(Now I am trying to teach you how to enter the field. No need to be stressed out. Just read these parts. Some people ask about the target of learning these is. I am answering them in this article. Ok. Do you remember the last article? If so, it will be better. Now it’s time to read this).
In the previous articles, I have tried to give you an idea about the Forex Market and use of different currencies in it. I hope you have some sort of an understanding by now. I am trying to give you an idea about the profits that can be obtained via Forex market in this article. Read this and have a good idea about it as well.
You may remember Forex market processes and its currency types. Earning profits via currency types in Forex and the way of doing is explained in this article as in LKR/USD example in previous articles.
In Forex market foreign currencies are used. These are major and minor currencies that we described in previous article. Out of them, USD and Euro do the most significant effect. We can easily earn through exchanging these currencies. (First you buy it and later you sell it). In Forex market, these are connected as EURO/USD. It means Euro vs. USD. (In here, there has to be two currencies to exchange. It is like buying something for something alike). In following image, it has shown the different currencies we meet in Forex market.
You can see different currencies in the above image. (Even though there are many only the familiar ones are used for trading). It is an image of the software we use in Forex market business that shows the types of currencies. (This software is not directly prepared for the use in Sri Lanka, that’s why it shows everything).
We describe about this software in future articles. You can see as bid and ask in front of the currency type (EUR/USD). These are actually synonymous to buy and sell. There are two currencies in Forex market usage and therefore we can obtain profits via the increases and decreases of the values of a certain pair. It’s because this is an exchange between two currencies. (Imagine a situation like this. EUR/USD market has increased and now you can buy it. Then think EUR/USD goes down. Then you can sell them. In this way we can earn a very good profit. The most important benefit in Forex market is ability to earn profits for both parties. But do not take it too much serious. You will get to know it eventually when you use our software. It’s actually very simple).
Usually we cannot earn profits to both parties in stock market. It’s because we can only deal with only a single companies shares at a time. We can only get the benefit when selling after prices have gone up. (It’s the same procedure occur in a normal grocery shop as you know. You buy a good when its value is low and then sell later when its value is higher). We buy when value is low and we sell when value is high. But it cannot be done just because we need. It requires a buyer as well. But in Forex market, you don’t need to wait for a buyer as it involves a large number of people around the world. You can buy and sell very fast. It is described further in following part. (We don’t need to wait because of the large number of buyers around the world. Actually we don’t know who are buying as it is done through the broker companies). See the image shown above. We are using an example from that image to explain the buying and selling.
Currency Bid (Sell Price) Ask (Buy Price)
EUR/USD 1.2875 1.2878
Earning profits when values are increasing (Market Buying Instance)
The values of a certain currency change very quickly in World financial market. It’s due to the high demand towards the popular currencies. Also the demand and supply determine the increase or decrease of the value of a certain currency. Imagine that above currency values are increasing and see the example given below.
In stock market, we buy during periods of low values and sell them in periods that values are higher. In Forex market we have to have bought money if there is a trend of increasing values. If not, we would have nothing to sell when prices are high. That means you have to buy. Then the “Ask” or Buy Prices are the parts relevant to you. Also remember that there are two values due to exchanging two currencies at once.
If you are buying, 1.2878 is the value relevant to you according to above prices. Imagine that you bought same amount to that price. How do you earn profits?
To earn a profit you have to wait until price goes higher than 1.2878. That means current Ask (Buy price) has to go higher than Bid (Sell price). If explained further, the Bid 1.2875 price has to go higher than Ask price 1.2878. Imagine new prices are like this.
Currency Bid (Sell Price) Ask (Buy Price)
EUR/USD 1.2880 1.2883
You bought for 1.2878 and now it is 1.2880. It is higher than 2units to the price you bought. You have a profit of 2 units.
1.2880 - 1.2878 = 2
If you sell now, you can have a profit of 2 units. (These units are called as Pips. It will be explained in the future). (In simple you sell what you bought for a lesser price. It’s just like selling something you bought for a price of 100 t a price of 150. You get a profit of 50.)
Earning Profits when prices are decreasing (Instance of Market sell)
If values are going down we should have bought money or we will not have anything to sell when prices are low. In here Sell action is the relevant action. You have to consider Sell price or Bid shown in here. You got to remember that there are two prices due to exchange of 2 currencies. Due to this we can earn profits irrespective of the prices are increasing or decreasing.
If you are selling according to the current prices 1.2875 is the relevant value. Think that you have bought some money for this price. The how do you earn profits?
For this, the market prices have to go below the price you bought the money. That means current Ask price has to go down below the Bid price (1.2875). Imagine the values are changed like this.
Currency Bid (Sell Price) Ask (Buy Price)
EUR/USD 1.2870 1.2873
You sell for 1.2875 and now Buy price is 1.283.Now your prices have gone down by 2 units and you can have it as profit.
1.2875 - 1.2873 = 2
You can sell the amount you have and earn the profit of 2 units.
If Forex market is going up it is called Market Buy and if it goes down it is called Market Sell. (This is like the other side of the Buying story. This says that you can earn profits when the market prices come lower than the Sell price of yours. Now you may wonder how we get profits when market prices are going down. It’s because this involves two currencies. When market increases we buy Euro. When market decreases we buy USD. In this example Euro is the first currency. So we sell it when prices are going down. Now you can understand. Isn’t it?)
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