipation of future events.
Practice Accounts
Thankfully, almost all trading platforms offer the ability to practice Forex trading with a practice account, allowing you to conduct false trades in order to gain experience in the market without spending any actual money.
I’d advise making full usage of these, only beginning to make real-life investments when you’ve mastered trading with these practice platforms.
The more you can practice using these practice accounts, the better experience and insight you’ll gain in the market without risking any of your hard-earned money.
