What is Forex and how to Make Money with it

First, congratulations! You’ve just found something few forex (foreign exchange or currency) beginners ever find — an ideal starting point. Going beyond simplifications and theory, here is a practical, well-detailed, step-by-step guide to actually understand WHAT is forex and HOW does it work.

Figuring out how to get started with forex and how to make money trading forex, can be frustrating. Still, you’ve got to start somewhere. Welcome to somewhere.

What is Forex Market

FOREX, also known as FX market, Foreign Exchange Market or Currency Market, is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices. The foreign exchange market assists international trade and investments by enabling currency conversion. It also supports speculations on the floating exchange rate and interest rate between two currencies.

Like everything else, currencies need to be priced in the currency, so currencies always quote and trade in pairs. Foreign exchange (forex) prices are the product of the movement of one currency relative to another. For example, when people talk about the price of the JPY (Japanese Yen), they’re referring to the Yen value relative to another currency, depending on which pair they’re considering (e.g. USD/JPY).

Forex market is the largest financial market in the world, with up to $5 trillion traded every day.

What is Forex Trading

Forex Trading is the simultaneous buying of one currency and selling another for capital gains and/or steady income.

Forex Trading for Capital Gains includes all speculative trades, or profiting on floating exchange rate between two currencies (eg. EurUsd) by either:

  • Buying low and selling high a currency pair anticipating that the base currency (the one on the left) will appreciate against the counter currency (the one on the right);
  • Selling high and buying low a pair anticipating that the base currency will depreciate against the counter currency.

In either case, the forex trader could earn an amount of money on the difference between the opening and closing price of the trade.

Forex Trading for Steady Income includes all carry trade or profiting on the interest rate differential between two currencies by either:

  • Buying a forex pair with a higher interest rate base currency (the one on the left) and lower interest rate counter currency (the one on the right);
  • Selling a forex pair with a higher interest counter currency and lower interest base currency.

In either case, the forex trader could earn interest income on the difference between the two yields, also known as Overnight Interest or Swap in Forex.

Continue reading or get a FREE 20$ welcome bonus and notice what is forex and how does it work in real-time.

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Why Trade Forex

There are more reasons to have some forex exposure beyond currency diversification - or as much of your assets (investments or savings) to be denominated into currencies that are more likely to hold their real value or appreciate in the long run and lift your portfolio along with them.

Forex offers some of the best risk/reward opportunities of any financial market

Once you do your homework, you’ll realize that the currency market is arguably among the most rewarding asset classes for traders and investors. Forex trading in Kenya offers the potential for better risk-adjusted returns IF you know how to exploit it. The availability of leverage in forex magnify gains and losses, creates an unmatched profit potential for those with limited trading capital IF (big IF here) they learn how to control the downside risk.

Just as Easy to Profit in a Falling Market as in a Rising One

Just as it’s easier to row with the current than against it, it’s easier to profit by trading in the direction of an established market trend. Unlike with stocks (and other financial markets), in forex, it’s as easy to profit from falling markets as from rising ones. This is a huge advantage of the forex market. During a downtrend, when prices are falling, it’s easier to profit by trading with that downtrend, selling a currency, or more precisely, a currency pair (they always trade in pairs).

The most flexible hours and the best liquidity

Forex market hours offer the best flexibility. Forex markets trade in a seamless 24-hour session, 5.5 days a week, from Sunday 5:15 P.M. EST until Friday 5:00 P.M. EST (Forex Hours). “Trading in foreign exchange” (FX) markets averaged $5.1 trillion per day in April 2016, according to the 2016 Triennial Central Bank Survey of FX and over-the-counter (OTC) derivatives markets (Forex Turnover). The more liquid the market, the easier it is to be profitable. Prices are fairer and more stable, less subject to sudden unpredictable movements.

The lowest startup and trading costs

Forex trading has among the lowest entry or startup costs in money and time of any financial market, in terms of trading capital and training/equipment costs. Unlike most markets, you do not need many thousands of dollars to get started. That’s because, in forex, we can trade on margin, typically 1% or less. This allows us to make substantial profits on small price movements. In theory, the answer to ‘how much money you need to start forex trading’ is as little as 1.000 USD. However, you’ll learn that you’ll lower your risks and have more chances to profit by starting with at least a few thousand euros (or the equivalent) if possible.

How to get started in Forex

Forex trading has gotten a reputation for being excessively risky due to a combination of:

  • beginners who failed to do their homework and understand what is forex and how does it work; 
  • brokers who failed to provide sufficient forex for beginners type of education to deal with leverage using.

If you’ll do your homework, you will see the absurdity of that reasoning. Just because there are individuals who behave stupidly with cars or power tools doesn’t mean that these should be avoided altogether.

The same goes for forex, including the typical leveraged trading. If you’ve had the right preparation to learn about forex and have the discipline to actually trade forex with proper risk and money management, you can keep the risk to acceptable levels, just as with any other kind of investing.

In the beginning, don’t try to be a bad imitation of an experienced pro. Instead, focus on becoming a great forex beginner. That means finding and using some easy forex strategies and one of the best trading platform that even a forex beginner can, in measured stages, start to implement and use successfully.

As with driving, there are ways to simulate the experience until you’re ready for the real thing (Forex Demo Account), and ways to then start slowly under less challenging conditions (Forex Retail Account) until you’re ready for more challenging conditions (Forex Professional Account).

As with evaluating any vendor, do your homework before you decide to open an online forex account. To maintain maximum objectivity, we will neither recommend AM Broker nor specific forex forum or websites that provide forex broker reviews. To speed your research, however, we offer the following guidance on how to choose a forex broker using AM Broker for the seek of illustrating.

How to Make Money in Forex

Currency rates don’t tend to move by big intraday margins, so there are basically two ways to make money in forex trading:

  • Riding stable, proven, long-term forex trends such that weeks or months movements still translate into large amounts of money.

Forex market produces some of the most stable long-term price trends that are ideally suited for long-term investors, and also can provide simple, effective ways to profit in bear markets. Currencies can be excellent long-term plays because the fundamentals of the underlying economies that drive currency prices change much more slowly than those of individual companies. It’s a longer, more complex process to change the relative growth rates of entire economies (or currency unions in the case of the Euro) than it is for an individual company. This is the long term trading strategy to make money in forex.

  • Using leverage to amplify small hours or days percents movements and make bigger profits, and that is the basis for retail forex trading.

For example, with 100:1 leverage in forex trading, a daily average 1% exchange rate fluctuation means 100% profit. It also means a 100% loss. Leverage in forex trading needs to be managed very carefully to limit the risk as losses can sum up quickly.

Learning Forex Basics

How to read a forex quote

Being able to read and really understand a forex quote is, unsurprisingly, key to trading forex. Let’s start with an example of an exchange rate: EUR/USD 1.12540.

The currency on the left (EUR) is the base currency and is always equal to one unit — 1€, in this example.

The currency on the right (USD) is called the counter or quote currency.

The number is what the counter currency is worth relative to one unit of the base currency. When that number goes up, it means the base currency has risen in value, because one unit can buy more of the counter currency. When that number goes down, the base currency has fallen. In this example quote, 1€ is equal to $1.12540.

You’re always buying or selling the base currency. Within a pair, one currency will always be the base and one will always be the counter — so, when traded with the USD, the EUR is always the base currency. When you want to buy EUR and sell USD, you would buy the EUR/USD pair. When you want to buy USD and sell EUR, you would sell the EUR/USD pair.

Forex prices

As with stock trading, the BID and ASK prices are key to a currency quote. They, too, are tied to the base currency, and they get a bit confusing because they represent the dealer’s position, not yours. The bid price is the price at which you can sell the base currency — in other words, the price the dealer will “bid,” or pay, for it. The ask price is the price at which you can buy the base currency — the price at which the dealer will sell it, or “ask” for it.

  • The ask price tells you how much of the counter currency (USD, in our example) it will take to buy one unit of the base currency (EUR).
  • The bid price tells you how much of the counter currency you can buy when you sell one unit of the base currency.
  • The difference between these two prices — the ask price minus the bid price — is called the forex spread.

The bid and ask are typically shown as EUR/USD bid/ask, and the ask is represented with only the last two digits. For example, EUR/USD 1.12540/46 means that the bid is 1.12540 and the ask is 1.12547. You could sell 1€ for $1.12540 (the bid) and buy 1€ for $1.12547 (the ask).

The bid price is always lower than the ask price, and the tighter the spread, the better for the investor. Many brokers mark up or widen, the spread by raising the ask price. They then pocket the extra rather than charging a set trade commission. With AM Broker you can trade with ECN spreads, starting from 0.0 pips.

What is a lot in forex

Forex is traded by the “lot.” A micro lot is 1,000 units of currency, a mini lot is 10,000 units, and a standard lot or 1 forex lot is 100,000 units. The larger the lot size, the more risk and potential reward you’re taking on; If you’re a beginner, we recommend sticking to mini lots while you get your footing.

And hey, this seems like a good place to note that reliable forex brokers almost always give investors access to a demo trading account. It’s much more fun to lose play money than real money, especially while you’re learning the ropes.

What is a pip in forex

Remember when we said forex trading was complex? We weren’t lying. In stock trading, you might hear or read that a stock’s share price went up a point, or $1.

A pip is the forex version of a point: the smallest price movement within a currency pair. A pip’s value depends on the trade lot and the currency pair. If you’re trading a pair that has the USD as the counter currency and you’re using a dollar-based account to buy and sell, the pip values are:

  • Micro lot (1,000 units): pip = 10 cents.
  • Mini lot (10,000 units): pip = $1.
  • Standard lot (100,000 units): pip = $10.

If the USD is the base currency, the forex pip value will be based on the counter currency, and you’ll need to divide these values for micro, mini and standard lots by the pair’s exchange rate.

To figure out how many pips are in the spread, subtract the bid price from the ask price: That gives you 0.0007 in our EUR/USD example. For most pairs, the smallest price movement happens in the fourth digit after the decimal, so the spread here is 0.7 pips or $0.70 on a mini lot. That’s the cost of the trade.

Understanding what is forex and how does it work is important, but if you want some help, sign-up and our trainers will provide step-by-step guidance to get started. Play around with a FREE $20 welcome bonus and notice how forex can make you serious money today. 

>> Use code WELCOME20 at registration


What's Next

1 What is a Forex Account and how do I open one

2 Introduction to Forex Trading - The Ultimate Guide 2019

3 Forex EA Generator - Welcome to the Money Machine



Categories:  Forex