In the forex market, we purchase and sell currencies in order to profit from price fluctuations. From this perspective, forex trading operations are similar to other financial market transactions, such as stock trading. Still, you should have no trouble in trading forex, if you have previous experience trading equities.
However, there are some notable distinctions between transactions in the currency market and those in the stock market or other marketplaces. To begin with, forex traders can profit both when prices rise and when prices fall. Unlike stocks, where we can only earn if the price rises.
What’s the deal?
This is due to the fact that buying and selling currencies in forex is done in pairs. For example, when we ‘sell’ EUR/USD, on the other side, we are selling the Euro currency while simultaneously buying US Dollars. We do this when we believe the US Dollar will strengthen against the Euro in the future. If this occurs, the EUR/USD price chart will fall, and we will still be able to profit from forex trading even if the Euro exchange rate falls.
Make Money on Forex
What about the transaction fees? Is there a commission required for the broker as a forex trading service provider? The answer is, of course, yes, because it is also known as a spread in forex. This is the price difference determined by the broker based on the Bid and Ask.
To make it easier, let’s look at the following simulation of how to make money from forex.
GBP/USD formerly had a bid price of 1.2700 and an ask price of 1.2704. If at that time you estimate the value of GBP will strengthen or increase, then you take a BUY position on GBP/USD at 1.2704. After some time, the price will change. It can move up, it can move down.
If your prediction is true, the value of GBP/USD will rise. For instance, up to the number specified in the first scenario. Now is your time to reap the benefits of forex trading by CLOSE (Sell) GBP/USD at 1.2720. The profit from one forex trading transaction is: 1.2720 – 1.2704 = 16 pips (Pip is the smallest price movement available in the currency).
In the other circumstances when price swings in a different direction, you may be certain that you will lose according to the loss limit that you have set using Stop Loss or Cut Loss.