There are two ways to earn money in Forex trading. Any one can earn money by day trading or positional trading.
- Day Trading: - Day trading in Forex market includes buying & selling currency, futures & options of currencies with the goal of making profit due to volatility in the price during the day. The positions in day trading never held overnight irrespective of profit or loss.
- Positional Trading: - The goal of positional trading is to profit from the move the primary trends rather than profiting from fluctuation that occur during the day. Positions are carried forward more than a day.
What we have to trade in Forex market?
There are many variants available in Forex market for trading. The major options for trading are:
- Currencies: - Many brokers provide as much of 30 currencies for trading in the Forex market. The major currencies are USD, EUR, JPY, GBP, CHF, AUD & CAD.
- Derivatives: - Derivatives are the financial instruments linked to currencies or indicators. Below mentioned are the derivative products that are commonly used in the Forex Markets.
- Forwards: - A Forward contract is customized contract between two counter-parties where settlement takes place of a specific date in the future at today's accepted price.
- Futures: - A futures contract is an agreement between two counter-parties to buy or sell an asset at a particular time at a certain price.
- Options: - As like in any market options are of two types; calls & puts.
- Warrants: - Longer dated options are called warrants. Options generally have lives of up to one year.
- Leaps: - Leaps are the options having a maturity of up to three years.
The amount any one can make out of Forex trading depends upon:
- The amount invested: - The more amounts invested more are the earnings.
- Risk taken: - Higher the risk taken, higher are the chances of return. (there are also chances to loose higher amount)
The exact profit depends on:
- Net gain per trade.
- Number of trades.
- Leverage utilized.
How to earn money in Forex trading?
Let us try to understand with help of an example.
David thinks that EUR will appreciate as compare to USD.
- He observes the Bid/Ask prices of EUR/USD currency pair, prices are 1.2368/1.2370.
- David makes a purchase of 1000 Euros. His investment is $1237.
- After five days EUR appreciates as considered by David.
- At the fifth day from purchase the Bid/Ask prices are 1.2542/1.2544.
- David sells 1000 EUR he previously had bought.
- He gets $1254.2 from the entire transaction.
- The profit made by David is 1254.20-1237.00=17.20$.
- As the Bid prices of EUR/USD Currency pair are 1.2542/1.2544.
- He sells 1000 EUR at the rate 1.2542.
- He gets $1254.20 from this transaction.
- After two hours he observes the Bid/Ask prices. The prices are 1.2432/1.2434.
- David buy's 1000 EUR at the rate 1.2434. His investment is 1243.4
- David's profit from this entire transaction is 1254.20-1243.40=10.08$
If you feel that base currency will appreciate compare to the quote currency then you shall buy the currency pair, and if you feel the base currency will depreciate compare to quote currency then you must sell the currency pair.