Forex is the science of buying and selling currencies against each other. It is a long time that cryptocurrencies and metals have also been added to it. Therefore, Forex traders usually trade metals and cryptocurrencies too, if they see the potential of making some profit. “Forex Traders” do this to make profit. However, we can’t say that all transactions of Forex market are done by Forex traders who want to make money. In fact, most or I’d better to say over 95% of the transactions are done by centrals banks and big players of this huge market. These are the ones who make the prices move. Retail Forex traders have no impact on this market. But as a retail Forex trader, you can make money if you know how to buy and sell currencies against each other. So, make sure to read this article entirely and carefully.
After this short introduction, now please let me answer two important questions in more detail:
What Is Forex?
Forex means Foreign Exchange. For traders, Forex is the science of buying and selling currencies against each other, to make profit. Let me give you a simple example:
Let’s say you have $1,000USD while each Euro equals $1.20USD. Someone tells you that Euro will go higher against USD within the next several months and will most probably reach $1.25USD.
What does this mean to you?
It means if you convert your $1,000USD into Euro now, and then you keep the Euro for several months, then the value of your capital will be higher than $1,000USD if Euro’s value really goes higher against USD.
So you decide to convert your $1,000USD into Euro. It means you give your USD to get Euro. In other words, it means you pay USD to buy Euro, or you buy Euro against USD.
Therefore, when each Euro equals $1.20USD, you will have 833.33 Euros if you convert your $1,000USD into Euro:
$1,000USD / 1.2 = €833.33
Let’s assume that Euro really goes up against USD and for example it becomes $1.25USD after eight months. Now, if you convert your Euro back to USD, you will have $1,041.66USD:
€833.33 x 1.25 = $1,041.66USD
Therefore, you have made $41.66USD profit because you had $1,000USD and now you have $1,041.66USD:
$1,041.66 – $1,000 = $41.66
This is how Forex trading makes profit for Forex traders. However, you can lose money in it too. In the example above, if Euro wouldn’t go up against USD, you would lose money. Indeed, most Forex traders lose because they take wrong positions. I will explain this more. Please keep reading.
Forex Trading Brokers and Platforms
In the example above, I assumed that you had $1,000USD cash, and then you paid it to buy Euro. However, this is not how Forex traders trade currencies. They do it online and through a software that is known as trading platform. MetaTrader or MT4 is the most famous and popular trading planform that I also use to analyze the currencies’ price charts. I will explain about chart analysis later.
To trade currencies, the way that currency traders do it, you must sign up for an account with a Forex broker. Brokers are like banks. You sign up for an account with them and then deposit some money in your account. Then, they allow you to install their platforms on your phone and computer, and login to your account through the platforms. When you do so, you can buy and sell currencies against each other, through the platform and with the money you have in your account.
It is as easy as this to start buying and selling currencies with real money. But it is also so easy to lose all the money you have. So please be patient and don’t dive into the Forex market, before I tell you everything that you must know.
In the example above, you saw that trading $1,000USD could only make $41.66USD profit. The questions is, how some Forex traders make thousands of dollars every month? Does it mean that they have hundreds of thousands of dollars in their trading accounts?
Most retail Forex traders have small accounts, usually below $100,000. However, brokers offer something that is called leverage. It enables you to trade a larger amount of currencies with a smaller account. For example, when the leverage of your trading account is 100:1, then every dollar of your account works as $100. This enables you to trade larger volumes of currencies to make more profit. However, it can cause you to lose money faster and easier.
In the example above, you could only buy €833.33 with your $1,000USD, and so you could only make $41.66USD profit. But if you could buy 100 times more, then your profit would be $4,166.00USD. But keep in mind that if the market would go against you, and Euro would go down against USD instead of going up, then your loss would be much bigger also. So leverage is not always your friend. It can be your enemy too. A 100:1 leverage is enough for a retail Forex trader whose account is not too big. However, never go for a 500:1 or larger leverages. If you like to learn about leverage in more detail, you can read this article: Leverage, Margin, Balance, Equity, Free Margin, Margin Call And Stop Out Level In Forex Trading
How Do Forex Traders Make Money?
So far, you’ve learned that Forex traders use three important things to trade: (1) broker; (2) platform; (3) leverage
Additionally, in the example above, I showed you how you can make money through buying/selling currencies against each other. However, there is a big question here:
How do you know that when you should sell currencies against each other?
Or, I’d better to say: how can you predict the direction of the currency market?
For example, how can you know that Euro is going to go up against USD or visa versa?
The answer of these questions tells you how Forex traders make money. They can make money only when they can predict the direction of the markets correctly, otherwise they will lose. This is something that you learned from the example above. Therefore, it is important to know how Forex traders analyze the markets and decide which currency has to be sold against other currencies. Here is where currency trading becomes fun and challenging at the same time. It is where you must learn how to manage and limit your risks. It is where many Forex traders make a fortune and so many others give up on Forex trading after losing lots of time and money. So please make sure to read the rest of this article more carefully.
1. Forex Market Analysis
To make money through Forex, you must know how to analyze the currency markets to predict their next directions. There are two ways to do this:
- Technical analysis
- Fundamental analysis
– Technical Analysis
The trading platforms that I talked about give you the markets’ price charts. Many traders analyze these charts to predict the next direction of the markets. They use some rules and techniques to understand when to buy or sell. I wish I could explain how to analyze the price charts here in this article, but it is impossible to do so. It needs several articles and videos to do it. However, this site is full of useful and detailed articles on this topic. I will write more articles too. So please make sure to add your email address to our mailing list through the form above, so that I let you know whenever there is a new article published on the site.
Technical analysis is not too complicated. But you need to spend some time to learn and master it. What I use a lot is the candlestick price chart. Candlesticks are small units the return some important information about the price fluctuations. This is a sample of a candlestick price chart:
– Fundamental Analysis
Some traders prefer to use the economic factors, also known as fundamentals or economic news, to predict the next direction of the markets and take proper positions. There are tens of different fundamentals that each of them have a different impact on different currencies. Each country has its own fundamentals that impact their currency.
For example, interest rate is the strongest economic factor that directly impacts the value of the related currency. Let’s say that the central bank of The United States decides to increase the USD’s interest rate. When they announce it, the USD value will suddenly go up and will also keep on going up, in long-term and during the next several months or maybe even years. Why?
When USD’s interest rate goes higher, it means banks will pay more interest for the USD that people deposit in their bank accounts. When people, investors and big players of the market become aware of this, they buy USD to deposit it in their banks accounts to receive the interest. And, like any other commodity, when a currency gets bought more than others, its value will go higher because currency market also moves based on supply and demand. When there is more demand for a currency, its value goes higher against other currencies, and visa versa.
There are so many other economic factors that move the markets. For example, employment and unemployment related news are also very strong, but not as strong as interest rate.
Economic factor are very important for professional traders and also big players of the currency market, like banks and hedge fund companies. While they use technical analysis, they closely follow the economic factors to make sure that they make the right and proper positions. Many retail traders also do the same.
2. Forex Trading Strategy
Here in this article, I am just explaining what Forex is and how Forex traders make money. This is just a general article for those who are new to Forex trading and want to learn it from the basics. I cannot go to details of each related topic. However, if you follow me on this site, you will learn each part in detail too.
So far, you’ve leaned how Forex traders make money through Forex trading, but you don’t know it in detail, and so you cannot start making money with Forex trading now because there are still a lot of things that you must learn. First of all, you must decide whether you want to become a technical trader who uses technical analysis, or you want to become a fundamental trader who uses economic factors to trade. You can use both at the same time as well. The number of retail Forex traders who use technical analysis is more because you can locate more trading opportunities on the price charts, compared to following the economic factors.
The method that you use to find or locate the trading opportunities is called trading strategy or trading system. Different Forex traders have different trading strategies to make money. For example, I use technical analysis (also known as chart analysis) and I am more interested in candlestick signals and patterns, while I also use price chart patterns and support and resistance breakouts. I know these terms are confusing for you if you are completely new to Forex trading, but please don’t worry. You will learn all of them.
3. Demo Trading
Demo trading is one of the best things we have in Forex trading. It allows you to trade with demo money to improve your skills and gain experience. In demo trading, you also win and lose, but it is just with demo money, not real money. So there is no risk to do demo trading. However, you must consider it as a real money and have the same discipline as if you are risking your hard-earned money, otherwise you cannot develop skills and discipline you need to trade with real money.
After choosing your trading strategy, you must demo trade to become a consistently profitable demo trader who makes profit with their demo accounts, every month, consistently, and at least for six months or even one year in a row. Then you can open a small live (also known as real account) to keep practicing for another 6-12 months to make sure that you have become disciplined, skilled and experienced enough to use your trading strategy to trade with real money. Then you can gradually increase your trading capital. It takes time. You cannot become a consistently profitable Forex trader overnight.
4. Forex Signals
I am always asked, “how can I make money fast in Forex?”
This question becomes asked by those who are in rush to establish a good source of income that makes reasonable amount of money. They know what Forex is, and they are aware that it takes time to become a consistently profitable trader. But they are eager to start making money faster.
There is no shortcut to become a consistently profitable Forex trader. You must pass the steps above, patiently and completely. However, the good news is, there are some services that offer Forex signals for those who merely want to know when to buy and sell the different currencies to make money or grow their capital, while many of them haven’t become or don’t want to become consistently profitable traders. Therefore, they join these Forex signal services to get the signals and apply them to their Forex accounts. Although it is too hard to find a reliable Forex signal program, it is not impossible.
This is how you can earn while you learn. Indeed, it is the true answer for those who want to know how they can make money fast in Forex. It is also a great solution for those who are learning how to trade Forex, but they haven’t become consistently profitable yet. Even it is a fantastic way for those who are already consistently profitable traders and they make money on their own, but still they want to make more money through using the signals of another company that offers reliable Forex signals.
Therefore, you must consider this solution, whether you are new, or you’re a professional Forex trader.
I am happy that now you know what Forex is and how Forex traders make money. If you have any questions, please leave a comment below. Also, please don’t forget to read my next articles. You are in the right place at the right time to make a fortune through Forex trading.