In our previous article, we discussed the Forex market and how it functions. In this article, we shall discuss how Forex is traded, what the fundamentals of Forex trading are, and how traders make money from the fluctuations in the Forex market.
The key to making money in the Forex market is to buy and sell at the right time. If the market moves in your favour, you will be making a profit. In case the market moves against you, you will sustain a loss. In other words, the profits lie in the exchange. In order to simplify it for you, let’s take the help of an example. If you have ever traveled abroad or overseas, you must have made a Forex transaction. If you travel to Europe from the United States of America, you convert your dollars into euros. The amount of euros that you get is determined by the exchange rate prevailing in the market at that event. And the exchange rate is always fluctuating.
Before we discuss further how to trade Forex, there is a concept that you need to know. As we have discussed in the previous article that currencies are traded in pairs, we get two terminologies i.e. base currency and quote currency or the counter currency.
Base Currency and Quote Currency
In the Forex market, the unit prices of currencies are quoted as currency pairs. USD/GBP, EUR/USD, USD/CHF, and USD/CAD are some examples of currency pairs. Base Currency is the first currency appearing in the currency pair quotation and in the examples that we have just mentioned, USD and EUR are the base currencies. It is also known as the transaction currency. The second part of the currency pair is the quote currency.
If we break down the currency pairs, the base currency represents the amount of quote currency needed to get one unit of the base currency. In EUR/USD, the amount of US dollars is to be ascertained to get one unit of Euro. This understanding of base and quote currencies will lay the foundation of your career in Forex trading.
Watch the below video for further information on “How Forex is Traded”.
How to Trade Forex
Now, we shall discuss how to trade Forex. Let’s suppose you are in the Forex market, and you decide to sell your currency at the current price in the market. For that purpose, you will use the sell option. Once you have used the sell option, you have to see where the price moves. If the price of the base currency increases, you will sustain a loss. Similarly, if the price decreases, you will earn a profit. The more the price decreases, the more profit you will be making. You can also check daily signals and indicators to get more precise information.
Please note that the prices are quoted in decimals and even a fraction of movement can either be beneficial or harmful. Check out more Free & Premium Trading Indicators and boost your trading strategies with them.