What To Do And How
In this lesson we are going over the very basics of how profits can be made through Forex trading.
The interesting thing about currency trading is that you can make profits even when exchange rate of a pair begins to drop, given that you choose the right position to take.
Let’s get into it.
The Main Idea
There are two types of tradesthat can be carried out in Forex.
A trader can buy or sell.
Buying
The goal is to buy currency when you feel its value is about to take a hike. When that hike comes and the value increases, sell it at a profit.
Selling
The goal is to sell currency when you feel its value is about to depreciate. When the value has dropped, buy it back and you will have to pay less than what you got for it when it was initially sold.
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Putting theory into action
The transaction always takes place using two currencies. The currency pair we will be trading in this example is AAA/BBB. The fact that this currency pair does not exist cannot stop us.
So you think the value of A is about to increase in the coming days/weeks. You see the quote “AAA/BBB 1.5”. This means that for 1.5 BBBs you can buy 1 AAA and decide to enter this trade. You buy a Standard Lot (A Standard Lot means 100,000 units).
To buy a Standard Lot of AAA you pay 150,000 BBB (1.5×100,000). This means that 150,000 BBB have been used to buy 100,000 AAA. When you’re trading on margin, you don’t need to have 150,000 BBBs in order to make this trade, but for the sake of clarity we are not going into that in this example.
A week passes and there has been a major hike in the value of AAA, just as you expected. The quote now says “AAA/BBB 1.6”. So you sell i.e. you sell the 100,000 AAA you bought for BBB.
Whereas initially you invested 150,000 BBB, you now get 160,000 BBB in return. The 10,000 BBB difference is your profit. You did nothing other than buy and sell at the right times and now you have 10,000 more BBB than you did at the start. This is how Forex trading works.
Had you opened a position by selling instead of buying, you would be hoping for the rate of the sold currency to drop so you can buy it back cheaper and make a profit that way.
Rollover
Even though the FX market itself is a 24 hour business, the particular broker you’ll be working with will close at 5 pm according to their time zone.
The broker will rollover all positions and credit or debit the interest. Traders who don’t want to engage with this interest situation tend to close their positions before 5 pm. The people who do this are called day traders.
Rollover rate and how it’s calculated
When the trader makes a transaction they buy or sell. Most of the time these transactions happen using money leveraged from the broker. Margin trading allows traders to enter bigger positions than their accounts would have allowed otherwise. However, with such transactions trades become open to interest when they are rolled over to the next working day.
Interest is earned on the currency that is bought and paid on the currency that is sold.
This means that if the interest rate on the currency bought is higher than the one that is sold then at the time of rollover, the trader will earn a net gain (the difference between the interest rates of the two currencies in a position).
On the other hand, if the interest on the currency bought is lower than the one that is sold, then the trader will find themselves facing a net loss.
Anyone who does not want to expose their account to interest should simply close their trades before the closing time to avoid rollover.
Now you know all the ways money can be made in Forex; through profitable trades and interest.
How do people navigate their way through these processes though? Well it’s speculation, mostly.
It may seem like a flimsy foundation to base your investment on but there is a method to this madness, believe it or not, and the next lesson explains that method.
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