How to Make Money in Forex (part 1)

In the explanation of how to make money in forex this time will begin the explanation of how currencies traded in the market, then we will outline a foreign exchange contract to buy and sell positions. Also discusses three critical points in every trade and explain the difference in supply / demand that brokers charged for each transaction. Also, it provides four reasons that cause money fluctuates every day. We then turn to the theory of shards which helped us decide to be in a position to buy or sell. Concludes with an explanation of how to read charts and how to identify the structure of the market.

Buy Low, Sell High

Forex traders make money by speculating on the movement of currency values. There are only two ways to do this. The first way is to buy, hoping prices will rise. The second way is to sell, expect prices to fall.

Buy

Currency rate AUD / USD is currently 1.0325. You enter long positions on hopes the Australian dollar will strengthen against the US dollar. Purchase transactions are called "long positions" in the forex market.

After three hours, the exchange rate of AUD / USD to 1.0375. You are right, and you make 50 pips in this transaction. Another way of stating this is a buy position you generate profits.

The following example presents an accurate contract:

Buy AUD / USD at 1.0325

Suppose you buy 100000 Australian dollars for this contract, or one standard lot. Because the exchange rate is 1.0325, you pay AUD 100000 to USD 103250.

After three hours, the exchange rate of AUD / USD rose to 1.0375, then you sell AUD 100000 and receive USD 103750. This transaction resulted in a total profit of USD 500 for you.

Action	AUD	USD
Buy AUD 100 000 at the exchange rate of AUD / USD is currently at 1.0325	+ 100000	- 103250
3 hours later, selling AUD at the rate 1.0375 100000	-100000	+103750
The resulting total profit is USD 500	0	+500

If you do not use leverage, you have to spend USD 103 250 to USD 500. The yield calculated by percentage, your profit is only 0.484% (500/103250).

However, if you use 100: 1 leverage given broker, you only need to spend a margin of USD 1032.5 to buy AUD 100000. calculated by percentage, your profit is 48.4% (500 / 1032.5).

Sell

EUR / USD rate today is 1.3142. You enter short positions as it predicted the euro will continue to weaken against the US dollar. Transaction is called a "short position" in the forex market.

After two hours, the EUR / USD to 1.3112. You are right, and generates 30 pips on this transaction. Means your transactions generating profits.

Let's look at the following example:

Sell ​​EUR / USD at 1.3142

Suppose that you sell 200 000 euro for this contract, or two standard lots. Because the exchange rate is 1.3142, you received $ 262840 from the amount of 200000 euro. After two hours, the EUR / USD fell to 1.3112.

Then you buy back  200000  euro  and pay USD 262240. This transaction resulted in a total profit of $ 600 to you.

Action	EUR	USD
Selling 200000 euro at the exchange rate EUR / USD 1.3142	-200000	+262840
2 hours later, the repurchase of 200000 euro at the rate of 1.3112	+200000	-262240
The resulting total profit is USD 600	0	+600

Similarly, if leverage is not used, you should use a 200000 euro or USD 262840 to USD 600. The yield calculated by the percentage of this is a gain of only 0.228% (600/262840).

However, if you use 100: 1 leverage given broker, you only need to spend a margin of USD 2628.4 to sell 200 000 euro. Calculated according to a percentage of your profits is 22.8% (600 / 2628.4).

Three Points in Every Trade

When you execute a position, there are basically three points in each transaction, namely: entry price, profit targets and stop loss.

The price of entry is defined as the price at which the trade is triggered. Target profit is defined as the price at which trading ended with a profit. Stop losses are defined as the price at which trading ended with a loss.

Long Position (Buy)

Suppose the price of GBP / USD is 1.5800. because you estimate pound will strengthen against the US dollar, then you enter into long position (buy).

You decide to get 30 pip profit and stop loss of 30 pips. Once this value is recorded in the brokerage platform, there are only two things that can happen, the trade will reach its profit target or stop loss suffered.

In this example:

Price entry = 1.5800

Stop losses = 1.5770

Target profit = 1.5830

See the following picture:

For a buy position, profit targets placed over the price of entry, while a loss placed below the entry price. In this example, you take a pip in an amount equivalent to exit: 30 pips above the entry price, and 30 pips below the entry price.

Every time a transaction have the same distance between the price of entry to target profit and the price of entry to stop losses, this transaction has the risk to reward ratio of 1:1.


The following figure shows the actual movement of trade by buying position:

The following figure shows the actual movement of trade with a buy position and ended up with a profit:

The following figure shows the actual movement of trade with a buy position and ended up with a loss:

Short Positions (Sell)
Suppose the price of GBP / USD is 1.5800. You estimate the pounds will drop against the US dollar, therefore you enter short positions.
You decide to get 50 pip profit and 30 pip stop loss. Only two things will happen, trade will reach its profit target or stop loss suffered.

In this example:
Price entry = 1.5800
Stop losses = 1.5830
Target profit = 1.5750

See the following picture:

For a short position, the profit target is placed below the entry price and stop loss placed above the entry price. In this example, you set a 30 pip stop loss and profit target of 50 pips. This is called risk 3: 5 to reward ratio.







The following figure shows the actual movement of trade with short positions:

The following figure shows the actual movement of trade by selling positions that ended with a profit:

The following figure shows the actual movement of trade by selling positions that ended with a loss:

Every transaction must always be accompanied by stop loss. For most traders, have a profit target is a natural thing, almost no traders who thought to use stop losses. Interest stop loss is simple, but very important. Basically Stop losses are a level that warn you to get out of the deal with losses that could be accepted because the transaction will not benefit you.
In my career as a forex trader, I often see traders who destroyed their accounts because they refuse to use stop loss on each transaction. When it comes to transactions in the foreign exchange market, we will not always be true. Interest stop loss is to help us, not hurt us.
Trader face the risk of destroying their entire account when making transactions "naked" or not using stop loss. Do not adopt this practice. Interestingly, a group of traders who destroyed their account by not using stop loss are a group that left the forex market because they think the trading currency is risk. Again, I recommend that you use stop loss on every your transaction.

Okay, I continued on the next post (how to make money in the forex part two), I will review about the difference in supply / demand, the things that cause the price of the currency to fluctuate, and the theory of fractions.