It is not uncommon to come across people asking if one can really make money from forex trading. Given to the fact that majority of traders in the forex market are on the losing side, while just a few are on the winning side (in the ratio of 10:1), it is actually wise to ask this question. Making money from trading forex is not a myth; it is real. How is that possible someone may ask; what exactly goes down in the forex market?
THE FOREX MARKET:
Forex is a financial market where currencies are traded to make profits. It is the largest market in the world and accounts for about 5 trillion dollars on a daily basis. It is the most liquid market in the world too.
Trading the forex market entails either buying or selling a currency in exchange for another. In other words, forex traders buy money with money. How then does the profit come in? The answer is exchange rates. Before we go into what and how exchange rates affect the forex market, let us first understand what a currency pair is.
Currency pair, like the term “pair” implies, is a forex commodity made of two different currencies. It shows the quotation and pricing structure of a forex commodity. A single currency has a value that can only determined by comparing it to other currencies. That is the whole idea behind pairs; to determine its value by comparing or pairing it with others. Examples of currency pairs are EUR USD, AUD USD, USD CAD, EUR CHF, etc.
When a pair is to be traded in the forex market, the trader has to first of all interpret it. Let us take USD CAD as an example. The first quote there is known as the base currency, and the second is the quote currency; that is USD is the base, and CAD is the quote. If
USD CAD = 1.35
It means that with 1 USD, one can get 1.35 CAD. The base currency is always regarded in the value of 1, and the quote currency is regarded in the value of the pair.
INTEREST RATES OF PAIRS:
Making money from trading the forex market largely depends on interest rate if not totally. It is what drives the forex market. The interest rate of a currency is defined simply as the strength. If the interest rate of is high, then its value in the forex market is high too, if it is low, the value of the commodity becomes low too.
The forex market is subject to changes and fluctuations; which is how it is possible to make money trading the forex market. Interest rate is subject to inflation and deflation. If a trader buys a currency pair, it is with the hope that the value/ interest rate of the pair will increase so that it can be sold off for a profit. If a trader sells a pair, it is with hopes that the pair’s value will decrease after which the trader will buy it as a cheaper rate. This is how forex traders make their money.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.