How to Make Money from Foreign Exchange

Learning how to trade Forex for beginners can give you a better understanding of Forex as well as prepare you for this risky, yet potentially lucrative market. Forex stands for foreign exchange and refers to the act of purchasing and selling one currency in exchange for another currency.

Before participating in foreign currency exchange, it is important to understand common terminology related to the practice as well as the benefits and potential drawbacks of this type of investment. If you’re new to this type of investment, then it is worth taking the time to learn more about it in order to ensure that you are better prepared for when you begin to buy and sell currency.

The Foreign Exchange Market (FOREX)

The foreign exchange market, commonly known as Forex or FX, involves the act of buying and selling various currencies with the intent of turning a profit. Forex has become the most traded market on a global scale as businesses, countries and people participate in it every day. Unlike hedge fund investments that are better long term, multiple currency exchange transactions throughout a singe day can fluctuate profits.

Foreign currency exchange rates are determined by the demand of a specific currency at the time of sale or purchase. These prices fluctuate rapidly, but only in small increments, which can reduce financial risk but also make it harder for investors to make a profit on small trade amounts. Therefore, most investors who are interested in turning a profit with Forex trade with leverage or they can also borrow money from a broker.

Currency is always traded in pairs as you exchange one type of currency for a different type. For example, trading USD (US currency) for CAD (Canadian currency) is just one form of many types of exchanges that are common on the Forex market.  

The Forex market is available 24 hours a day, seven days a week, due to traders working across multiple time zones. Forex trades can be made:

  • Over the counter.
  • From trader to trader.
  • Through Forex brokers or dealers.

If asking, “What is Forex?” then it is important to review common terminology before you begin to participate in this type of investment. Common terminology includes:

  • Lot sizes. Forex is traded by a lot amount. Lot amounts are micro lot, mini lot, and standard lot which consist of 1,000, 10,000, and 100,000 units of currency respectively.
  • Pip. A pip refers to a small increment of change in currency prices. Pip values consist of 10 cents for a micro lot, $1 for a mini lot and $10 for a standard lot.
  • Pairs. Pairs refers to the two types of currencies that will be traded.
  • The spread. The spread refers to the difference between the asking price and the bid price.

Now that you understand the Forex definition, you can begin learning more about trading through Forex, including the potential benefits and drawbacks of doing so.

Explanation of Currency Trading

If you want to learn about Forex trading for beginners, it is worth taking the time to learn how a transaction is completed in order to get a better idea of this type of investment. To participate in foreign exchange, you will need to learn how to read a Forex quote. However, your credit score will not influence your ability to invest.

An example of an exchange rate is EUR/USD at 1.12045. The currency that is listed first is the base currency is and is always equal to one unit. The second currency listed is referred to the counter or quote currency. The number that is listed after the two types of currencies refers to the relative value of one unit of the base currency. As the number rises, the base currency rises in value. Should the number fall, that means the base currency value has fallen.

When buying or selling currency, it is important to keep in mind the bid and asking prices of a particular currency. The “bid price” refers to the price that you can sell the base currency. This price tells you how much of the counter currency that you can purchase when selling one unit of the base currency. The “ask price” refers to the price that you can purchase the base currency. Therefore, the ask price informs you how much of the counter currency it will take to buy one unit of the base currency.

Trading on the Forex Market for Beginners

When learning how to trade Forex for beginners, it is important to realize that Forex is a very risk type of trade. When participating in Forex, you are essentially betting that the type of currency that you purchase will rise in value.

As mentioned previously, small trades do not typically make much of a profit or loss. Therefore, most investors participating in Forex borrow money from brokers in order to trade more than their account value. This can increase an investor’s return if the currency goes up, but it can also increase losses if the currency loses value.

Pros and Cons of the Forex Market

Now that you have learned how to trade Forex for beginners, it is important to review the potential benefits and drawbacks you may experience when participating in Forex. Doing so will allow you to make an informed decision as to whether or not to participate in this type of investment. The benefits of foreign exchange include but are not limited to:

  • The market is always available, regardless of location or time.
  • You can use leverage in order to use a small account to trade in large sizes, potentially earning a large return on a small investment.
  • Software and data for Forex are provided for free.

While buying and selling currency offers several benefits, it is not without its potential risks and drawbacks, including the following:

  • Exchanging currency comes at a high risk.
  • The more leverage that you use, the higher your risk to substantial financial losses.
  • The market has a lot of competition, including large financial institutions with highly trained traders.