Ways to Generate Income through Forex Trading

 

Forex trading, also known as FX or foreign exchange trading, involves the global buying and selling of currencies, where banks, institutions, and individuals participate to speculate on the exchange rate between different fiat currencies. As the largest financial market worldwide, it facilitates significant trading activities on a daily basis.

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How does forex trading work?

 

Forex trading involves speculating on the potential rise or fall of one currency in comparison to another, with the aim of making a profit.

The value of a currency is impacted by various factors, such as economic conditions, political events, geopolitical developments, and trade and financial activities.

Placing a trade in the forex market is a straightforward process. The mechanics of trading are quite similar to those found in other financial markets, like the stock market. Therefore, if you possess prior experience in trading, you should be able to grasp the concepts and techniques of forex trading relatively quickly.

And even if you don't have prior experience, you can still pick it up by completing School of Pipsology, our forex trading course!

The objective of forex trading is to exchange one currency for another with the expectation that the price will change. More specifically, the currency you bought will increase in value compared to the one you sold.

Here's an example:

You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800 (10,000 * 1.18 = $11,800).

Two weeks later, you exchange your 10,000 euros back into U.S. dollars at the exchange rate of 1.2500 (10,000 * 1.25 = $12,500).

You earn a profit of $700 ($12,500 - $11,800).

An exchange rate simply represents the ratio of one currency's value against another currency. For instance, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.

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How to Read a Forex Quote

Currencies are always quoted in pairs, such as GBP/USD or USD/JPY.

The reason they are quoted in pairs is that, in every foreign exchange transaction, you are simultaneously buying one currency and selling another.

How do you know which currency you are buying and which you are selling?

Excellent question! This is where the concepts of base and quote currencies come in…

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Base and Quote Currency

 

In forex trading, when you have an open position, you are essentially exchanging one currency for another. Currencies are always quoted in relation to other currencies.

Let's take an example of the foreign exchange rate for the British pound versus the U.S. dollar:

The first currency listed on the left of the slash ("/") is the base currency (e.g., the British pound). The base currency serves as the reference point for the exchange rate of the currency pair and always has a value of one.

The second currency listed on the right is called the counter or quote currency (e.g., the U.S. dollar).

When you buy a currency pair, the exchange rate tells you how much of the quote currency you need to pay to buy one unit of the base currency. For instance, if the exchange rate is 1.21228 for EUR/USD, you would need to pay 1.21228 U.S. dollars to buy 1 euro.

On the other hand, when you sell a currency pair, the exchange rate tells you how many units of the quote currency you will receive when you sell one unit of the base currency. In the example above, you would receive 1.21228 U.S. dollars when you sell 1 euro.

The exchange rate represents the price at which you can exchange one unit of the base currency for a certain amount of the quote currency.

Buying a currency pair, such as EUR/USD, means you are purchasing the base currency (EUR) while simultaneously selling the quote currency (USD). In simpler terms, it can be expressed as "buy EUR, sell USD."

You would buy a currency pair if you believe the base currency will appreciate (increase in value) relative to the quote currency. Conversely, you would sell a currency pair if you expect the base currency to depreciate (decrease in value) compared to the quote currency.

Forex brokers use standardized quoting methods for currency pairs. The currencies are typically separated by a slash ("/") character, but this can also be replaced by a period, a dash, or omitted altogether. For example, "EUR/USD" can be represented as "EUR-USD" or "EURUSD," and all these notations have the same meaning.

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“Long” and “Short”

 

To begin forex trading, you need to decide whether you want to buy or sell a currency pair.

If you want to buy, it means you are interested in purchasing the base currency and selling the quote currency. For this trade to be profitable, you want the base currency to increase in value, allowing you to sell it back at a higher price. In trader terminology, this is referred to as "going long" or taking a "long position." Remember, "long" means "buy."

On the other hand, if you want to sell, it means you are looking to sell the base currency and buy the quote currency. For this trade to be profitable, you want the base currency to decrease in value, enabling you to buy it back at a lower price. This strategy is known as "going short" or taking a "short position." Remember, "short" means "sell."

 

“I’m long AND short.” just like the lil dog looking like an hot-dog ya feel me ah lie?

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Flat or Square

If you have no open position, then you are said to be “flat” or “square”.

Closing a position is also called “squaring up“.

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The Bid, Ask and Spread

All forex quotes are quoted with two prices: the bid and ask.

In general, the bid is lower than the ask price.

 

 

What is “Bid”?

The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency.

This means the bid is the best available price at which you (the trader) can sell to the market.

If you want to sell something, the broker will buy it from you at the bid price.

 

What is “Ask”?

The ask is the price at which your broker will sell the base currency in exchange for the quote currency.

This means the ask price is the best available price at which you can buy from the market.

Another word for ask is the offer price.

If you want to buy something, the broker will sell (or offer) it to you at the ask price.

 

What is “Spread”?

The difference between the bid and the ask price is known as the SPREAD.

On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.

• If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568.

• If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588.