When & How Do You Trade Forex?
After you have opened an account with a Forex broker, you can immediately start trading currency pairs. Unlike the stock markets, for example, the Forex market is open 24 hours a day, 7 days a week.
The trading volumes do fluctuate strongly: the volume during the London & New York session is the highest.
Example of making money with Forex
You trade with €10,000 in the EUR/USD. Suppose the exchange rate of EUR/USD rises from 1 to 1.1. This means that for $10,000 you would first receive $10,000 and now you receive $11,000.
By opening a position in EUR/USD you could achieve this 10% profit. It is also possible to use leverage, which can increase the profit up to 300%! However, keep in mind that if you make the wrong decision, this profit can easily turn into a big loss.
Are you interested in Forex trading? Then read on to learn the basics so you can get started yourself!
Read currency pairs
Forex relationship Currencies are always shown as a ratio when you invest in Forex. This is because the value of one currency must always be expressed in another currency. For example, you trade in EUR/USD (the value of the euro quoted in dollars).
For example, when you start trading EUR/USD, you buy or sell euros for dollars. For example, when the exchange rate is 1.2, this means that you receive 1.2 dollars for every euro.
The first number in a pair is also called the base currency and the second number the quote currency .
Long and short positions in Forex
long and short When investing in Forex, there are actually two options with which you can open an investment. The first is to buy or go long and the second option is to sell or go short .
When you go long on a position, you are speculating on a rising price. If you open a short position, you are speculating on a falling price. If you think the price is going to rise then you go long and if you think the price is going to fall then you go short.
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How are your results determined?
Your broker constantly monitors the result of your open investments. When you have bought EUR/USD and the euro has increased in value, you have a paper profit as a result .
Only after you have closed the position does this profit become final. The same goes for losses: your open investment position may be loss-making now, but that can change at any time.
So you only earn money that you can withdraw when you close a profitable Forex position on your investment platform. Please note that you can lose the entire amount in your trading account if your open positions are too loss-making. You will then be faced with a margin call .
Open a Forex position
You can often open a Forex position with your broker with a mouse click. Within the Forex trading software you often see a bid and an ask price .
The bid price is the price at which the broker wants to buy the Forex pair.
The ask price is the price at which the broker wants to sell the Forex pair.
There is always a difference between the bid and ask price: we also call this difference the spread . Exotic Forex pairs (the less traded ones) often have a wider spread, while well-known pairs such as EUR/USD are cheaper to trade.
The spread is part of the cost of Forex trading .
Be aware of the costs of Forex
When you start investing in Forex, costs are very important. You probably start trading Forex because you want to make money, not because you want to fill the broker's coffers. It is therefore extra important as a Forex investor to keep a close eye on the costs.
When you invest in shares, you often do this several times a month or even year. Forex trading is more active: you often open many positions in one day. The transaction costs per investment are then lower, but because you open so many positions you still lose a lot in costs.
If you want to make money on Forex, it is therefore important to keep a close eye on the costs of your investments.
Manage risks
If you want to be successful with Forex, it is very important to manage your risks properly. In any case, you have to make sure that for every € 0.50 in loss you make just a little more profit to break even. The broker also takes a small amount of transaction costs on every trade.
It is often best to bet on trades with a favorable ratio of potential profit to potential risk. This means that you only open a Forex position when your potential profit exceeds your potential loss.
This is the case, for example, if the price is 1.2 and you see that the next level from which the price often bounces off is 1.22. You can then set a take profit (the moment when you automatically take your profit) to this value. If you see that when the price drops by 1.19, the price often continues to fall, you can set your stop loss here. Your ratio between your potential profit and loss is then 2:1.
By smartly managing your risks in this way, you increase the risk-return ratio of your trade. That way you increase the chance that you can make money trading Forex.
Another way to manage risk is by using forex trading signals!
Using leverage when trading Forex
You can also use leverage when trading Forex. Leverage allows you to increase the amount of your investment. When you invest with € 1000, you can open a position for up to € 30,000 with a leverage of 1:30 on a currency pair such as EUR/USD. When the price then rises by 1%, you achieve a positive result of 30%.
It is important to be careful with a lever. It is precisely with the use of leverage that you see that many investors go wrong. Your losses also hit much harder, so you can quickly lose a substantial amount.
Tip: watch out for slippage!
When you start investing in Forex it is important to take slippage into account . When the market is very volatile, your stop loss order may not be executed at your set value. This can suddenly increase your loss further.
You can use a guaranteed stop loss with some brokers . You often pay an extra commission for this, so you should only use this guaranteed stop under volatile market conditions.
Conclusion: can you make money with Forex?
You can certainly make money with Forex. However, few people manage to trade Forex profitably for several years. To be really successful you need a substantial amount of money; you see that many private investors use high leverage. A higher leverage also means higher risks, which increases the chance of losing the investment. In the end, few people succeed in making consistent money with Forex.
If you want to make money with Forex, it is wise to at least take the following into account:
Unexpected events: decisions by Central Banks and governments can suddenly cause the exchange rate to rise or fall sharply .
High volatility: with a 10% increase in the exchange rate with a leverage of 1:30, you can either make a 300% profit in one fell swoop or lose all your money.
Bad strategy: many private investors use a risky strategy in which they keep losing positions open for a long time.
Malfunctions: When your Forex broker has a malfunction, it may mean that you cannot close a losing position in time.
Unfair competition: large banks have much more information and can also influence/manipulate the market.
Do you dare to invest in Forex despite all the risks?