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?
Forex trading allows individuals, banks, funds and other entities to profit from price fluctuations in currency value. You can buy a particular currency and then sell it when the currency is stronger (worth more). The difference in the purchase price and the sell price will either result in a profit or loss (unless you break-even).
How do you Make Money from Forex Trading?
Currencies are coupled with another currency to create a Forex pair. Forex pairs appreciate (increase in value) or depreciate (decrease in value). Profitable Forex trading is 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 appreciated or depreciated in value by using the change column (2nd from right). The change column refers to change in value during a single 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 the 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. It refers to a point movement, let's look at an example...
If the GBP/USD (Brisitsh 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 increasing in price as well as decreasing 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, as you believe the Euro is going to strengthen against the US Dollar. 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, as you believe the Euro is going to weaken against the US Dollar. If your prediction is correct, you could make a profit.
Bulls and Bears
If a Forex pair price is increasing or has increased, this is usually referred to a bullish price behaviour. If a Forex pair price is decreasing or has decreased, this is usually referred to a bearish price behaviour.