The profit that a trader attains in Forex is generated through the difference in exchange rates. The trade mechanism is simple; you buy, for example, 1 euro for $1.2 and wait until the euro rises to $1.3. Once this happens, you sell the euro and earn $0.1.
You can make profit not only through buying a currency with an increasing price, but also through selling a currency with a decreasing price. Your profit grows in proportion to your investment amount.
Please note that the figures provided are for illustrative purposes only, as Forex is normally traded with much larger amounts.
In order to earn money in the currency exchange market, a trader must:
Be able to analyse the market trends.
Have an understanding of fundamental analysis, which requires observing the various macroeconomic events that influence the valuation of currencies. These may include:
- Statistical data reflecting the economic status of the countries whose currencies are being traded;
- Statements of the countries’ leaders;
- Statements of the heads of central banks;
- Economic news, etc.
Have an understanding of technical analysis, which is based on three axioms:
- Market movement is affected by all factors.
- History repeats itself.
- Price movement is directional.
These axioms are reflected in all exchange rate charts. By analysing the charts in light of these principles, one can make predictions about the behaviour of currencies.
Normally, traders are able to make predictions on price movements for the next few hours or for a couple of days at most. Therefore, their trading strategy is formed based on short-term forecasts. Traders do not have to know how much the currency will cost in a month or at the end of the year to trade profitably. It is noted that making a forecast for one month is much more difficult than making a forecast for the next day. However, it is always helpful to have a reasonable approach to Forex trading strategies in the long-term in order to attain greater profit.
Know when to enter and when to exit a trade.
A trader who wants to be successful in trading Forex, should be able to make correct predictions regarding the change of course of the traded currencies and know the right time to enter a trade. In order to make profit, a trader should be able to make correct forecasts with regard to the currencies’ movement in the near future and buy a currency at its peak, before the emergence of a declining trend. If someone fails to do so, it is possible to incur losses. Therefore, it is very important not to “miss” the right point of purchasing and selling a currency.
Abide by the rules of capital control (money management).
It is very important that every trader develops a system to protect against risks that takes into account all rules of capital control. If this system is properly constructed, then the trader will receive a stable profit.
In order to apply this protection system, it is essential to have strong nerves. When in the market, you cannot afford to make emotional decisions, as they may eventually lead to large losses.
Compliance with all trading principles, gives a 60% guarantee that the trader will make profit. Profit margins depend on the quality of the trader, his ability to predict market changes and the solidity of his trading strategy.
To help you understand Forex markets and develop your own trading strategies, inquire the advice of TeleTrade’s consultants.