Forex trading is trading different currencies. In the forex market, you buy or sell different coins and money from other countries. As time passes, more and more people are becoming interested in forex trading.
Forex trading can help you multiply your money, and if you are a trader that works in the stock market, you will find that the forex market operates similarly to the other markets. There isn’t much difference in the way the markets operate and carry out their functions.
The expectation for forex traders to pick up one currency and hold it is because they expect there to be a change in price. The difference in price is measured via the exchange rate; the exchange rate is the ratio in which one currency is measured against the other.
Most traders use either the dollar or the euro as a constant comparison tool. The reason for this is straightforward. The dollar and the euro both are stable currencies, and they are easier to trade. The coins also rarely go down; they have been known to only strengthen over time.
However, making money is only possible if you are familiar with trading strategies. In this blog, I will talk about the best ways through which you can make money using forex trading.
Use A Base Currency You Are Familiar With
For traders starting forex trading and beginners, all the different currencies and the various currency rates can get confusing to understand; therefore, it is best only to use a base currency that you are familiar with.
The best base currency to use would be your home currency because you have an understanding of it. Your home currency will also be a convenient option for you. Once you have deposited in your trading account, then you can pick and choose any two worldwide currencies to pay up together.
At this point, you can choose any currency you want. If you set up your trading account in Euros, then you can use it to pair up two major worldwide currencies like the UK dollar or the US dollar. Choosing a dominant currency like this will mean that you will face a few restrictions during forex trading.
Use Sentiment As A Guide To Help Improve The Odds
You can use this tool to get an idea about the market and know what is happening in the industry. IGCS is a free tool that can be used by new traders and can let them see how many traders are long and how many traders are short in a particular position.
The sentiment tool is meant to be a contrarian index where we do the opposite of what everyone is doing in the market.
This tool can help you gain direction and can also provide you with valuable industry insights. For new traders, it can help you immensely in making trading decisions.
All The Currencies Are Quoted In Pairs
One thing that you will notice is that all the currencies on the forex platform will be quoted in pairs. The reason they are quoted in pairs is that you are simultaneously buying one currency and then selling another.
The first listed currency that you will see is known as the base currency, and the second currency is known as the quote currency.
While buying the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency.
While selling the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency.
Know Your Risk Appetite
Trading on forex is no doubt a risky game, and many traders often back out from making a specific trade because they feel that it is too dangerous and risky. You need to know what exactly your risk appetite is to be able to execute successful trades while having peace of mind as well.
Before evaluating what you can gain, it is always better to know what you can lose with this trade. It helps you in countering excitement. The best way to make the most out of forex trading is only to take up as much risk as you are willing to afford. There is never any guarantee that some or all of your trades will work out; therefore, it is always better to play safe.
Understand That Forex Trading Is Not A Get Rich Quick Scheme
Forex trading can be difficult, and it is not a get rich quick scheme. You can end up losing and winning both, so it is essential to play the game carefully to be able to buy at low rates and sell at high prices.
Forex trading has many thrills attached to it, but you always need to be careful and only take on as much risk as you can afford.
You may believe that you need to be quick in making decisions to prevent the opportunity from flying by, but we often in our haste end up making wrong decisions and end up making losses. The professionals know this, and therefore they are usually calm in making decisions.
If you end up missing an opportunity, it isn’t the end of the world, and there is also a high possibility that another good chance might cross your path again sometime soon. If you are a new trader, you need to take things slow and at your own pace.
Learning how to trade successfully takes time, and it also gets increasingly simpler. For beginners, it might feel overwhelming, but you need to not cave in the false pressure, and you need to always trade with a calm head.
Spot The Trends In The Market
The best way to work around forex and end up making profits is by carrying out trend analysis. The way other traders are interacting can help you determine the market mood and also will help you predict the stock movements quite accurately.
Most traders often spend an hour or so analyzing the market and trying to figure out the direction the market is heading towards so that they can make profits.
Invest In Options
You don’t have to be trading all the time. One good way through which you can make money via forex is by buying options. I will talk about the mechanics of options in detail below.
Options can help you not carry out the entire trade and purchase the right to buy or sell a particular amount of currency if the future trends work out in your favor. To be able to earn this right, you pay a premium.
What Are Options, And How Can You Use Them?
There are two types of options available to forex traders for currency option trading. The first option is the traditional call or put option, and there is also the single payment options trading (SPOT) option.
Spot options generally have a higher premium cost as compared to other options, but these forms of options are easy to manage and execute.
The call/put options are the traditional forms of options. These kinds of options give the buyer the right to purchase a currency pair at a prespecified time in the future. The exchange rate is also fixed beforehand.
Both the put and call options allow the buyer to gain the right to make the purchase some time in the future, but at the same time the buyer is not obligated to go forward with the transaction.4
To be able to buy this right, you will have to pay a premium. If the options work in your favor, you will cash in the money, but if the options don’t work out in your favor, then your options will end up expiring worthlessly.
Single Payment Options Trading
The other type of options trading is the single payment option trading. The way the SPOT options work for forex traders is relatively simple.
A currency trader can buy a SPOT option by putting in the desired scenario. The scenario can be anything like, “I think the price of currency X/Currency Y will have a price ratio of 1.8:1 in 30 days from now.”
Based on your estimate, a premium will be quoted. If you purchase this option, then the SPOT will be in place, and if your estimated scenario occurs, then the choice is automatically converted into cash.
How To Trade Options Online
Sadly not all the retail forex brokers in the world provide the opportunities for you to trade options within your accounts.
The best thing you can do before finalizing a retail forex broker is to do your research and find a broker that is giving out the most options at your preferred price. If you are looking for a forex broker that allows you to trade with options along with the traditional options, then you will need to do your research on the case too.
What Is The Benefit Of Purchasing An Option?
The most apparent benefit of purchasing an option is that you buy the right but not the obligation to hold a particular position. Acquiring an option minimizes your losses in the case when you plan to hold a spot for an extended period, says six months.
In case if things go south and the price falls instead of rising or if the price acts against what you have predicted, you will only have to forego the premium amount that you have paid. Your losses will be limited to a certain extent.
In the case of a gain, you will be able to make an infinite amount of gain. So options enable you to make more profits and fewer losses.
Currency options can be used as insurance, and they can be used to protect or hedge an existing forex position. Currency options can also be sold against a current forex position to provide additional income that increases the project’s breakeven rate.
You can use options to assume a strategic position in the market, and you can even purchase multiple options at a time to hedge and protect yourself against adverse movements.
What Are The Options Intrinsic And Extrinsic Value?
For European and American style options, two components can help measure their value. The first part for most European options is the intrinsic value, and it talks about the favorable difference, if any, between the options strike price and the prevailing forward exchange rate to the final delivery date of the option.
How do we know which options are made up of intrinsic value and which mostly consist of extrinsic value? Options that are deep in the money with low volatility levels and those that are close to their expiration often have their prices made up of intrinsic value.
Options that generally have high volatility, long time until expiration and strike price situated at the money tend to have the highest extrinsic value.
American Style Options
American Style options can be exercised at any time before their expiration, and thus their pricing requires a modification to the pricing model.
European Style Options
The European style options can only be exercised on the expiry date, and their pricing is naturally non-adjustable.
Usually, the American style option doesn’t get exercised early because then the buyer will have to forego the time value of the money. If the American option needs to be used early, then the option needs to be in the money, and it needs to be in the money to such an extent that there is an overall positive carry on effect.
If that is not how the case is, then it is simply easier to sell back the options to capture both the time and the intrinsic value of the option. Therefore it doesn’t make much difference whether you choose to get a European option or an American option.
Forex trading can help you earn some extra cash with your money if you play your cards right, and if you keep yourself familiar with all the trading strategies.