How do Forex Traders Make Money?
A forex trade works like this: You purchase 10,000 euros when the pair is quoted at EUR/USD = 1.1800. The value of the euro rises, and the pair is worth 1.2500. You earn $700.
What might make you think that the euro will rise against the dollar? There might be the obvious reason that the European Central Bank has announced that it intends to raise interest rates, but that doesn’t happen very often.
What usually happens is that the euro falls to a point, and then stops falling. It reaches what traders call a “support floor,” a point at which traders think the price is low enough.
When a currency hits a support floor, it often climbs back from it to a new level, as part of a trading pattern. Traders will have observed the drop to the support floor, will begin acquiring the euro at that point, and the currency will rise to its new level until it hits “resistance,” the point at which there is a kind of consensus that the price is high enough.
The trick, in any trading strategy, is to buy at the support floor, and sell at the resistance.
Traders judge these from experience, long-observed trading patterns, and a wealth of other formulas that they apply.
Traders also use a number of different indicators, usually available on most trading platforms, to help in making judgements. These indicators can be plugged into the charts on which you make your trades.
Successful forex trading is based on strategies. When you first learn to trade forex, you have to learn about the different strategies, and choose the ones that you find most useful. Obviously, one of the things traders think about the most is when to enter and when to exit.
Experience counts for a lot. Observing a single currency pair over a few months, one begins to spot regular patterns apart from those that one reads about in the manuals. It is this combination of experience and learning that makes a consistent trader.
Once you have discovered patterns that repeat themselves, once you have a good sense of the market for a given currency pair and you know what to expect it might do, you will find that you begin making money consistently on the forex market.
If you remain prudent, cautious, disciplined, and if you adhere to what you have learned, you will continue to make money.
Proceed with caution, but don’t be afraid. Control the risks as much as possible. You will lose on some trades. It is important to accept that, and move on.
Psychologists tell us that it is very hard to accept losing on a trade, but it is important not to try to salvage a bad trade – that is a sure way to lose a lot of money.
Take your small loss and make a new trade. And keep going.