How Profits Are Generated In Forex Trading

How Profits Are Generated In Forex Trading


Foreign exchange trading is buying or selling one currency in exchange for another, in an attempt to extract the profit from the price movements. Currency markets are open 24-hours a day during the week, which is the advantage over the Stock Market which is only open for each weekday.

These blogs provide an overview of these fundamental basics, including how profits are made, leverage, Forex brokers and trading fees.

1. How Profits are Generated in Forex Trading


Trading Forex takes into the account all that have learned so far. We can Buy and Sell a currency pair and whether that price moves in our favor will determine if we make or lose the money. The amount of that profit/loss is defined by how many pips price moves, the position size and the pip value.

Most Forex traders use the price charts to help determine which trades they will take. If they believe that the EUR/USD is going to rise, then they will buy the EUR/USD. The first currency pair is the directional currency on the chart. If the EUR is expected to increase relative to the USD, the price chart will rise. If the EUR is failing, the chart shows the pair falling.

Assume a trader believes the EUR/USD, which is currently trading at 1.05250, will increase. They buy one mini lot of that currency (10,000). The price does rise to 1.05450, and the trader exits. This is the 20 pip gain, and each pip is worth $1. Therefore, the trader made a $20 on that trade. If instead the price dropped and the trader closed out the position with the loss of 1.05170, then they lost 8 pips in that case.

The EUR/USD often moves between 75 and 120 pips per day.

Forex prices are rated with a Bid and Ask price. The Bid is the price you can sell at right now. The Ask is the price you can buy at right now. The difference between both term bid and ask is called the Spread.

The Small spreads are typical of heavily traded currency pairs, such as the EUR/USD where the spread often be one pip or less. A large spread is typical of currency pairs that are not so popular or that move a lot each day.

Paying a spread is a cost. If you buy the EUR/USD at the 1.05156 ask price, and then sell right away at the 1.0514 bid price, a pip has been lost without the price even moving.

Forex traders use some tools and Forex Trading Strategies to help them decide when to get into trades, when to take profits and when to cut losses.

2. How Much Forex Leverage


Profits and losses are magnified with the Use of Leverage. The Leverage means borrowing money from the broker to increase the capital available for trading. Forex brokers typically do not charge interest on borrowed leverage/funds.

Let assume that the trader deposits $1,500 into a forex account, and they get 10:1 leverage. It means the trader can take positions up to $15,000.

3. Forex Brokers And Forex Trading Fees


All around the world, there are many Forex  Brokers. Since the forex market is not highly regulated in certain regions, there are plenty of unscrupulous and ill-run brokers out there.

When searching for the broker one of the primary things to look for is longevity and regulation. Ideally, the broker should be regulated in a larger market such and the US, Great Britain, Australia, Japan, Canada, or New Zealand.

Brokers with a long track record are favored for the new brokers, as there are always new forex brokers popping up and many leave just as quickly.

Also, consider what you are personally looking for from a Forex broker. Some traders are more concerned with trading costs and fees, while others are more concerned with customer support.

The one major consideration when choosing a broker is the fees they charge. Most brokers don't charge fees for their trading platform or for receiving real-time prices/charts. Most brokers do charge a spread though. Typically the lower the spread, the better.

Many brokers just charge the spread, but don't take any other fees. Other brokers may charge their commission, but if they do the spread is usually much smaller. Day traders are typically better off paying the small charge for the decreased spreads, while a Swing Trader and long-term traders should be able to do fine with the typical broker that has somewhat larger spreads but no commissions.

Spreads and Commissions vary by broker. Compare both of them, along with other criteria to find a broker that works for you.

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