What Is The Best Way To Make Money Trading Forex
What is Forex (FX) trading?
It is nothing but the buying and selling of currencies.
You can easily place a trade in the currency exchange market. The trade mechanics are very similar to those found in the stock exchange market. If you have any experience in trading, you can easily invest in the foreign currency market.
But don’t worry, if you have zero knowledge of trading, you can slowly pick it up with our Forex trading articles.
The main objective of Forex trading (FX) is to exchange one country’s currency in relation to another country’s currency with an expectation of a boost in prices.
In the EUR/USD currency pair, if you have purchased 10,000 Euros (+10,000), which is equivalent to 11,800 USD (-11,800). But, after two weeks, you would like to exchange the 10,000 Euros back to the US dollar, and then the exchange rate is 1.2500 (+12,500). Hence, you earn a profit of 700 US dollars (+700).
EUR 10,000 *1.18 = US $11,800
EUR 10,000 * 1.25 = US $12,500
An exchange rate is simply defined as the ratio of one country’s currency value against another country’s currency.
For example, the USD/AUD exchange rate indicates how many US dollars can buy one Australian dollar or how many Australian dollars you need to purchase one US dollar.
How to Read FX Quote
In general, currencies are always quoted in pairs, such as EUR/USD, USD/AUD, USD/JPY etc.
The main reason why currencies are quoted in pairs is that in every foreign currency exchange transaction, you are concurrently purchasing and selling one currency for another.
But, how exactly do you know which currency you are planning to purchase and which currency you are going to sell?
It’s an excellent question. From here onwards, the concept of base and quote currencies arrives.
Base and Quote Currency
In the foreign currency exchange market, you always exchange one currency for another currency.
Here is a simple example of the Great Britain Pound (GBP) versus the US dollar (USD).
GBP/USD = 1.21228
Here, GBP is called the Base Currency (the first listed currency to the left of the Slash (/)).
The USD is called as the Quote or Counter Currency (the second listed currency to the right of the slash (/)).
The base currency is also known as the reference element for the exchange rate of the currency pair. It always has the same value.
When purchasing, the exchange rate indicates how much you need to pay in units of the quote currency in order to purchase one unit of the base currency.
In the above example of the GBP/USD currency pair, you need to pay 1.21228 US dollars to purchase one British pound.
When selling, the exchange rate indicates how many quote currency units you need to sell for one unit of the base currency.
Similarly, from the above example of the GBP/USD currency pair, when you sell 1 British pound, you will receive 1.21228 US dollars.
The Base Currency means how many units of quote currency are required for you to get one unit of the base currency.
If you purchase the EUR/USD currency pair, it means you are purchasing the base currency and simultaneously selling the quote currency.
In terms of Caveman talk, purchase EUR/sell USD.
You will purchase the EUR/USD pair only if you believe the base currency (EUR) will appreciate (gain value) corresponding to the quote currency.
You will only sell the EUR/USD pair only if you think the base currency (EUR) will depreciate (lose value) corresponding to the quote currency.
In the Forex market (FX), there are so many currency pairs to be traded, then how do the forex brokers decide which currency to list as the base currency and which to be listed as the quote currency?
However, there is a standard way to quote the currency pairs in the Forex market (FX).
Prior, you must have noticed that the currencies quoted as currency pairs are usually separated with a slash (/) character.
But, there are some forex traders who quote the currency pairs with a period or as a dash (for example, the EUR/USD pair is always quoted as EUR-USD or just EURUSD.)
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