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You decide to exchange 14, U. This means for every 1. You go on holiday, to the U. The 10, GBP remains as is for the next 2 weeks just sitting in your wallet. Day 14 2 weeks later. The above example is a brilliant demonstration of how money is made trading forex. Lets take a look at what this looks like on a price chart, to get an appreciation of what's just happened:.
It seems a bit impractical to having to go back and forth to a foreign-exchange dealer to profit in this way, and that's where the advent of online trading brokers came into existence. I'll talk a bit more about those later, and if you want more detail, here's a complete guide on choosing a good forex broker for when you get started. Not to dissimilar to those online betting apps, you have a list of forex pairs, and away you go So naturally it makes sense to discuss, how do forex pairs work?
The first thing to grasp is that currencies have exchange rates when traded. An easy way to remember this is to read the pairing from left to right. The left-hand-side currency is known as the base currency , and the right-hand-side is known as the quote counter currency.
On the right side, we have our counter currency sometimes this is referred to as the quote currency. The exchange rate is 1. Now, when we buy a currency pair our expectation is that the base currency Euro in this example is going to increase in value, and the counter currency USD will depreciate.
The opposite holds true when we sell. A good way to remember this is to think, you have to look down at a short person, so going short must mean you think the market is going down! And then Long must be the opposite by the process of elimination. Going long buying , we expect the base currency to strengthen while the counter currency weakens - all at the same time relative to each other. Alternatively, going long means a trader has a positive sentiment about the future and is bullish.
Going short , we expect the base currency to weaken while the counter currency strengthens - all at the same time relative to each other. Now in terms of the actual exchange rate number, this is where it becomes really simple and all comes together. When longing we want the exchange rate to go up, and when shorting we want the exchange rate to go down.
This is the bid and ask price. The difference between those two prices is known as the spread. The reason these 2 prices exist is that this is one of the ways the brokerage makes money. What is Bid? In other words, the price at which you can sell the base currency, and buy the quote currency. What is Ask? In other words, the price at which you can buy the base currency, and sell the quote currency. What is Spread?
You may notice, the price at which you can buy at ask is higher than the price at which you can sell at bid. This mechanism means as soon as you click that buy button you will instantly be in a very small loss. The same holds true when you short. That small loss is 3 pips, or 0. They are a business after all Essentially a derivative of the actual asset itself.
This has excellent benefits, as it allows you to instantly buy and sell forex pairs, without having to own a massive safety deposit box to store all your cash! Can I still trade? Yes, you can by trading on margin and using something called leverage. One of the key benefits of trading CFDs is the ability for you to trade on margin. The easiest way to explain this is by breaking down margin into its components:. The initial margin is what you initially deposit into your trading account at the beginning.
It's essentially the collateral you place against a trade , to give the broker confidence you have the funds to open larger positions. Imagine this as a deposit you put on a house, so the bank knows you're serious about buying a house. In forex, this deposit if your initial margin, and gives the broker a sign that you're serious about open some trades.
The margin requirement is the amount your broker requires in order for you to open a. This is usually expressed as a percentage and is also known as leverage when expressed as a ratio. As a trader, this means you can hugely amplify your returns, but at the same time amplify the losses. He really knew his stuff that guy. It should all start to make a little bit more sense now on how money is made when trading forex.
The powerful tools of leverage and CFD's combined make trading one of the most profitable vehicles you can choose to drive. But before we can start making those returns, we need a plan. This will be your forex trading strategy A forex trading strategy is a plan you make to build a money-making portfolio.
A good forex trading strategy will answer the following questions, no more and no less:. The aim of the game is to try and predict which currency will gain strength and increase relative to another currency. In forex those questions can be replaced with the following steps:.
In this step traders will determine the value of each currency, to determine if you want to buy it or sell it, based on its fundamental value. In this step traders check the current price, and historical price of the forex pair and compare it against your value calculation.
If its below value, buy, if its above value, sell! In this step traders will work out at what price they're willing to take their profits, or minimise losses. A forex strategy must have a structured plan that encompasses valuation, optimisation and risk management, in a quick and easy fashion every week.
To understand this, we need to look at something called fundamental analysis. This is where we consider a variety of economic variables to determine the supply and demand of a currency. Simply, how much money is there in circulation in the economy. Each currency is backed by an economic region or country. Therefore, what we want to do is take a deep look into how well that economic region is doing to decide whether we want to buy or sell their currency. A lot of traders use things like a macro currency strength meter to do this for them, as it's not an easy task to do alone.
The first step to answering the questions of "what" we want to buy or sell, is to change the question to:. There are 6 key factors to consider:. These 6 broad categories are essentially how global macro traders, from investment banks, right the way to your stay-at-home novice value a currency. Once analysed, this will tell us, in the future, if there will be an increase or decrease in the supply of the currency for a particular region.
Then from this, we can answer our original question of "what" we want to buy or sell by understanding the basic principles of supply and demand theory The theory of supply and demand suggest the amounts of goods and services available for people to buy in comparison to the amount of goods and services that people want to buy.
I think the best way to explain this is with a little example:. Once upon a time, in a small town, there was a Gold mine. The miners were working for 2 weeks and found an almost infinite amount of gold, and it was easily accessible to the whole town. In this town, there was a massive "supply" of gold. As the gold was so easily available, the "demand" for gold was quite low. This made it cheap. Day After a month, there was a storm, and it flooded the mines, washing away all the gold that the village had, leaving a small stockpile that was in the Mayor's house.
Gold has now become scarce, and the "supply" has become restricted. As the gold was no longer easily available, the "demand" for gold has drastically increased. This made it a lot more desirable and more expensive. There are 2 rules we can gain from our story:. This same principle applies to currencies.
By using our fundamental analysis, we can determine the supply and demand of the currency, and by net effect, its value. And just like that, we know "what" we want to buy and sell, and "why" we're doing it The most powerful trading strategy there is and is used by nearly all investment banks and you soon enough you'll be using it too budding forex trader. But Marcus, how do we know whether there is more or less money in circulation?
The trick is to use a scoring system for each economical variable which makes it easier for us to interpret the data. This is essentially what a macro currency strength meter would do to make it really easy. Our macro currency strength meter has already considered if there is more or less money in circulation for the United States and Japan.
It then computes the currency score on a scale of to on how strong or weak the currency is dependant on this. If we have a strong positive score for a currency, we would want to buy it the currency is in low supply, more demand. If we have a weak negative score for a currency, we would want to sell it the currency is in more supply, and less demand. If you'd like to learn this in a bit more detail, we have a free web-class breaking it all down simply here. Now we know what we're doing, and why we're doing it The best traders answer this is with a traffic light system based on the current market sentiment :.
If the market is against you - don't enter. If it is neutral - wait longer. Most traders shouldn't expect to make that much; while it sounds simple, in reality, it's more difficult. Most day traders can have a reasonable level of success trading forex for a couple of hours each day. Of course, the more time you devote to it, the more potential profits you can make.
Because forex markets cover the entire world, it's possible to trade forex 24 hours a day from Sunday evening through Friday afternoon. ET and continue trading as other markets open and close through Friday at 4 p. Stocks offer a greater variety of options and risk levels than forex trading, but they require much more capital to get started. Forex also allows trading 24 hours a day, while stock trading times are more limited.
You can make money or lose money in any market, so what's most important is to know your particular market and how to trade effectively. Admiral Markets. Table of Contents Expand. Table of Contents. Day Trading Risk Management.
Forex Day Trading Strategy. Hypothetical Scenario. Trading Leverage. Trading Currency Pairs. Larger Than Expected Loss. The Bottom Line. Trading Forex Trading. By Cory Mitchell. Cory Mitchell, Chartered Market Technician, is a day trading expert with over 10 years of experience writing on investing, trading, and day trading for publications including Investopedia, Forbes, and others.
Learn about our editorial policies. Reviewed by Julius Mansa. Department of State Fulbright research awardee in the field of financial technology. He educates business students on topics in accounting and corporate finance. Outside of academia, Julius is a CFO consultant and financial business partner for companies that need strategic and senior-level advisory services that help grow their companies and become more profitable.
Learn about our Financial Review Board. Key Takeaways Risk management is a critical part of forex trading strategy, usually done with a stop-loss order. How many hours of trading per day do you need to make money on forex? What time does the trading day start on the forex charts?
It is perhaps better to avoid those pairs which have high spreads. The recommended spread by the trading experts tends to be around pips. When it exceeds 6 pips, trading may become too expensive, which can lead to greater losses. Still, it doesn't mean that you should totally avoid anything which has a high spread. The best way to trade sensibly and effectively in this regard would be to exercise proper risk management within your trading to help minimise the risks of trading.
As we saw above, the major Forex pairs consist of the most heavily traded currencies and all include the US dollar. Minor Forex pairs, also known as cross currency pairs, are pairs that do not include the US dollar.
These pairs have wider spreads and less liquidity than the major pairs, however, they still have sufficient liquidity for trading. Examples of minor pairs include:. Then there are the exotic currency pairs, which include the currencies from emerging economies. Exotic pairs are the least liquid and also tend to have the largest spreads. Examples of these exotic pairs include:.
If you're interested in trading these currencies but aren't ready to risk your funds yet on the live market, there's no better place to start than with a free access Admirals demo trading account. Instead of heading straight to the live markets and putting your capital at risk, you can avoid the risk altogether and simply practice until you are ready to transition to live trading. Take control of your trading experience, click the banner below to open your demo account:.
Just like any other skill, becoming successful at trading takes time and plenty of practice. To master this skill you need to have a lot of patience, discipline, but most of all you need to be passionate about the industry. Successful trading starts with having a trading plan that is based on either Technical or Fundamental analysis. Technical analysis looks at price charts of a financial instrument, using technical indicators or price action to attempt to predict future movements in price.
Whereas, fundamental analysis attempts to predict price movements based on macro economical data and news releases. There are many different ways you can learn currency trading online as there are a lot of different education providers. To start learning for free with Admirals we suggest heading over to our "Forex Strategy" section in our Articles and Tutorials education portal to learn different trading strategies. It's time to briefly detail the Forex trading sessions along with the currency pairs I have just discussed.
Understanding the Forex trading sessions will also strengthen your trading strategy. The Forex markets are open 24 hours a day during the week, except on holidays. However, the market isn't dominated by one market. Instead, there is a global network of brokers and exchanges and brokers around the world. The Forex trading hours are based on the market opening hours of each participating country.
Although a hour Forex market offers many opportunities for both individual and institutional traders , since it guarantees liquidity and a reliable opportunity to enter and exit trades at any possible time within the Forex trading hours, it still has its pitfalls for traders. While you can trade different currencies anytime you wish, you can't monitor your position for long periods of time. This means that there are Forex trading times in which traders miss opportunities, or worse, there is a spike in market volatility that leads the spot to move against a position when you're not nearby.
To reduce such risks, you have to learn when the markets are most likely to be volatile, and therefore decide what times are best for their individual trading strategy and style. If you look at these hours, you may notice that there is a pattern that generally follows: as one major Forex market closes, there is another one that has opened. There are specific times in which the markets are more active and times when they are less active.
All traders need to keep track of the different levels of activity throughout the trading sessions. Next, I'm going to briefly discuss these periods and the times that traders generally consider the best and worst times to trade. When there is low liquidity, which usually occurs when markets open, and at around 12am, there is substantial risk for trading.
Low liquidity can bring about higher volatility than traders see during common trading hours. Professional traders don't recommend entering trades any time from am. These high-risk periods can put your account at risk. Typically, professional traders see the first three hours of a major trading session as having the best momentum, trend, and retracement.
It is during these hours that traders seem to find the best opportunities. Do you want to learn more about trading hours? You can find more in-depth information in our full article on this topic here:. Many factors can make or break you as a trader, such as having a clearly written trading plan and following it. This indicates that you know exactly what your entry and exit points are and that you know what you are looking for.
Trading involves a lot of psychology and can be a lot harder to manage without a proper plan. The key is to minimise the psychological effect that our emotions might have on our performance. Apart from the mental side, it is very important to have a broker and platform that you can trust. The MetaTrader trading platforms are widely regarding as some of the best Forex trading platforms.
These platforms are the most used in the world and come equipped with a whole range of useful technical indicators to help with chart analysis. Admirals offers free access to both the MetaTrader trading platforms.
Aside from this, we offer other useful tools, such as the Trading Calculator. Since risk management is a key factor in trading and it's nearly impossible to calculate the correct lot size since every pair has a different pip value, the trading calculator can be a very important tool for a trader.
Generally speaking, the best pair for you to trade is the one that you are most knowledgeable about. A useful way to keep track of economic announcements which might affect the value of a currency is with our currency exchange rate Forex trading calendar , where you can also find predictions and forecasts concerning announcements. With a Forex trading calendar, you can find predictions about potential currency-related events that may influence the Forex markets. The dynamics of Forex trading is an interesting subject to study.
As globalisation becomes a bigger, more pressing issue for most countries around the world, the fate of their currencies is closely interconnected. Make sure you study the foreign exchange market extensively before investing. There are many Forex pairs available for trading and it is highly recommended to try trading most of them before you choose a particular one to stick with.
As Forex trading is risky, you should try it first on a Demo account with virtual currency so you can practice before risking your own capital. If you want to start trading Forex or investing in thousands of other markets, MetaTrader 5 is commonly regarded as one of the best available platforms for doing so.
It is available on desktop, a web terminal and as a mobile app, which makes it a convenient forex currency trading app as well. Traders can easily track the movement of currency rates and a wide range of other financial assets, such as CFDs on stocks, commodities and stock indices, to name a few. The following articles may be of interest to you. Discover some people who have become wealthy trading Forex and discover different trading and risk management strategies that are essential for any trader to minimize losses and maximize potential profits:.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time.
Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks. Contact us. Start Trading. Personal Finance New Admirals Wallet. About Us. This estimate shows how much a forex day trader could make in a month by executing trades:.
That may seem very high, and it is a very good return. See below for more on how this return may be affected. It won't always be possible to find five good day trades each day, especially when the market is moving very slowly for extended periods. Slippage is an inevitable part of trading. It results in a larger loss than expected, even when using a stop-loss order. It's common in very rapidly moving markets.
This is a high estimate for slippage, assuming you avoid holding through major economic data releases. You can adjust the scenario above based on your typical stop-loss and target, capital, slippage, win rate, position size, and commission parameters. Most traders shouldn't expect to make that much; while it sounds simple, in reality, it's more difficult.
Most day traders can have a reasonable level of success trading forex for a couple of hours each day. Of course, the more time you devote to it, the more potential profits you can make. Because forex markets cover the entire world, it's possible to trade forex 24 hours a day from Sunday evening through Friday afternoon. ET and continue trading as other markets open and close through Friday at 4 p.
Stocks offer a greater variety of options and risk levels than forex trading, but they require much more capital to get started. Forex also allows trading 24 hours a day, while stock trading times are more limited. You can make money or lose money in any market, so what's most important is to know your particular market and how to trade effectively. Admiral Markets. Table of Contents Expand. Table of Contents. Day Trading Risk Management. Forex Day Trading Strategy.
Hypothetical Scenario. Trading Leverage. Trading Currency Pairs. Larger Than Expected Loss. The Bottom Line. Trading Forex Trading. By Cory Mitchell. Cory Mitchell, Chartered Market Technician, is a day trading expert with over 10 years of experience writing on investing, trading, and day trading for publications including Investopedia, Forbes, and others.
It is possible to make money trading money when the prices of foreign currencies rise and fall. Currencies are traded in pairs. Buying and selling currency can be very profitable for active traders because of low trading costs, diverse markets, and the availability of high leverage.