Forex Basics Course - Lesson 2: Why Trade Forex?
Previous... Forex Basics Lesson 1: What is Forex?
Now that you know what the Forex market is, we can move on to some slightly deeper topics, such as why you should trade Forex?
Trading Forex allows individuals, banks, funds and other entities to profit from price fluctuations in currency value. The difference between the purchase price and the sell price will either result in a profit or loss (unless you break-even).
Many traders and trading funds have made lucrative profits from trading Forex.
How do you Make Money from Forex Trading?
Currencies are coupled with another currency to create a Forex pair. Forex pairs increase and decrease in value. Profitable Forex trading is about being able to speculate these price fluctuations correctly and to buy and sell currencies accordingly.
Below are some examples of Forex pairs. You should be able to tell which Forex pairs have increased or decreased in value by using the change columns. The change amount is calculated by using the difference between the current price and the price from the previous trading day.
Forex pairs consist of a base currency (the first currency in a pair) and a secondary currency (the second currency in a pair). The base currency is usually set at the value of 1, the secondary currency is the exchange value for 1 of the base currency.
In the above illustration, AUD/USD is priced at 0.71250 to buy, meaning that 1 Australian Dollar (AUD) is worth 0.71250 US Dollars (USD). The EUR/JPY is priced at 132.276 to buy, meaning that 1 Euro (EUR) is valued at 132.276 Japanese Yen (JPY).
Price movements in the Forex market are usually measured by PIP value. Pip is an acronym for Point In Percentage. The term PIP refers to a point movement. Let's look at an example...
If the GBP/USD (Briitsh Pound / US Dollar) is currently priced at 1.5810 (1 British Pound is worth 1.5810 US Dollars) and price moves up to 1.5811, we would refer to this as an increase of 1 pip. If price then fell to 1.5809 we would refer to this as a 2 pip decrease.
Some prices include pipettes or fractional pips, these are 1/10 of a pip. Using the GBP/USD example from above, the GBP/USD could be priced at 1.58105, this includes the pipette value as well as the pip value.
Make Money in Either Direction
One of the great advantages to trading Forex is that you can make profit from a Forex pair rising in price as well as falling in price...
If you believe the EUR/USD is going to rise in value, you could buy the EUR/USD. This is called going long and involves buying Euros and selling US Dollars. On the other hand, if you believe that the EUR/USD is going to fall in value, you could sell the EUR/USD. This is called going short and involves selling Euros and buying US Dollars.
Bulls and Bears
If a Forex pair is increasing or has increased in value, this is usually referred to a bullish price behaviour.
If a Forex pair is decreasing or has decreased in value, this is usually referred to a bearish price behaviour.