Lucky you, this is what this article is about today. We are going to discuss “how money is made trading the forex market”.
For those of you, you read the first part of this educational series on what is forex, would have known that forex is all about the trading of currencies from all around the globe. Majority of retail traders and market participate are in just to speculate. That is just to buy when the price is low (cheap) and sell back when it gets high (expensive) and that’s also what we do too.
Before I can proceed further, I will need to explain one basic term we will use a lot that term will be called “exchange rate”
What is/are exchange rate?
An exchange rate is simply the ratio of one currency valued against another currency. Am sure everyone should at least know the exchange rate of their country’s currency against the United State Dollars, for those that have no clue about that, you can Google that by just typing your country’s currency and the country you want to get the exchange rate. Like the picture below.
Why is the exchange rate so important?
Asking why an exchange rate is important is similarly to asking “why is international trade important”. We need to get a rate that’s dynamic to be able to convert from one’s currency to another.
Let me illustrate with an example. The EUR/USD exchange rate indicates how many EURO can purchase one US Dollar or how many US Dollar you need to buy one EURO and is usually in this format EURUSD 1.2578* . That means 1 euro is equivalent to 1.2578 dollar
*the figure is bogus and is meant for educational purposes only.
So back to the question, how is money made by trading forex.
Let’s first of all create an imaginary country in our head and we will call it “Small County” – you can call it whatever name you want. And this small country’s currency is call smallie (SMS) and we will assume that the exchange rate to the United States Dollar (USD) is 1USD=100SMS which means for every 1 USD you have, its equal to 100SMS.
You happen to get your hands on a 100 USD bill which is equivalent to (100USD * 100SMS = 10000 SMS). After some days the value of this USD increased and the value of SMS decreased, let’s assume the new exchange rate is 1USD=150SMS
Are you confused by this new exchange rate?
Remember the United States Dollar gained in value, which mean 1USD that was worth 100SMS is no longer the same but now worth 1USD=150SMS.
NOTE: that in forex once one currency gains value the other will simultaneously lose value. Example EUR/USD, if EUR should gain in value, automatically the USD WILL LOSE in value too.
So that’s what happened here, the USD gain value. Which mean 1 USD is now valued at 150 SMS.
Don’t forget that you have 100 dollar bill with you right? And you decided to sell it at this new exchange rate of 1USD=150SMS. You made an astonishing profit of (100USD *150SMS =15000USD) unlike when you would have made a profit of 10000SMS assuming you used the pervious exchange rate of 1USD=100SMS.
Now, you see how money is made from the forex market. We tend to buy cheap and sell expensive, isn’t this cheating you will say? Nah it’s not, consider it as a business and you don’t need to worry there are thousands of people willing to buy and sell to you immediate at the market price.
Are there losses in trading forex?
Let’s assume again that the USD lost its value and the SMS simultaneously gained value and the new exchange rate is 1USD=90SMS. It means that your 100 USD bill will immediately be lost in value from 10,000USD to 9,000SMS. This means that you are at a loss of 1,000SMS.
If you follow the articles on this blog, then you don’t need to worry about losing because I am a successful forex trader and I will try my best to give out hints and tips how conquer this market and make some decent income.
What Tools Do I Need to Start Trading Forex?
Forex Trading is so simple that you just need a computer with an Internet connection and all the information on this website. The days of going to an exchange floor or calling your broker to open a position for you on the phone is over. So to trade and made decent returns from this multi-trillion market there is NO EXTRA TOOLS NEEDED – no Robot, no E-books, no services needed.