Before we begin to discuss earning money by trading forex (foreign exchange), there are some basic terms with which you will need to familiarize yourself. The foreign exchange market is an over the counter (OTC) market where you deal with a forex broker, who is the link to the interbank market, where the big boys like large banks and financial institutions play. The broker sets the foreign currency exchange rate and executes your orders. Trading is non-stop for 24 hours a day five days a week and you can trade whenever you please.
Understanding price quotes: Trading in the foreign exchange market is done using currency pairs and the foreign currency exchange rate is quoted accordingly. If you were to ask your broker for a Euro/USD (US dollars) quote, you will get something that looks like this: EUR/USD 1.3050 1.3055
In this example, the Euro is called the base currency and the USD the quote or variable currency. This is a two-way quote that you can use either to buy or sell. The first price is the bid price, indicating how many USD you would receive if you sold one unit of the base currency Euro. The second price is the ask price, indicating how many USD you would have to pay if you bought one unit of the base currency Euro. The difference is the spread. In market jargon, you are going long when you buy, and short when you sell. In this example. if you buy one Euro, you are long Euro and short USD.
Understanding margins and leverage: One of the great attractions of trading in the forex market is how you can multiply your bet by the use of leverage. For every one dollar in that you invest, called a margin, your broker will lend you a multiple, which can be as high as 300. If you wish to control an investment of $10,000 you only have to come up with $100 if your broker is offering a hundred-to-one leverage. However, remember at all times that leverage is a double-edged sword and earning money or losing it are both possibilities. A 1% decline in the leveraged $10,000 investment will wipe out 100% of the $100 you are using to control it.
Online trading: All you need to start in forex trading is a high speed Internet connection and a personal computer. Find yourself an online broker who will open a trading account for you in your territory. As this is an OTC market, your broker has the freedom to allow you to trade in small size lots to suit your budget. To attract retail customers such as yourself, brokers often offer micro and mini accounts with an initial investment as low as a couple of hundred dollars. Many brokers, in addition to offering a trading platform, will offer you freebies such as free news and market information as well as a demo account where you can try out your strategy before risking real money.
Before you start trading, it is a good idea to gather whatever resources you need to trade successfully. These tools could include forex forecasts, a forex trading signal service or a forex robot to track the trends in the foreign currency exchange rate and trade on autopilot on your behalf. Once you have done your research and gathered your resources you are equipped to begin earning money on the foreign exchange market.
