Can You Make Money From Forex Trading – Many people think that you can only trade currency pairs by buying and selling them at higher prices. The truth is that this is only one way to use Forex trading to make money: there are many other options and we will talk about them in this article.
In addition to trading currency pairs directly, you can also trade instruments related to currencies or currency pairs, such as CFDs, options or binary options.
Can You Make Money From Forex Trading
You may have noticed that many brokers charge a level of leverage for your business. Depending on various factors, they can offer you a profit of 1:30, 1:50, 1:100 and so on. Although this advantage is not exactly a way to make money, it can help you increase your profits – or, unfortunately, create losses if not used wisely.
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Thanks to leverage, traders can make a satisfying profit even if they only have £100 available for trading. Let’s assume there is no profit and you have £100 to execute the trade. If the price moves 3% in your favour, you will make a profit of £3. However, if you choose a broker that gives you a 1:50 profit, you open a position worth £5,000 and a 3% move in your favor will give you £150.
However, remember that when you use leverage (margin trading), you can increase your profit, but lose more money than the original deposit.
‘Trading’ usually means buying something low and selling it high, so the difference between the buy and sell price is your profit. When this concept is applied to trading currency pairs, you can say that you are taking a long position.
There is another concept of “short selling” or when you take a short position. This is when you can sell something at a higher price and buy it later at a lower price. So the profit here will be the difference between the selling price and the buying price.
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To understand how this works, imagine you’re in a coffee shop one morning and someone wants to buy your laptop for £800 because their computer is broken and they’re in a rush for it. You agree to sell it. After a few hours, they no longer need the laptop, but they can’t take it with them – this is where you have the opportunity to close out your short position. You offer to buy the laptop back for £750 plus £50 (£800 minus £750).
While the example simplifies it, the concept works the same way in the Forex market. You basically make a profit by selling a currency pair in the hope that the price will drop and you will be able to buy the same currency pair later at a lower value.
Remember that when trading Forex, you can develop many strategies that will bring you profit. One way to trade currency pairs directly is to open positions in the same direction as the trend (called trend trading), which means that in an uptrend you will buy the pair, while in a downtrend you will sell or you will shorten the pair.
Another way to make money in the foreign exchange market is to trade contracts for difference or CFDs. CFDs represent a derivative trading instrument and they are available for different types of markets such as stocks, indices, commodities and currencies.
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If you decide to trade CFDs, you will be able to speculate on the movement of an underlying asset, but remember that with CFDs you do not actually own the currency pair in which you have your position. Price and profit accordingly.
Let’s look at an everyday example. Your friend wants to sell his motorcycle today for 500 euros, but you think he will sell it at a higher price tomorrow, so you ask him to wait. Because of the possible uncertainty, you make an agreement with him that if the price falls below €500, you will pay him the difference – while if the price rises above €500, you will receive the difference (negative A small fee, because after all, you do not own the current asset).
So you go to the market the next day and your friend gets an offer of €525 for his bike. As you correctly predicted the price movement, you will get a profit of €22 for yourself, while the remaining €3 will be a fee for your partner.
By trading Forex CFDs, you will earn in the same way, with the difference that you trade CFDs on margin. Margin trading means that you have to pay a certain percentage of the contract value (the broker takes care of the rest).
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The position you can take when trading CFDs where the underlying asset is a currency pair is similar to trading the currency pair directly. Therefore, you will take a long (buy) position if you expect the price to rise, or you will enter a short (sell) position if you expect a decrease in the value of the currency pair.
Forex options are another derivative tool through which you can make money with the Forex market. Unlike CFDs, the option seller must deliver the underlying asset to the option holder if the option holder exercises the right.
This means that you, as the holder, have no obligation to buy or sell the currency pair, but if you decide to do so, the seller is obligated to deliver. So there are two types of options: call option and put option. You would buy a call option if you expect the price to rise and lock in the price at which you can buy the pair in the future. You want to hold a put option if you expect the price to drop because you want to determine the price at which you will be able to sell the currency.
For example, you can set a buy price for 1.10 EUR/USD in anticipation of a price increase. It turns out you are right and the price does indeed increase to 1.20. Since the option gives you the right to buy the EUR/USD pair at 1.10, you decide to activate it and buy the pair at the agreed price. After buying EUR/USD at 1.10, you can sell it on the forex market at 1.20 and cash out the difference immediately.
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If for some reason the price moves against you and falls to 1.08, you will let the opportunity expire. It should be noted that if you do not exercise the option, you pay a certain premium to the option seller and this premium is the maximum loss you have.
Binary options are another way to make money with Forex. They gained popularity among traders due to their simplicity and the possibility of earning more than 70% profit, therefore they are also called fixed return options.
By trading binary options, you can predict the direction of price movement regardless of the size of the move, where the primary binary option is high/low.
Remember that Forex trading is associated with risk, which means that you need to prepare before you start trading. You need to understand how currency pairs work and what factors affect their values.
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Additionally, it would be a good idea to familiarize yourself with technical analysis indicators and how to use them to your advantage. Also, try to organize good money management so that all your funds are not at risk at once.
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