Firstly, are you looking for a new way to make money online? Secondly, have you considered using Forex? This article will answer the following two-part question to help you decide. What is the Forex Market For? Can it make you rich?
First, please review the following article. I wrote it to give you an introduction to this topic. And why I want to share my knowledge of Forex with you.
Click this link: How To Make Money In Forex – The Magic Formula!
This article is an overview of Forex. It will leave you with many questions that I will be answering in a series of following posts, this being the first one.
The Forex Market
The word Forex is an abbreviation for Foreign Exchange. When we travel abroad, we experience the effects of the Forex Market first hand.
For example, when you fly to Europe and need the local currency, Euros, you will need to purchase Euros with your United States Dollars at a Currency Exchange Office in an Airport, or a Bank.
Today, January 13, 2022, one hundred US dollars will buy you 87.4 Euros.
When you leave Europe and wish to sell your leftover Euros, it will cost you about 88.4 Euros in exchange for that same US Dollar. Notice that spread of about one dollar? The currency exchange office makes a profit both ways. This market is not the Forex market, but the currency market.
This spread is much smaller when you trade currencies on the Forex Market. The vast amounts used to change hands in the Forex market make up for the profit in volume. Hence, the currency exchange office needs to factor the spread in the Forex Market to make sure they make a profit.
Approximately 8 Trillion Dollars are traded in the Forex Market each day compared to about 187 Billion Dollars in the New York Stock Exchange.
The Main Purpose Of The Forex Market
The main purpose of the Forex Market is to keep large International business transactions running smoothly. Businesses that operate internationally, have to buy and sell products and services in foreign countries using their currency.
Large enterprises purchase foreign currency in advance, in the countries they do business in to maintain predictability in their financial transactions. Rather than wait till the bills are due, they make sure they already have the foreign currency in hand to control their costs accurately.
Predictability and stability are essential for accurate accounting.
This is an oversimplification of the process but I think you can get the idea of what the Forex market is for.
How Can The Forex Market Make You Rich?
It is not the purpose of the Forex market to make you, or anybody else rich.
Serendipity comes into play here. Since vast amounts of currencies are bought and sold each day, the market is very liquid. The spreads are kept relatively low most of the time. And trades are easily executed in seconds and even fractions of a second.
Today, with computers and mobile devices readily available, it is easy to open a trading account with a Forex Broker and trade online at any hour of the day. The Forex Market is open for business 24/7, except for about 48 hours over the weekend.
The concept of getting rich is simple.
You open a trading account. Make trades. Be sure that you have more winners than losers. Rinse and repeat. Do this often enough and it will make you rich.
Sad to say, the process is not as easy as that. If it was, everyone would be jumping into the Forex Market as traders to get rich quick.
Don’t get me wrong. You can get rich. If you’re not careful, you can also go broke. In order to get rich, there is a strict process you will need to follow that I will outline below using 10 steps.
10 Basic Steps To Trade Forex Profitably
- Open a cash and demo trading account with a Forex Broker
- Go through extensive training that could take years to become skilled in trading the Forex Market.
- Practive extensively with paper trades using your demo account.
- Become an expert at risk management where you minimie your losses and maximize your profits.
- Learn how to set stop loss and take profit levels to stach the deck in your favor.
- Maintain discipline in trading without allowing your emotion to get the better of you.
- Develop your own trading style where you make more money than you loose. You will have losing trades.
- Learn the best times to trade and when not to trade.
- Transition to using cash, starting with small amounts first before using larger ones.
- Eventually you will need a trading account of at least $10,000 to make suffient profits without over extending yourself
If you are a fast learner and work very hard in practice, you could become a profitable trader in less than a year. Don’t be alarmed if it takes you longer. It took me over three years to become a profitable trader.
I will go into great detail on the above 10 steps in future articles. Before I end this article I will give you a brief primer on how trades are made.
How Trades Are Made
When you open a trading account, the broker will require you to download a piece of software where you will use trading charts to analyze and make your trades. The most common chart software for Forex is called Meta Trader 4. Or MT4 for short. This software is specifically designed for Forex trading.
There is a learning curve required to use this software effectively. Anyone serious in trading Forex will be able to start using this within days or even hours. However, to fully understand all the features and technical aspects, such as indicators, will take several weeks or even months.
It’s All In The Charts
The charts are used to graphically show how the currency pairs are changing in value with respect to each other. They can be set up to study intervals of a minute all the way to monthly charts.
Daily charts are used most commonly as the starting point to understand what is happening in the Forex Market.
The chart shown above is the 4 Hour chart. I initiated a Sell trade of the GBP (Great British Pound) vs the USD (US Dollar).
In the top left, you will see that at the moment in time that I took this screenshot, the closing price for the GBP-USD was 1.37182. This means that one GBP was worth 1.37182 GBP. This value changes by the second.
The horizontal axis represents the date. The verticle axis is the value of the USD with respect to the GBP.
Trade Setup And Explanation
Notice that I selected an inflection point where the trade appears to be reversing. If the USD drops in value with respect to the GBP, my trade will increase in value because I sold the pair. The further it drops, I will make more profit.
I set a predetermined Take Profit level (TP) shown by the green line at 50 pips. Since I invested only a micro lot, each pip drop will give me a profit of 50 cents. So at 50 pips, I will make a profit of $5. If I had invested 1 lot my profit would be $500. Since I am trading a small account of $2000, investing only one micro lot is good risk management.
There is no guarantee that this will occur. The trade could reverse and go up. In that situation, I will start to lose money. Hence I set up a predetermined Stop Loss (SL) position shown by the violet line at the 25 pip level. If the GBP-USD value rose and reached this level, the trade would automatically close out at a loss of $2.50.
Essentially, I am risking a loss of $2.50 to make a profit twice as much at $5.00. If I see the trade going against me, I don’t have to wait till it reached my maximum loss position. I could close it out for a smaller loss.
The Importance Of Understanding And Using Trading Charts
A major part of your training will be how to use charts to see what the current status is as well as predict where the currency pair you are trading will move in the future.
A trove of indicators has been developed over the years to help predict chart movements. Two trains of thought have evolved regarding the use of indicators.
One group of traders uses one or more indicators for every trade they make. Another group of traders place their trades using price action and don’t rely on indicators.
There is no right way or wrong way. During your training, try both approaches. Then use the one that works best for you.
I prefer to trade using price action exclusively. There is only one active indicator I use to help me visualize the charts that match my style of trading.
More details of how to trade Forex successfully will be covered in future posts. If you haven’t done so I strongly urge you to review my introductory article on Forex, link below:
In conclusion, I want to keep you informed when I will be publishing future posts on Forex. I need your help to contact you.
If you fill in the form below I will be able to do that effectively. In exchange for your name and email address, I will give you a free eBook on an iconic work that could change your life.
It is called appropriately, Think & Grow Rich by Napoleon Hill. It is an easy read and will help you get into the right mindset to be a successful Forex trader.
Thanks for reading this post. Please leave me any questions or comments below and I will respond promptly.
I wish you every success in whatever ventures you are currently involved in.