What Is Forex and How to Make Money with It?

by Vahid | Forex Basics | Wednesday, July 25th, 2007

What Is Forex?

Forex is the knowledge and business of making money through trading foreign currencies. Forex is not a new business and its history is as old as the history of money.

What is forex is a question that people ask a lot these days. There are people who have been making money through Forex from many years ago. Fortunately, with the help of computer and internet, Forex trading has become much easier. You can sit at your personal computer and trade from home without having to make any phone call or referring to any bank.

How is it possible?

There are brokerage companies that enable you to buy and sell different currencies through the Internet and some simple softwares. For any trade that you make, you pay a small commission to the brokerage company that you are trading through it.

You need to find a good, reliable and well-known brokerage company and sign up for an account with it. Then you have to fund your account. You use the money you have in your account to trade. Any profit that you make, will be added to your account and visa versa. Then you can withdraw the money you have made.

What currencies can you trade?

In Forex, you deal with currency pairs. There are four main currency pairs: British Pound and USD (GBP/USD), Euro and USD (EUR/USD), USD and Japanese Yen (USD/JPY), USD and Swiss Frank (USD/CHF).

In each currency pair, the first currency works as commodity and the second one works as money. For example when you choose GBP/USD to trade, if you buy, you buy British Pound against USD and if you sell, you sell British Pound against USD. It doesn’t matter what currency you have in your account. The trading software takes care of the exchanges and transactions automatically.

How can you make money?

Buying low and selling high or selling high and buying low is the base of making money in Forex. For example If you buy GBP against USD when each GBP is equal to $1.9554USD and then sell it when it is $2.0235USD, you have made a profit. I don’t want to focus on more details in this article and explain how the profits and the money you make will be calculated. I will talk about these topics in other articles.

But the big question is that how you can find out the best time to buy and how you can predict that if you buy, the price will go up and you will make a profit? This is the most important question that makes you a successful trader.

There are two methods to know the optimum time to buy and sell: Technical and Fundamental Analysis.

In technical analysis, you can predict the direction of the price using the the price chart analysis and also with the help of some special tools that are called Indicators.

GBP/JPY price chart with three indicators: RSI and MACD
What Is Forex

Technical Analysis is a science and if you want to start working on Forex, you have to learn it properly, especially if you want to work as an intraday trader. It is not too hard to learn the technical analysis. If you are a focused and a serious person, you can learn technical analysis in a few months. There are a lot of free resources over the web that you can use to learn. There are some expensive training courses but those who sign up for them are not happy and believe that they have learned nothing. So don’t waste your money. If you are serious to learn, there are a lot of free resources over the Internet. You can also visit this weblog every now and then or subscribe for my RSS feed. I will try to share my experiences with you.

The other method is the Fundamental Analysis. This method is used to predict the future movements of currencies’ prices, according to the economic and even political situation of the world and important developed countries like USA, UK, Germany, Japan and… .

Fundamental analysis has a long term usage but good traders can predict the sudden changes that happen after releasing an important news about economic situation of an important country. For example when the news says that economic situation of USA is improved for 5% in comparison to the last month, USD will become stronger and people start buying it. So the value of USD will go up because of the sudden increase of demand. If you know the effect of the news on the price, you can take the proper position and make money. Of course there are two sides in this story which means if you take the wrong position, you will lose.

Experienced and professional traders take the advantage of both technical and fundamental analysis whereas 99% of traders are dependent on the technical analysis.

Some good things about Forex:

1- Forex is an online home based business that doesn’t need referring, recruiting and advertising. You only deal with the currencies through the Internet. So you will not have to reply any email, make any phone call and spend any money on advertising.

2- If you learn Forex trading properly, you can make a lot of money. Forex can be your full time job that makes thousands of dollars for you every month. I have to emphasize again that if you start working on Forex before you learn it properly, it can be risky and you will lose your money. It is like driving. If you drive a car, before you learn to drive properly, you will hurt yourself and others but if you learn it properly first, it will be pleasant and funny.

3- You can make a lot of money by spending a small amount of money. Unlike other investments like stock market that you have to invest a lot of money to make a reasonable profit, you can make a good income through investing small amount of money. For example, with a $5000 account, you can make about $5000 per month. Of course it highly depends on the way that you trade and the strategy that you follow but good and experienced traders can double their money every month.

4- Forex - and of course stock market - are the only businesses that competition has positive impact on them. It is amazing, isn’t it? Competition is the biggest problem in all other businesses but in Forex, it helps the traders to make more money. Why?

Supply and demand are the factors that determine the price in any market. When there are too many buyers and sellers, price volatility will be much higher and market will be more dynamic. Price will go up and down more frequently and this is what we need to make money. When price goes up we buy and when it goes down we sell and make profit.

So if you choose Forex as your business, you will not have to be worried about competition.

What is Forex? If you are looking for a business to make money full time or part time, Forex is the best option. It can make reasonable decent income for you and on the other hand, you will not have to be worried about the problems like marketing, advertising, referring and recruiting and even you will not have to be worried about competition.

On this weblog, I am trying to help people to learn forex. I share my knowledge and experience with them. If you like to trade forex and make money and also learn to become a profitable and professional forex trader and forex market analyst, join my “Forexoma Live Market Analysis” program: Click Here

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33 Comments:
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Comment by kavitha gautam

2007-07-28 02:34:33

I enjoyed this article and the idea of working with Forex is intriguing but also scary. i will need to have a lot more information and read a lot more about it as you say before venturing into it.but it is definitely a very interesting area.