Forex exchange rates: what is a currency pair, where you can trade currencies, what affects forex exchange rate in Forex. How do you make money trading money? How to start earning on differences in forex exchange rates. An example of simple trading strategy for newbies.
Currency and Forex: how to make cash on changes in currency rates
On January 15, 2015, in just one day, investors could increase their deposit by more than a quarter. On that day, the Swiss National Bank shocked currency markets by the abrupt decision to scrap the currency peg, letting the franc’s rate move freely. Within a day, the Swiss franc was 26% up to the US dollar and 30% up to the euro. However, such a good luck is rare. Furthermore, there were those who lost everything due to this surge. What is foreign exchange market or Forex and how you can make money on trading currencies, read on in the article.
Forex exchange rates: a right way to make money
Each country with rare exceptions has its own local currency. Currency is a trading instrument like commodities or securities. It can be sold, bought, that is, exchanged for other currencies. The objective of forex trading is to exchange one currency for another in the expectation that the price will change. However, you cannot directly exchange the Mexican peso for the Indian rupee for example. Therefore, fully convertible currencies are used as a basis to make any exchange in the stock or Forex market..
The value of a local currency, equivalent in other currencies, indicates in a way the performance of a country’s economy. Any changes in the value result in the change in the currency exchange rate that is controlled by the central bank. And you can make profits on these changes. You understand what factors and in what way affect the Forex currencies, you can make money on the differences in exchange rates.
Where you can trade currencies:
- Banks. This way is good for long-term investors. Its flaws include a narrow range of available currencies (they usually provide transactions only with fully convertible currencies) and large margin (the difference between buying and selling the currency
- Exchanges. Facilities that provide buying and selling physical currency through brokers, licensed by the exchanges. Currency pairs are traded in the following exchanges: MOEX (Russia), LIFFE (Great Britain), ЕОЕ (the Netherlands), DTB (Germany) and others.
- Forex. Here, you don’t trade the physical currency, rather, you trade CFDs (contracts for difference). It means that a trader doesn’t hold real currency, he/she bets on which side the exchange rate will change. Forex advantage is small initial deposit. Brokers, providing forex trading, are licensed by regulators.
What currencies are traded in Forex? The list of Forex traded currencies is rather short. The eight currencies most often traded are the U.S. dollar (USD), Canadian dollar (CAD), euro (EUR), British pound (GBP), Swiss franc (CHF), New Zealand dollar (NZD), Australian dollar (AUD) and the Japanese yen (JPY). Sometimes, there can also be exotic currencies like the South African rand, the Russian ruble, etc. These currencies feature broad spread, weak volatility (the pace of price changes) and liquidity, insufficient information for analysis
Forex currency rates are affected by the following factors:
- Macroeconomic statistics. Interest rate, discount rate, balance sheet, unemployment rate, inflation, consumer prices index and so on.
- Information environment. Many people are influenced by external factors. So, foreign exchange rates can be influenced by the publications of forecasts, opinions, news and so on. They can influence traders’ decisions and thereby move a currency value in a particular direction
- Institutional capital. Market makers, investment banks, large investors can move an exchange rate by placing large-sized trades.
- Geopolitics: world conflicts, sanctions, elections, etc.
How you start forex trading:
- Study theory. Read articles on the Internet, watch webinars and seminars about what are currency pairs, how to make money on forex exchange rate, what commissions are charged by brokers. Study the basic rules of how to minimize you risks.
- Select a broker, get registered and verified (very your identity). Before you start trading currencies on a real account you have to pass verification. To open a demo account, you don’t have to be verified. I recommend you to start trading from demo account..
- Train placing trades, having studied the platform functions.
- Learn to analyze fundamental factors.
- After you have been performing successfully for a sufficient period of time, you can start trading on a real account. You’d better start with a cent account.
What currencies are best to trade in Forex? There is no single answer. ON the one hand, the stronger the volatility is, the quicker you can generate income. But such markets often feature slippages (discrepancy of the open / close price to that specified by the trader); such currency pairs are risky assets. In addition, the volatility may change, depending on a trading session. As a way out, you can use the volatility calculator.
Some tips on Forex trading for beginners:
- Try to evaluate as many factors that could affect the rate as possible. This may be statistics on the economy, whose currency you trade, investors’ forecasts, etc. For example, if positive statistics does not match the forecast, the exchange rate will roll back.
- Do not make hasty decisions, but do not wait for too long. Support you trades with a stop loss.
- Make up a diversified portfolio with a few correlated assets.
Trading strategies to make money on Forex exchange rates
- Scalping. Multiple trades opened for a period of a few second or minutes. It requires much attention and emotional tension.
- Day trading. Suggests making one or a few trades within the same day without paying a swap. A trade can be held up in the market for a few hours.
- Long-term trading. A trade is help on for a few days or weeks. Currencies in Forex that suit this strategy are usually included in exotic currency pairs.
Strategies can also be divided in those, based on fundamental analysis (Forex exchange rates are forecast according to reports on economic data) and those, based on technical analysis (trading with indicators that anticipated the trend direction, based on the price movements in the past). One of the technical-based strategies will be explained further
Forex trading strategies
Now, when you already know in general how to trade foreign exchange rates correctly, I’d like to share one interesting Forex strategy. It is based on technical analysis; therefore I’ll right away warn about some restrictions: you do not trade in the last 3 hours of Friday and in the first 3 hours of Monday, at the time of the news releases, or statistical reports, and during the flat.
The strategy applies two indicators that are combined into a single tool:
- Bollinger Bands. It is a common channel indicator, whose borders are drawn by moving averages. Moving averages (MA) it an averaged price value during a particular period of time. There are two variants of the strategy, based on Bollinger Bands: you enter a trade at the time of the border breakout (a strong trend appears) or at the time of the price rebound in the direction of the reversal (more often, the price is moving inside the channel).
- Start Bands. It is complementary tool of channel type, based on Stoller Average Range Channels. It differs from Bollinger bands by a slightly different approach to identifying channel borders.
You can use both indicators separately (they are included in MT4 standard tools). Or, you can download the template following this link. To install the template in MT4, open File-Open Data Folder, past the template into Templates folder, import the indicator from archive into Indicators folder that is in the MQL4 folder. After you restart the platform, the indicator will be in the list.
Trading conditions: currency pair –EUR/USD; timeframe – M15 (15 minutes). Settings:
- Bollinger Bands Period = 20
- Bollinger Bands Deviation =2
- MA Period =21
- ATR Period =21
- KATR = 2.0.
- Shift = 0.
Requirements to open a long position:
- Trading time is during the European session when there is the strongest volatility for the currency pair
- Bollinger Bands top border is below the top border of Stark Bands.
- Rising candlestick breaks through the borders of both channels. It is good when the candlestick body is as long as possible compared to the previous candlesticks
At the next candlestick, you open a long for Euro/US dollar currency pair with a stop loss at a distance of 10-30 pips. A way to exit the trade: when the price reaches 10 pips, protect the trade at the breakeven level with a stop, close a part of the position and the rest hold up with a trailing stop at a distance of about 10 pips.
Requirements for opening a short.
- Trading time is during European session
- Bollinger Bands bottom line is above the bottom border of Bands.
- Falling candlestick breaks out the borders of both channels. It is good the candlestick body is as long as possible compared to the previous candlesticks.
The exit conditions are similar.
You can learn more interesting strategies in our special section by following this link. If you are not sure that will be able to handle the strategies, I recommend you to learn more about social trading service in LiteForex where you can copy trades, entered by advanced successful traders.
Let’s sum up. Currency is a trading instrument to make money just like stocks, oil, gold and other assets. It can’t be said that a particular instrument is better or worse – they all perfectly suit risk diversification. You don’t need much money to start trading. There are rather more important to understand how the financial market operates, to select the rights trading strategies, to strictly follow risk management and to constantly monitor the market situation. Don’t expect quick and easy money! Do constantly improve and polish your knowledge, try to keep cool and don’t be afraid of losses. This way, you will certainly succeed!
I wish you successful trading!
P.S. Did you like my article? Share it in social networks: it will be the best “thank you" :)
Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.
- I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
- Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex
Price chart of EURUSD in real time mode
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.