Why Forex Traders Make More Money

Earning Money Online With Forex: Information For Beginners

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Earning money online is not only possible with blogs, digital products, other light internet activities and online trading, but also with Forex, trading in foreign exchange.

For beginners, this topic is quite complex and not very easy to understand, but anyone who has very good financial knowledge or has completed training in finance should find their way around the subject of foreign exchange trading.

Note: Nobody should simply enter the highly speculative forex trading without appropriate knowledge and experience, the risk of losing money completely is high. In addition, nobody should be involved in Forex trading with money that is needed for a living.

Definition of Forex (Abbreviation: FX)

Forex means Foreign Exchange and is used to describe buying and selling one currency in exchange for another. As an example, consider the following situation: The US dollar is depreciating against the euro, so that a forex trader sells dollars and buys euros. Because the euro is gaining purchasing power for buying dollars.

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In this, Forex is similar to stock trading, in which the stock trader will buy a stock that he expects to rise in price and sell a stock that is likely to lose value.

The Forex market is the most heavily traded market in the world because millions of people, companies and countries are active on it. As soon as you exchange the currency of your country for that of the other country in a foreign country, you participate in the forex market. More than five trillion US dollars in volume are traded in the Forex market every day, this sum shows how huge this market is.

How does Forex trading work?

Put simply, one currency is always exchanged for another on the forex market (so-called currency pairs). The exchange rate determines which currency is sold and which is bought.

A market price is assigned to each currency pair, which shows how much you need of the second currency to purchase a unit of the first currency. As an example: The exchange rate between the euro and the dollar is EUR / USD 1.230. One euro costs 1.23 US dollars.

Another calculation example: You want to exchange US dollars for euros and invest 1,000 euros. Let us take the above-mentioned exchange rate as the basis for conversion. So you pay $ 1,230 to get € 1,000.

Now the EUR-USD exchange rate rises to 1.44. Now you can sell your 1,000 euros and receive 1,440 US dollars, the difference between your first purchase and your current sale is 210 US dollars, so a profit. But the whole thing can also go into the red if the euro loses value and the exchange rate z. B. would be 1.120. If you sold it, you'd get $ 1,120 and lose $ 110.

Explanation of important basic forex terms

I myself read a beginner's book about foreign exchange trading a long time ago and I was confronted with numerous terms that I had never heard of before. In the following I explain the most important forex terms, but with the note that these are only a small selection.

Exchange rate

The foreign exchange market is a decentralized marketplace that determines the relative value of the different currencies. Two currencies rarely have the same value; the exchange rates for two currencies are subject to constant changes.

The changes in exchange rates come about because supply and demand can increase and decrease, just like with other goods and services.

If the demand for a currency decreases or the supply of a currency increases, the currency value can decrease.

If the demand for a currency increases or the supply of a currency decreases, the value of the currency can increase.

Lot

In Forex, lots are traded. A lot is to be understood as the position size in foreign exchange trading, a lot corresponds to 100,000 units of the base currency of a corresponding currency pair. For EUR / USD that would be 100,000 euros.

A pip change (explanation of the term “pip” below) means that the 10,000th part of a lot changes, which corresponds to the fourth decimal place.

Example: If the EUR / USD currency pair goes up one pip, the position size of one lot in the base currency has gained 10 euros.

EUR / USD rises from 1.2230 to 1.2231, i.e. by one pip. The lot size of 100,000 euros increases to 100,010 euros.

In addition to the lot of 100,000 units of the base currency, there are also smaller lots such as

  • Mini lot: 10,000 units of the base currency
  • Micro lot: 1,000 units of the base currency
  • Nano Lot: 100 units of the base currency

pip

A pip is the fourth decimal place in a currency pair or the second decimal place if JPY is part of the currency pair.

Spread

The spread or bid-ask spread is understood to mean thatDifference between the buying and selling price of a currency. The spread is the main fee that the trader has to pay to the online broker or bank for a trade. The larger the spread, the more the bank earns.

Since the brokers or middlemen usually do not charge any commission when trading forex, their income is generated exclusively via the spread.

The amount of the spread depends on the respective forex broker, so you should always include them when comparing the various providers.

Example: You want to exchange US dollars for euros. A dealer offers you 0.920 euros per dollar. So for 100 dollars you get 92 euros. If you want to exchange the 92 euros for US dollars at the same retailer, you will only get back 99 dollars. The trader collects the difference of one dollar - the spread - as a fee. In this case the spread is 1 percent.

Leverage

Under Leverage (Leverage) is to understand the ability to trade with significantly more money than you actually have in your account. Leverage gives you the opportunity to increase your profit margin by maximizing the return on your capital.

Example: If a broker offers you leverage of 1:20, then you can trade 20 times more money than you deposited. So if you have deposited 1,000 euros, you can trade with 20,000 euros, which can ultimately lead to a 20-fold higher profit, but also a 20-fold higher loss.

Learn Forex Trading

The terms explained are only a fraction of the technical vocabulary that you should learn if you are serious about Forex trading.

In addition to intensive reading of specialist literature, this also includes opening a demo account on an online trading platform and trading foreign exchange in a playful way. There are enough providers on the Internet. Just have a look at Libertex, here you can find out what Forex is exactly.

You can trade there in test mode until you are ready for the first real trade. I myself have already traded forex in a demo account. But I quickly realized that the topic is not for me. I would have to quit my current occupation to get fully into trading.

Ultimately, you should view trading as serious work, like a job you do full-time or part-time.

Conclusion

Trading forex is certainly not a book with seven seals. Above all, it is important not to write out of greed - that is, to want to earn as much as possible as quickly as possible and to avoid common trading mistakes.

However, if you are completely unfamiliar with the subject, you should familiarize yourself intensively with the topic with literature, online courses and a demo account on a trading platform in order to get routine, to put the theory you have learned into practice and to gain experience . The exchange with other Forex traders - e.g. B. in a corresponding Facebook group - promotes further development.

And never use money that you need for a living. Forex trading is and will always be risky.