How to Make Money on Forex - A Step By Step Guide
Forex, an abbreviation of foreign exchange, revolves around the trading of currencies. The foreign exchange is a global market and is quite liquid in nature. There is a large worldwide reach of commerce, finance, and trade.
A forex market helps determine the exchange rates of every other currency. Moreover, it also involves exchanging, selling, and buying currencies at their determined or current prices.
As per reports, in April 2019, forex's everyday trading volume touched $6.6 trillion. The turnover is clearly impressive and shows how forex has helped change the lives of people in many ways. In this article, let's explore everything about this market and how to make money on forex.
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Regardless of the settlement or clearance of a transaction, there are many opportunities available in the financial markets for traders to make money. So, whether you opt for an over-the-counter deal or make a transaction through an exchange trade, the possibility of making an income is quite high.
Forex is an OTC (over-the-counter) or decentralized market used to trade different currencies. When compared to an exchange market, there are many differences between the two. An OTC transaction is made between two parties, while government bodies regulate exchange trading.
Moreover, exchanges are confined to a single trading floor and involve all transactions to be completed via a central organization. On the other hand, forex is not bound to one location. Moreover, unlike exchanges, forex has multiple moderators that may link different buyers and sellers.
Therefore, market participants in forex conduct all transactions between themselves, without a visit to a central exchange. Additionally, OTC transactions take place electronically, creating convenience for different investors.
Also, no governing body regulates the prices of all OTC products. Instead, the prices are determined by market dynamics and demand and supply.
There are many advantages to choosing Forex for trading. Since forex isn't dependent on an exchange, there are no fixed closing and opening times. Therefore, you can perform currency trade and earn profit in forex all 24 hours of the day.
What's more, as compared to an exchange, forex trading involves low trading fees. This encourages even the low-income earners to make money in forex trading.
Here are some other benefits of forex trading:
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There are low entry barriers, again an encouragement for many people to become professional traders.
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Forex allows you to trade a wide range of currency pairs. This availability of more than one currency reduces failure risk.
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Since forex is a highly liquid market, it means that it is easy to move lots of money into and out of currencies through small spreads.
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Forex brokers allow traders to use leverage to sell and buy in the exchange market. This means that you can trade a small amount of your capital with a high money amount.
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When considering how to make money in forex fast, opportunities such as affiliate programs, active trading, and copying transactions can conveniently help you earn some passive income.
The table below summarizes the differences between a Forex and an exchange market.
| Differences | OTC Forex | Exchange Market |
|---|---|---|
Commission |
Low |
High |
Timings |
Flexible. Availability 24 hours |
Fixed |
Convenience of Transactions |
High-Trading done electronically |
Low-Central exchange visit is necessary. Single trading floor |
Barriers to Entry |
Low |
High |
Moderator |
Multiple |
Single |
Regulated by |
Parties involved |
Government bodies |
How to Trade on Forex: Main Terms and Conditions
If you are new to forex, you will come across various terms and conditions that may seem alien to you. So, if you want to know how to make money with forex, familiarizing yourself with these terms and conditions is imperative. Also, a better understanding will help you curate your forex strategy with convenience.
What is a Forex Trading
Let's start with what this concept is and how forex trading works. Simply put, forex trading works like currency exchange that we all do while traveling to another country. A trader sells one currency and buys another, and the fluctuation in the exchange rate is due to supply and demand.
In a forex market, every currency is given a unique three-letter code. For instance, the US dollar has a code, USD/Euro is the second most popular currency in Forex, and its code is EUR.
In forex trading, all currencies are expressed in currency pairs containing two currencies that are supposed to be exchanged.
Some major pairs of forex trading are:
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EUR/USD
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USD/JPY
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GBP/USD
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AUD/USD
Now every pair represents the exchange rate for both currencies. Here's how you can interpret this information:
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In a EUR/USD pair, the left currency is considered as base.
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Simultaneously, the right currency, USD in this case, is the quote.
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The exchange rate reflects the amount of quote currency required to buy a unit of the base currency. Therefore, the base currency is always represented by 1 unit while the quote currency keeps on changing.
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So, for instance, if the exchange rate of EUR/USD is 1.5, it means $1.5 is required to buy €1.
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A rise in exchange means that the value of the base currency has risen more than the value of the quote currency. Similarly, a decrease in value means that the value of the base currency has fallen.
Three Ways in Forex Trading
There are three different ways of forex trading, and each help a trader achieve a particular goal:
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Spot Market: Considered as a primary market where different currency pairs and exchange rates are swapped and determined, as per supply and demand.
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Forward Market: Instead of trading now, traders can lock an exchange rate and trade on that same rate but on a future date.
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Futures Market: This is quite similar to the forward market, except the contract is done on an exchange as opposed to privately.
Important Forex Terms
If you want to engage and reap all the benefits of forex trading, understanding the language of this world is quite essential. Here are some terms that you can come across.
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Currency Pair: It is a quotation that represents two currencies. The first currency in the pair is called the base, while the other is referred to as quote currency. Some popular pairs are known as majors, while the lesser known ones are called exotics.
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Cross Rate: This term refers to an exchange transaction between two different currencies that have taken their value from a third currency. The formula for cross rate is A/B x B/C = C/B.
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Direct Quote: This quote asks the amount of domestic currency required to buy a foreign currency.
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Indirect Quote: This is the opposite of a direct quote and reflects the price of a certain domestic currency in foreign currency terms.
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Pip and Pip Value: Pip is a common concept in Forex and measures the exchange rate movement. It represents a price change in any currency pair. Since four decimal places represent the forex prices, the value of a pip is 0.0001.
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Pending Order: A pending order instructs a broker to buy or sell a currency as soon as the market reaches a specific price shortly.
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Market Order: On the other hand, a market order instructs the broker to buy or sell a currency at the current price.
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Long and Short Position: This term refers to any betting on a certain currency pair to either go down or up in value.
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Bid-ask Spread: The determination of exchange rates is done by the maximum amount a buyer is ready to pay for a certain currency (bid) and the least amount a seller requires to sell it (ask). The difference between these two is called the bid-ask spread.
Forex Trading Tools
There are three types of quote charts used in Forex trading:
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Line charts are the most basic ones and identify all the currency trends in the big picture. This chart's trend lines help devise different trading strategies. A line chart is considered a starting point for trading analysis.
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Bar charts represent different trading time periods. They are more specific than most line charts.
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Candlestick charts are much easier to comprehend than the above two options. A candle's upper portion is the opening and highest price point, while its lower portion represents the closing and lowest price point.
You may also come across timeframes in forex trading. This term refers to a designated time on which trading commences. Forex time frames are usually measured in weeks, days, hours, or minutes.
Once you choose your trading strategy and know about the trading plan you want to follow, you can use time frame analysis and start forex trading.
How to Make Money on Forex - Fast Introduction
Once you have understood the terminologies above, you can take your first step and dive into the world of forex. Here are some steps that you should follow to accomplish your ambition to ace forex trading.
Select a Broker
It is impossible to ace forex trading without a broker. So, when selecting one, ensure to check their license and go through all the trading requirements. These requirements may include minimum deposit required, availability of any accounts, platforms available, bonuses, etc.
Once you are satisfied with a broker, don't wait any longer and get registered.
Develop a Trading Strategy
A trading strategy is a plan that covers aspects such as time horizon, tax implications, investing objectives, and any risk tolerance. This plan should be quantifiable, consistent, and verifiable. Simply put, a trade should have clear and price goals while curating a trading strategy.
Here are three top trading strategies:
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Breakout Day Trading Strategy: This strategy focuses on a certain position or asset's price after it successfully clears a specific level. When an asset crosses a specified threshold, volatility increases, and as a result, the prices follow the direction of the breakout.
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Momentum Bull Flag Strategy: This strategy features a chart pattern with a vertical rise. The bull flag strategy commences from the consolidation period.
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Swing Trading: In this strategy, a trader plans to earn profitability over some days, weeks, or months.
Choosing the right strategy is imperative as it determines the amount of money you are willing to trade and your tolerance for risk.
Open a Demo Account
Once you have curated a feasible trading strategy for yourself, open a demo account with a broker and start trading. It is important to note that you may face losses on your first trade, but that shouldn't discourage you in any way.
You won't lose anything with a demo account as you will be trading without money. So, instead of losing hope, analyze the mistakes you may have made due to your lack of knowledge, late/early entry, and many other factors that you might have ignored.
Tips to Avoid Losing Money in Forex
If you want to achieve success on your very first forex trading experience, follow the tips below and avoid losing any money.
Don't ignore the risk management rules and the overall trading system. Ensure to follow your trading strategy as planned and don't make changes while trading.
When it comes to forex trading, greediness should take a back seat. Instead of getting overwhelmed by good deals, think practically and analyze the scenarios before locking on an exchange rate.
Leverage can easily amplify losses. However, if used properly, it can increase your growth potential. Ensure to utilize reasonable leverage.
Ensure to perform backtesting and pretest your trading system in an MT4/MT5 tester.
If you don't want to lose money, protect your account. Familiarize yourself with money management techniques to reduce the chances of losses.
Start with a small amount when shifting from a demo to a live account. This strategy helps to evaluate your emotions and trading plans and is good to gain some practice.
Understand all the tax treatments and impacts for your trading activity, so you are mentally prepared at the tax time.
If you want to become a successful trader, keep good records of your trading activity, so you can learn from your past mistakes.
Don't compromise when it comes to finding a broker. Do your research properly before sealing a deal with one.
Finally, consider forex trading as a business. Set long-term goals rather than short ones, and learn from your errors.
Best Forex brokers
Summary
Forex trading may sound easy, but it does get tough as you start knowing more about it. The different terminologies, the task of choosing the right broker, and finding ways to avoid losses may overwhelm you, but know that forex trading gets better with practice and time.
In this guide, we looked into all the steps that you should take to enter the world of forex trading. We also found out how e Toro broker can help you survive trading without making any mistakes. Here's hoping that now you are aware of how to make money on forex.
FAQs
How Much Money Do You Require to Start Forex Trading?
If you want to start trading right now, an amount equal to $100 would be enough to begin with. If you demand more flexibility, $500 will give you more return and income.
How Long Does it Take to Learn How to Trade Forex Profitably?
Typically, it takes around one year to learn forex trading. You will easily understand the technical side within a few wells. However, the risk management aspect takes one year to fully comprehend.
Is Forex a Reliable Way to Make Money?
Yes, it is. However, it isn't an easy way, and you may require some time creating strategies to earn some money through this trading option.
How Much Do Most Forex Traders Make On Average?
It all depends. With forex trading, a professional trader can make anywhere between $1000 to $5000 per day.
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Team that worked on the article
Ivan is a financial expert and analyst specializing in Forex, crypto, and stock trading. He prefers conservative trading strategies with low and medium risks, as well as medium-term and long-term investments. He has been working with financial markets for 8 years. Ivan prepares text materials for novice traders. He specializes in reviews and assessment of brokers, analyzing their reliability, trading conditions, and features.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
The topics he covers include trading signals, cryptocurrencies, Forex brokers, stock brokers, expert advisors, binary options. He has also worked on the ratings of brokers and many other materials.
Dr. BJ Johnson’s motto: It always seems impossible until it’s done. You can do it.