How To Make Money in Forex
Posted On April 23, 2012 by admin
Understanding how to make money in forex requires you to understand what you are doing. Even though the forex market is the currency market, as a regular forex trader you are not actually buying and selling currencies. What you are trading are financial contracts. These contracts are based on the relative price and interest rates of two currencies, which form the currency pair of the contract.
When you open a position, you are creating a contract which has zero value. More accurately, it has a very small negative value because the broker takes the bid/ask spread into consideration. The contract states, in essence, that you will exchange a certain amount of the base currency for a certain amount of the quote currency. This contract is based on the current market prices, since that is the only way you can find a counterparty to the contract (someone to take the opposite position). The contract also specifies a daily interest rate that you pay, or receive.
As market prices change, the value of your contract will change. It can become a liability to you, having negative value. The reason is that, to fulfill the contract (meaning close the position) you would need to pay more than the price set when you first created it. If however the opposite happens, that is, if it becomes cheaper to fulfill the contract than it was when it was opened, it gains value and can be sold at a profit. If contracts fall in value by a significant amount relative to how much cash you have in your account to cover them, the broker will close them automaticaly based on current market prices to prevent you from defaulting on your side of the deal.
You profit in forex by predicting how prices will move. Knowing how to make money in forex does not require you to have a crystal ball, it simply requires you to make a good enough analysis of the market to be right about how prices will move more often than you are wrong.