How to Make Money With FOREX

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

We continue our FOREX trading education  with the mechanics of how money is made and lost trading FOREX.

As with most any other investing endeavor, you want to obtain something that will increase in value at which time you can sell and make a profit.

Hence the old adage, buy low and sell high. FOREX trading adds a new twist to this old financial proverb because when trading the FOREX, you can just as easily make money…

Selling high first and later buying low.

In other words, it does not matter if the price is going up or down, there is an opportunity for profit.

When you trade currency online, you need to determine whether you are going to be a BULL or a BEAR.

Being a Bull just means that you expect that prices are going to go UP and of course that means that if you take a bearish position, you expect that prices will be going DOWN.

This terminology is the same for most any financial market.

As a FOREX trader there are several tools at your disposal to help you determine whether whether you will want to be a Bull or a Bear of which we will discuss in other lessons but for now let’s play the Bull role and enter a trade.

 Because we have a bullish view of the market, in this case the EUR/USD, we expect that prices are going to rise so our objective is to buy low and wait for prices to go up at which point we can sell and make a profit, hopefully.

When we take a bullish position, also referred to as taking a “LONG” on the EUR/USD currency pair, we will be BUYING Euro and SELLING the US Dollar.Whenever you buy one currency in the pair, you are simultaneously selling the other, and vise versa.

Remember from earlier lessons that in the case of EUR/USD, because the Euro is on the left hand side of the forward slash, it is the BASE currency for this pair. The price scale on the right-hand side of FOREX charts represents the currency on the right hand side of the forward slash, in this case the US Dollar.

Because the price on a EUR/USD chart represents how many US Dollars it takes to buy one single Euro, the higher the price goes, the “weaker” the dollar gets.

It also costs Americans more to travel to Europe!!

So anyway we have decided to become a Bull and take a "long" position in this EUR/USD trade, let's check it out...

# 1 – Price has broken through the down trend line so we decide that there is a high probability that the price is going to continue up. More on trend lines in later articles.

#2 – We place a buy order with our broker which is automatically executed through our trade station.

We enter the market at $1.1950

Because we are buying the EUR/USD pair, we are actually buying Euros and selling dollars because we believe the Euro is going to appreciate in relation to the dollar.

#3 – The Stop-Loss

A stop loss is a buy or sell order set at a predetermined location that acts as a safety net limiting your risk in case the price does not go the way you expect it to.

There are many different methods for determining how and where to place the stop loss, but if there was ever one rule you should live by when trading, it would be…

NEVER EVER trade without a stop loss order in place.

One method for determining the location of a stop loss when buying is to place it under the last low which is the method used in this example.

So we enter the market at 1.1950 and place a stop loss order at 1.1700. This means we have determined that 250 pips ( 1950 minus 1700 ) is an acceptable risk on this trade. If you are trading a FOREX mini account 250 pips (Price Interest Points) would be $250.00.

If the price does not go up, but instead goes down, when it hits your stop loss order it is automatically executed and you are taken out of the market at your predetermined loss.

Of course you could lessen your risk and place your stop loss only 50 pips or even 30 pips or less below your entry price. But as we will see in later articles, price usually does not go straight up or down but instead it waves up and down so if you place your stop to close to your entry point and the price waves back down a little before continuing up, it could hit your stop loss if it is set to close and take you out of the market at a loss just before price continues in your anticipated direction.

# 4 - It is often said that exiting the trade is harder than entering. Think about it, you are in a profitable trade and the question now is where do you get out? What if price turns around and starts to go against you? How much of your profits are you willing to give up before you exit? What if you panic too soon and exit just as the price turns your way again and climbs 80 more pips?

There are many methods to determine when you should exit, in our simple example we will connect the price lows with a line creating a up trend line. Once price starts to trend, which will be discussed in later articles, it usually continues in that direction for some time.

 When the price completely breaks through a trend line, the chance of a reversal is high so that is usually considered a good time to get out of the market.

The trend is no longer our friend but has come to an end so it’s time to bail out.

In this case we exited at 1.2650

#5 – We can see from the TIME scale at the bottom of the chart that this trade lasted 30 trading days. A trade that lasts this long is called a POSITION trade.

While we are on the subject, the different popular types of trades are:

1. Position Trade – A trade that lasts several days to weeks or even longer.
2. Swing Trade – A trade that lasts one day to several days
3. Day Trade – A trade that lasts less than one day. Day traders may trade several times in one day.

Which type of trader you are will depend on your personality, style, objectives, etc.

So let’s look at our trade...

Entered the market at 1.1950 on a trend line break – we bought Euros

Exited the market at 1.2650 on a trend line break – we sold the Euros which increased in value 7 cents

Total pips = 700

On a mini account that would be a profit of $700.00

On a full size account that would be a profit of $7000.00

That is a simple example of how you make money going “long” or by being a “bull.”

The next page will give an example of a "bear" trade or going "short."

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