How to Make Money With FOREX Part 2

The Mechanics of FOREX - How money is made...and lost.

Part II Taking a bear position.

SELLING first and BUYING later.

 Of course the USD is not always weakening against the Euro in fact prices are usually always waving up and down in FOREX land so there will be times when you may consider taking a bearish position.

When you become a bear and SELL the EUR/USD, you will be selling the Euro and at the same time buying the dollar. This is also considered “SHORTING” the market.

Going “long” means you are bullish and buying.

Going “short” means you are bearish and selling.

When you sell a currency pair like the EUR/USD, you are essentially SELLING at the current price, agreeing that you will BUY it back at a later time.

Because of the sheer size of the FOREX market, there is always another trader willing to sell you a lot when you get ready to buy it.

Why is this? Because when are ready to BUY back that lot at a LOWER price believing prices are going to go back UP, there is always a trader somewhere in the world ready to SELL it to you because they believe prices are going to CONTINUE to go down.

To clarify….

Price is 1.210 which is the price you SELL

Price drops down to 1.200 at which point you BUY.

You ended up with a 10 PIP difference which in the case of a FOREX mini account would be $10 minus the $3 spread would be a gain of $7 by SELLING first and then buying back later.

This is a simplified way to explain how selling or “shorting” the market works but it’s really all you need to understand.

In a nutshell, you are selling first and buying later, hopefully at a lower price.

Let's take a look…

#1 - The two green arrows point to two locations where the price tried to break above 1.1920 but could not. This chart pattern called a double top. If you look at the red bar three candles to the right of the candle pointed out by the left hand green arrow, you will notice that the wick was only several pips shy of reaching the same level as the two candle wicks pointed out by green arrows. With a little “creative license,” we could easily consider this formation a triple top.

 Because the price had tried a few times to break above the 1.1920 mark and failed, the third time ( right hand green arrow ) it tested that level and started to retrace was a clue that maybe prices were going to fall.

#2 – Based on the chart pattern we feel that prices are going to drop so we SELL one contract at 1.1830. At this point you would also place your stop loss which could go just above the last high.

#3 – As prices drop we monitor the trend with a trend line.

#4 – Trend line is broken and we BUY at 1.1530 for a profit of 300 pips minus the spread of 4 pips = 296 pips or $296.00 dollars for a mini account.

Note how the trend line was penetrated but then the price continued down. In this situation all the trend did was SHIFT which we will discuss in later articles.

Just remember going SHORT is just the opposite of going LONG.

The Perfect Trade –

The two trades on this page look simple and easy. The truth is it is always easy to look at a chart and “see” trades after they have already taken place.

I "went back in time" on charts to find some good examples for our learning benefit.

 When you are trading real time it is often not as easy.

Many “course” and “system” peddlers on the internet give examples of their breakthrough method by doing the exact same thing.

It seems as though the system brings you in just at the right time and takes you out with big fat profits.

In other words, they cherry-pick one good screen shot and hype it up.

In reality the market only trends about 30% of the time.

What is it doing the other 70% or so?

It is eating most traders up with WHIPSAWS and a generally choppy directionless attitude, much like this…

This is something you had better get used to if you are going to trade currency online!!

The next tutorial will talk about FOREX brokers and the types of accounts available to you as an online currency trader.

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