Forex Basics - Lesson 3: How do you Make Money Trading Forex
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You can gain access to the Forex market by using a Forex broker. A Forex broker offers Forex pairs to buy and sell and also offers other trading features and tools that can help you make better trading decisions.
How do I know when to Buy and when to Sell when trading Forex?
Being able to speculate future Forex price is one of the keys to being able to trade Forex profitably. It is not as daunting as it may seem at first. There are a number of trading tools and aids that help traders with their Forex price predictions...
Technical Analysis - is one of the most common ways that Forex traders analyse and predict the Forex market. It is widely used amongst Forex traders, as well as stock and commodity traders. Technical analysis involves studying historical price data, which is usually displayed on a price chart. Traders that use technical analysis as part of their Forex trading usually combine price charts with price action analysis and/or technical indicators.
Price action is studying price charts and looking for specific price patterns, levels of price reversal and other price behaviour. Technical indicators are aids displayed on price charts that can show a trader where future price may be. This site is dedicated to Technical Analysis and covers both Price Action Trading and Indicator Trading.
Fundamental Analysis - involves studying and predicting reports, events and news that heavily influence the value of a currency.
The next 2 Forex Basics Courses will help you understand both Price Action Analysis and Technical Indicators. Please don't feel overwhelmed, learning technical analysis is not as difficult as it sounds!
How do Forex Brokers Make Money?
Forex brokers make money through some or all of the following; Charging a commission for each trade entered, charging financing and interest costs for any positions held overnight, charging for price charting packages, setting a spread on offered Forex pairs. Spread is the difference between the actual price of a Forex pair and the price the broker is willing to buy or sell the Forex pair for (on your behalf). This spread price difference is used as a main source of revenue for some Forex brokers.
Types of Forex Brokers
Just to add a little more confusion, there are many different types of Forex brokers.
Spread Betting Brokers - If you are based outside the US, spread betting brokers are one of several broker options available to you. Spread betting is one of the most popular ways to trade Forex outside the US. It is cheap and there are several advantages, such as guaranteed stop losses and tax-free profits. Most spread betting Forex brokers offer a free demo or practice account, we suggest you open an account with Core Spreads - click here to open a free practice account now.
CFD Forex Brokers - If you are based outside the US, CFD brokers are another simple way to trade Forex. CFD brokers also offer free demo and practice accounts. We suggest opening an account with AxiTrader - click here to open a free practice account now.
True/ECN/STP Brokers - True brokers are those that deal directly with the Forex Market. If you are wanting the "real" trading experience or are based in the US, we suggest trading with an ECN or STP broker. Darwinex offers STP brokerage and free demo/practice accounts - click here to open an account with them. If you are based in the US, try Forest Park FX.
If you're not sure which broker to use, BrokerNotes have built a handy tool that'll show suitable brokers for you based on your requirements.
There are several ways you can initiate going long or short a Forex pair. Opening a trade at the current price is generally referred to as a market order. Requesting your Forex broker to open a trade at a specific price in the future is generally referred to as a limit order. Each trade (or position) can also have a set take profit and stop loss, meaning that your broker will close the trade automatically at a specified profit or loss.
Leverage enables traders to hold large positions with a minimal deposit. Most Forex brokers offer at least 1:10 leverage, meaning that for every 1 unit of currency you fund for a position the broker will fund 9 times that amount. Leverage allows you to make big gains trading Forex but it can also lead to big losses.
To the left is the Forex pair list from the previous lesson. Do you notice the slight difference in price for selling (going short) or buying (going long) the pair? This is referred to as the spread.