How to Make Money on the Foreign Exchange Market
We live in a time where people are discovering and thinking up new ways in which to make money. Often these include tried and tested methods that have proved to be fruitful such as making money on the foreign exchange market. Now, this can be a bit challenging if you are unfamiliar with trading, banking, and just the overall finance industry; luckily for us who are not in the know, Oanda offers the perfect solution in innovative trading education and more! In the meantime, learn more about how you can make money in the foreign exchange market.
What is the Foreign Exchange Market?
The Foreign Exchange Market is an over the counter (OTC) global marketplace. This marketplace is where exchange rates for currencies are determined for the entire world. Now, what is over the counter? This is a specific process that involves how securities are traded via a broker-dealer network rather than a centralised network. Back to the Foreign Exchange Market; individuals who participate in this global marketplace can buy, sell, and exchange different currency pairs. Taking it a step further, individuals can also speculate what the various exchange rates could be. Foreign Exchange Markets consist of banks, forex dealers, commercial companies, central banks, investment firms, hedge funds, retail forex dealers, and investors. The Foreign Exchange Market is also known as forex, FX, or the currencies market.
How can you make money with the Foreign Exchange Market?
As the world changes, humans are finding new ways to make money, and while forex has been around for decades, many of us struggle to grasp just how it works and how you can make money with it. It is also important to note that making money in forex will require trading, which can be tricky; luckily, we are up to the challenge of unpacking just how you can do it so that you make informed decisions.
In forex, you buy and sell currencies. The basic objective of forex trading is to exchange one currency for another, expecting the price to change. And it goes even further. Your expectation is also that the currency you bought will increase in value as opposed to the one you sold. Now before we get to making money, let’s understand a few key factors first. Currencies are traded and priced in pairs. Here is an example: a currency quote for a Pound Sterling/Euro pair of 1.3654. Here the base currency is the Pound. The Euro is then the quote currency. Essentially, the quoted currency is the actual currency that one unit of the base currency can buy. In other words, one Pound can buy 1.3654 Euros. Here, an investor can make money with forex in two ways. One, through appreciation in the value of the quoted currency or two, if the value of the base currency decreases. There are many currency pairs to trade, which can be pretty overwhelming. What do you choose as the base currency and the quote currency? Thankfully how currency pairs are quoted is standardised.
So how do you make money in the foreign exchange market? First things first, do you want to buy, or do you want to sell? If you are buying, that means you are purchasing the base currency and selling the quote currency. You want the base currency to increase in value; you can then sell it back at a higher value. In forex lingo, buying is referred to as going long or just long.
Now for selling. Yes, you can also make money by selling currencies. In selling, what happens is that you sell the base currency and buy the quote currency. Here the opposite works from buying; in other words, you want the base currency to drop in value, so when you buy it back, it is at a lower price. In forex, lingo selling is referred to as going short or just short.
But before you dive into the art of forex, you need to follow some steps to ensure you are covered, especially if you are a beginner. Continuously learn about forex. Because foreign exchange markets are quite complex, it’s important to stay up to date on the latest news and trends. This helps you to make informed decisions. Then you need to develop a strategy. Nothing is more important than going in with a clear idea of which currencies you will be buying and selling, even though the markets are incredibly difficult to predict. It is much easier to adjust your expectations than going in with no direction.