How Do Foreign Exchange Traders Make Money?
Foreign Exchange, or forex, traders make money in one of two ways: either by trading a pair of currencies such as the US Dollar against the Euro (USD/EUR) or by trading fluctuations in the spot prices of a single currency. Pairs trading is what most traders, especially new traders, engage in as it is more accessible and easier to understand than spot trading.
Other People Are Reading
-
Price Movements for Pairs
-
Forex traders seek pips--that is, the measure of profit in their trades. Each pip is worth $10. For example, if you made 20 pips in a single-lot USD/EUR trade, you have made $200. If you traded two lots you made $400, and so on.
Bid/Ask Spreads
-
The difference between the bid price and the ask price (or offer price) is the price the trader will pay to initiate the trade. For example, if the USD/EUR pair is bidding $1.37 and asking $1.38, the difference is one pip and trader will pay $10 per lot to trade this pair.
-
Technical Trading
-
Technical traders use chart patterns and volume movements to find their trades. Indicators they use may include Fibonacci lines, RSI, MACD and candlestick charts.
Fundamental Trading
-
Fundamental traders trade around news events such as the release of unemployment data or central bank decisions. For example, the fundamental trader is likely to know when the Bank of England is going to release its next interest rate decision. So on that day, he'll trade pairs involving the British pound.
Currency Options
-
Traders can also buy and sell options on a single currency the way they would on stocks or bonds. Currency options function in the same way with strike prices, expiration dates and the effects of time decay. This can be a less risky way to trade foreign currency.
Spot Trading
-
A trader who trades spot currencies likely knows that when a major currency like the dollar is rising or falling against another major currency, it is probably doing the same thing against several others, and that trend will be reflected in the spot price. Here the trader would go long or short a particularly spot price depending on the overall trend.
-
