FOREX - the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.
The investor's goal in Forex trading is to profit from foreign currency movements. Forex trading or currency trading is always done in currency pairs. For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This number is also referred to as a "Forex rate" or just "rate" for short. If the investor had bought 1000 euros on that date, he would have paid 1085.70 U.S. dollars. One year later, the Forex rate was 1.2083, which means that the value of the euro (the numerator of the EUR/USD ratio) increased in relation to the U.S. dollar. The investor could now sell the 1000 euros in order to receive 1208.30 dollars. Therefore, the investor would have USD 122.60 more than what he had started one year earlier. However, to know if the investor made a good investment, one needs to compare this investment option to alternative investments. At the very minimum, the return on investment (ROI) should be compared to the return on a "risk-free" investment. One example of a risk-free investment is long-term U.S. government bonds since there is practically no chance for a default, i.e. the U.S. government going bankrupt or being unable or unwilling to pay its debt obligation.
When trading currencies, trade only when you expect the currency you are buying to increase in value relative to the currency you are selling. If the currency you are buying does increase in value, you must sell back the other currency in order to lock in a profit. An open trade (also called an open position) is a trade in which a trader has bought or sold a particular currency pair and has not yet sold or bought back the equivalent amount to close the position.
However, it is estimated that anywhere from 70%-90% of the FX market is speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency.
Let’s continue on “How to make money on FOREX market?” The difference between the FOREX market and standard stock market is FOREX is pair. For example, EUR/USD is comparison between EURO and Dollar. The left hand side is base currency. You will usually see bid or offer price at the following form.
EUR/USD bid= 1.3500 offer= 1.3502
Brokers make money from difference between bid and offer. So when you start trading, you will be in deficit. The difference is up to bid and offer. Each pair is not equal. At Marketiva, EUR/USD is 2 or GBP/JPY is 7. However, Mini version of FxOpen is more than Marketiva at +1 but standard is equal.
For example, you buy EUR/USE at 1.3502 (offer price). After that, you immediately close so you can sell at 1.3500 (bid price). That mean you lose money at 0.0002 or 2 point (or pip).
If you buy (or long), when you create order BUY, you will get value at offer price. When you close the order, you will get value at bid price. When you buy, that means you are holding and waits for high rate price. You will close order by selling back at high rate price. The close order is automatically sell. You have not to create new sell order. If you close at low rate price, you lose money.
The advantage of FOREX market is you can trade when price is rappel. If you sell (or short), when you create order SELL, you will get value at bid price. When you close the order, you will get value at offer price. Selling is you notice broker to sell for waiting low rate price. You can close this order by buyback. The close order is automatically buy. You have not to create new buy order. If you close at high rate price, you lose money.
But you see point or pip at 4th decimal point (or 2rd decimal point in some pair). Let’s see EUR/USD.
Assume you predict EUR will climb when compare with USD. That means you can exchange EUR with more USD in the future. You create BUY order at 1.3502. Do you remember that you will get offer price? That mean when compare to bid price, you will get -2. This is broker’s commission.
As time pass by, after price claim to 1.3552 (or 50 point), you notice you cannot hold it. So you close at this point. That mean you get 50 point (or 50 pips or 0.0050 from base currency, 0.0050 USD)
Do 0.0050 USD is too less? You do think how to make high profit? For example, $1 per pip, you have to trade with $10,000! Good luck that you don’t have to put a lot of money like that.
