In the forex market, we buy or sell currencies, with the aim of making money (profits) from price changes.
From this point of view, forex trading activities are actually similar to financial market transactions in general, such as stocks.
If you already have experience in stocks, you should have no difficulty in trading forex. However, you can still trade forex even though you have no experience at all in other investments.
However, there are a number of striking differences between transactions in the forex market and the stock market or other markets.
First and foremost, forex traders can benefit both when prices go up and when prices go down. In contrast to stocks where we can only profit if the price goes up.
This is because in forex, buying and selling currencies is done in pairs. For example, if we “buy” the EUR/USD pair, it means that we buy the Euro currency by selling the US Dollar at the same time.
In this case, we expect the Euro to strengthen so much higher in the future than it is now. And if those expectations really come true, then the EUR/USD price chart will move up, and we can earn money from forex trading.
On the other hand, if we “sell” the EUR/USD, it means we sell the Euro currency by buying the US Dollar at the same time. We do this when we expect the US Dollar to strengthen compared to the Euro in the future.
If that happens, the EUR/USD price chart will move down, and we can still earn money from forex trading even if the Euro exchange rate decreases.
Also Read: 6 Reasons and Advantages of Forex Trading that You Must Know
Some Important Concepts in Forex Transactions
From the discussion above, of course you can conclude a number of basic concepts in forex. Well, in this section we will explain further:
1. Currency Pairs
Forex trading instruments are always written in pairs, such as EUR/USD, GBP/USD or USD/JPY.
This is because in every foreign exchange transaction we are simultaneously buying one currency and selling another.
In one pair, the first currency listed to the left of the slash (“/”) is known as the Base Currency. While the second currency on the right is called the counter currency (Counter Currency).
2. Buy/Sell In Forex Trading
In forex trading, the most commonly used terms are:
- Buy (Buy or Long): If you think the value of the base currency will go up.
- Sell (Sell or Short): If you think the value of the base currency will go down.
3. Rate/Exchange Rate/Price
Prices in forex trading are formed on an international scale market.
These prices will be seen in the trading software provided by the broker for us to use as traders, in the form of charts. For example, as shown below:
Look to the right side of the image. The number 1.1593 appears in a white box. That is the current price of EUR/USD.
However, if we are going to buy or sell, we will not use that price, but the price that appears in the red box in the upper left corner of the image.
Why is that? Because the difference between the two prices will be an advantage for the broker or institution that intermediaries you with the market.
This can be likened to the selling rate and buying rate if you do currency exchange in Money Changer.
4. Price Difference Between Offers and Requests (Spread)
The Bid Price (Bid) is the price at which you as a trader will sell (sell) the base currency.
Request price (Ask) is the price at which you as a trader will buy (buy) the base currency.
The bid price is always lower than the ask price, and the difference is often referred to as the Spread.
5. Close Transaction
After you open a position in a currency pair, of course later you will also need to close the position to realize forex trading profits. How to do Close, like this:
- If you originally Buy, to close means CLOSE (Sell).
- If you originally Sell, to close means CLOSE (Buy).
Next, take a look at the concrete examples below of how to make money trading forex.
Also Read: The 6 Type Forex Market Participants In The World
Practical Example of Make Money From Forex Trading
Let’s do a simulation with the currency pair GBP/USD (Poundsterling and US Dollar).
At one time, GBP/USD displayed a bid price of 1.2800 and an ask price of 1.2804. If at that time you estimate the value of GBP will strengthen/increase, then you take a BUY position on GBP/USD at 1.2804.
After some time, the price will change. It can move up, it can move down.
If your estimate is correct, the value of GBP/USD will move up. For example, up to the number written in the box Scenario 1.
Well, that’s your chance to be able to realize the benefits of forex trading by doing CLOSE (Sell) GBP/USD at 1.2820.
From the 1 forex trading transaction, the profits obtained are: 1.2820 – 1.2804 = 16 Pips (Pip is the smallest price movement available in the currency).
Well, now the question is, what if it turns out that the price of GBP/USD moves in a different direction, or does not match your expectations?
For example, GBP/USD actually dropped to the number as stated in the Scenario 2 box. If you CLOSE (Sell) in this position, it means: 1.2770 – 1.2804 = -34 Pips (you lose 34 Pips).
Thankfully, in forex trading, when you CLOSE, it depends on the analysis and it’s up to you. Is it expected that GBP/USD will continue to fall?
If so, then it’s best to Close now to minimize losses. Or do you believe GBP/USD will rise again? If so, don’t close now, wait for the price to rise again to get a profit.
The pips you earn here are to your advantage. It’s just that, to convert profits in the form of pips into money, another calculation is needed.
Calculating Forex Trading Profits
The pip will be how much money (dollars), depending on the number of lots and the size of the contract you are using.
The number of lots is the transaction volume that you fill in the order form when opening a forex trading position.
While the size of the contract is usually attached to the type of account you choose when opening an account at a forex broker.
Generally, there are three types of contracts:
- Standard contract: 100,000 units (one hundred thousand units; if we trade with the base currency US Dollar, it can be called one hundred thousand USD).
- Mini contract: 10,000 units (ten thousand units; if we trade with the base currency US Dollar, it can be called ten thousand USD).
- Micro contract: 1,000 units (one thousand units; if we trade with the base currency US Dollar, it can be called a thousand USD).
The illustration of the calculation of profit in Scenario 1, assuming an order of 2 lots and using a standard contract, will be like this:
- Profit($) = Pip Profit X Value Per Pips X Lot
- Profit ($) = 16 pips X US$10 X 2 Lots = US$320.
So, let’s summarize in the following image.
Looking at the example of the calculation illustration above, it may be implied in your mind, “Then, the forex trading capital is up to thousands of dollars? The smallest micro contract is only a thousand dollars, if the standard is even a hundred thousand. Expensive.”
No. Even though the contract order is like that, the capital for forex trading can be as cheap as US$10. How come?
This is because there are forex brokers that provide a facility called leverage.
Leverage is a proportional loan scheme with collateral, so it can increase the purchasing power of traders’ funds. For example a broker offers 1:100 leverage, meaning a trader with a capital of US$10 can have a buying power of US$1000 (from 10×100). In this case, US$10 becomes the guarantee fund (Margin) that the trader needs to submit to the broker.
Small, isn’t it!? Although later profits will also be adjusted proportionally to the leverage used by traders, but at least it is clear that the capital needed by traders to start trying to make money from forex trading is very low.
Even more profitable for us today, all trading platforms/software from brokers have performed the above calculation process automatically.
So, we can easily find out the dollar value of our profits without the need to bother calculating again, just trying to make profitable transactions.
For those of you who like to count, you can see a more complete explanation in a special article on how to calculate profit pips. However, if you are quite satisfied with this explanation and want to see firsthand how to place buy and sell orders, register to create a forex demo account.
With a demo account at a forex broker, you can simulate forex trading using virtual money (not real money) for free. You can immediately apply the knowledge gained from various forex trading learning materials.
Well, for beginners to be able to generate profit trading consistently, of course, you have to practice a lot and be balanced with the application of disciplined Money Management. In addition, traders also need to learn the psychology of forex trading which basically also has a big impact on the success of a trader.