How to earn money on Forex?

Already on basis of the name «OTC Forex market» it becomes clear that the main underlying asset that we will buy or sell is the foreign currency of this or that country. However, we will also pay for this underlying asset with money, therefore the correct name of a financial instrument on Forex is a «pair of foreign currencies». A pair of foreign currencies is a historically established combination of two foreign currencies among themselves, in which one foreign currency acts as underlying asset, and second expresses value of this underlying asset. For example, in the most popular EUR / USD pair, European foreign currency is the underlying asset, and the American dollar is the money we pay for the underlying asset. One should know that the first foreign currency in a pair is called , and the second – foreign currency of a quote.

Each of the world foreign currencies is in constant motion – it can either increase or decrease in value. And on this basis, we can either buy foreign currency, trying to make money on its growth, or sell, making profit from its further decrease.

So, for example, if you have an assumption that the US dollar will increase against the Japanese yen, all you need to do is open a purchase (long position) for the USD / JPY pair. And vice versa: if you think that the US dollar will decrease, and the Japanese yen will increase, you need to sell the USD / JPY pair (open a short position).

Example of a deal on the Forex market

Now we’ll look at an example of how a deal is carried out on the Forex market and from where an operation profit or loss comes from.

Suppose you have a belief that the British pound will increase against the US dollar after publishing poor employment data in the United States. Thus, you need to buy the GBP/USD pair. You open a deal at a price of the pair at 1.3000, expecting that in near future the price of the pair will rise.

Profitable deal

Unprofitable deal

Buying GBP/USD at 1.3000

Buying GBP/USD at 1.3000

Position Size: 1 lot (£100,000)

Total volume: $130.000

Must have on account: $ 1300 at a leverage 100

GBP/USD grows by 100 pips and reaches the level of 1.3100, at which you close the deal

GBP/USD drops by 100 pips to the level of 1.2900, where you close the deal

New size of position: $131.000

Result: you earn $1000 ($131.000 – $130.000)

New balance of account: $2300 ($1300 + $1000)

Investments income: about 75%

New size of position: $129.000

Result: you lose $1000 ($130.000 – $129.000)

New balance of account: $300 ($1300 – $1000)

Investments income: about 75%

As you can see in this example, when making a deal by 1 lot on the GBP/USD pair, you can receive $10 profit for each point of the price movement in your favor. However, if the price does not go in your favor, you will suffer similar losses. Therefore, one should open positions carefully and be sure to place protective orders about fixation the price of underlying asset in order to avoid excessive losses.

Spread and Points

When you make deals using pairs of foreign currencies, you will always see two available prices in the tool window. One of them is called price of selling ((Bid), another one – price of purchase (Ask). Difference between these two prices is called spread. The lesser spread, the lower final cost of a deal and the faster your position will start to bring profit. As a rule, size of spread is inversely proportional to liquidity and popularity of an instrument. The more the instrument is marketable the smaller size of it’s spread. For example, for the most popular EUR/USD pair, spread may be less than 1 point, while for much lesser common USD/PLN pair, spread is several times larger.

We already were touching the concept of points. Point is a minimum value by which this or that instrument might change, for example, a pair of foreign currencies. In most pairs of foreign currencies as a point called a fourth digit standing after a comma. It is the value (0.0001) on which that pair of foreign currencies can change. And if we see, for example, that the GBP/USD pair was worth 1.3000 a minute ago, and now the quote is 1.3005, then we can say: «The pound-dollar pair has risen in price by 5 points».

On some account types of the HYPERLINK FTM Brokers company you can see not 4, but 5 digits after comma. Such accuracy allows us to further narrow spreads on pairs of foreign currencies, so that clients can quickly make profit at their positions. And the fifth digit is often called “pip” (hence the term «pipsing» that is name of the strategy at which a client makes profit from small movements lasting several seconds or 2-3 minutes). And if, for example, we see that the GBP/USD pair rose from 1.30,000 to 1.30008, we can say that the pound went up in price by 8 pips or 0.8 points.