Trading foreign currency is simple and easy. However, making money with Forex trading isn’t. The majority of the Forex traders lose money playing the currency exchange game. Effective Forex trading, therefore, requires the ability to manage risk and a good knowledge about the Forex currency market. If you want to be amongst people who want to profit from Forex trading, it is important to educate yourself before you risk losing money.
How Forex Traders Make Good Profits
Currencies are traded in pairs. For instance, Europe and USD currency means the euro-US dollar pair. The second currency is quoted in terms of the base or first currency. The Eur/USD 1.25 currency means one euro will be purchased for $1.25 US dollars. When a trader thinks that the base currency will go up to the relative second currency, the person will be in a position to buy. For instance, if he thinks that the dollar will get stronger, he will take a selling position in the base currency. So if he goes a long way with the euro at $1.25 and the exchange rate rises to $1.30, the trader will make a profit because he will get $1.30 back for every $1.25 of currency that he brought to start with.
Understanding the Forex Trading Risk
Currency is mostly traded on margin. For example, a Forex broker might require just $2000 to trade $100,000 lot of currency. If the exchange rate is moving at 2 percent in the trader’s favor, it will double the money. However, the market can just easily go the other way and wipe it out. This is what makes Forex trading so risky. Suppose that a trader goes long on the euros when the rate is just Eur/USD 1.25 and the euro falls to 1.2250, a 2 percent margin will be gone and the broker will just close out the trade- leaving them with no way to recover fully from the loss if the market turns around.
Practice-Practice Makes You Perfect
When it comes to Forex trading, you have to practice before practice will make you perfect. Forex trading website mostly allows you to practice for free. A typical practice account permits you to use the website’s trading platform in order to trade a fictional account for only 30 days. You can become familiar with the charts and the analytical tools and get a good know how about how trading is done. You can also use these platforms to anticipate market trends and gain a good experience with the trading strategies before you risk the real money.
Limiting Forex Trading Risk
Last but not the least, traders must also learn how to manage risk in order to make money with Forex trading. One of the most basic tools is the stop-loss order. This is an instruction to the broker to close out a trade at a predetermined exchange so the losses are minimized if the market goes against the favor of the trader. Forex traders learn to use the sophisticated combinations of traders in order to manage their risks. Grid trading is, therefore an example. The trader takes different buy and sells positions in the currency. When the exchange rate starts to move, it will be in a favorable direction for one of the positions. At a predetermined point then, the trader will cash out the positive position and leave the other position open and this will open a new exchange of buy/sell positions. This process will be repeated till the overall balance is in favor of the trader at which he will cash out at a good profit.
Therefore, when it comes to forex trading, the above-mentioned things should be kept in mind as they will help you gain a better understanding of how forex trading is done.