The main goal of trading forex is to make money right? So how do you make money in forex trading?
As discussed on the part on reading a Forex quote, trading currency in the Forex market centers around the basic concepts of buying and selling.
Let’s take the idea of buying first. If you bought something (e.g a house) and it went up in value and you sold it at that point, you would have made a profit…the difference between what you paid originally and the greater value that the item is worth now. Buying in currency trading is the same way. Let’s use an illustration below.
To understand the 100 pip profit in monetary terms, you would need to know the lot size used in the trade. You can read about lot sizes in the glossary section but for the purposes of this lesson, I will just put a table showing the potential profit from different lot sizes.
As you can see, the 100 pip profit would vary from $10 to $1000 depending on the lot size.
Now let’s take a look at how a trader can make a profit by selling a currency pair. This concept is a little trickier to understand than buying. It is based on the idea of selling something that you borrowed as opposed to selling something that you own.
In the case of currency trading, when taking a sell position, you would borrow the currency in the pair that you were selling from your broker (this all takes place seamlessly within the trading station when the trade is executed) and if the price went down, you would then sell it back to the broker at the lower price.
The difference between the price at which you borrowed it (the higher price) and the price at which you sold it back to them (the lower price) would be your profit. For example, let’s say a trader believes that the USD will go down relative to the JPY.
In this case, the trader would want to sell the USDJPY pair. They would be selling the USD and buying the JPY at the same time. The trader would be borrowing the USD from their broker when they execute the trade. If the trade moved in their favour, the JPY would increase in value and the USD would decrease.
At the point where they closed out the trade, their profits from the JPY increasing in value would be used to pay back the broker for the borrowed USD at the now lower price. After paying back the broker, the remainder would be their profit on the trade.
For example, let’s say the trader sold the USDJPY pair at 122.761. If the pair did, in fact, move down and the trader closed/exited the position at 121.401, the profit on the trade would be 136 pips.
By now you should have an understanding of how profits are made in Forex. Losses are made when the pair moves in the opposite direction to your position. For example, if you sell a pair and it rises, you make a loss equal to the pips that the pair would have moved. In monetary terms, the loss will also be related to the lot size.
In short, if you buy a pair and it rises, you make money. If you sell a pair and it falls, you also make a profit. Losses are made when you sell a pair and it rises and when you buy a pair and it falls in price.
If you enjoyed this post please share it with your friends. Thank you in advance!