Imagine This…
You’re sitting in front of your laptop, coffee in hand, watching the EUR/USD chart tick up and down. You’re about to place a trade—your goal? To buy euros and sell dollars, hoping the euro gets stronger.
But how exactly does this make you money?
Welcome to the world of forex trading—the global financial market where you can make (or lose) money by speculating on currency price movements.
What Is Forex Trading?
Forex trading, short for foreign exchange, is the act of buying one currency while selling another. This is always done in pairs, like EUR/USD or GBP/JPY.
The forex market is the largest financial market in the world, with over $7 trillion traded every single day. It operates 24 hours a day, five days a week, across major financial centers like London, New York, Tokyo, and Sydney.
Unlike the stock market where you buy shares of companies, in forex you’re speculating on the value of one currency versus another.
How Forex Trading Works
Let’s say you believe the euro (EUR) will rise against the US dollar (USD). So, you buy EUR/USD.
Here’s a real-life-style example:
| Action | EUR | USD |
|---|---|---|
| Buy 10,000 EUR at 1.1800 | +10,000 | -11,800 |
| Sell 10,000 EUR at 1.2500 | -10,000 | +12,500 |
| Profit | 0 | +700 |
Your profit comes from the change in exchange rate—from 1.1800 to 1.2500.
Just like that, you’ve made $700. Of course, in real life, it takes strategy, timing, and risk management. But the core idea remains: buy low, sell high—or in forex terms, buy the base currency when it’s weak and sell when it’s strong.
Understanding Currency Pairs
In forex, currencies are always traded in pairs. Why? Because you’re always buying one and selling another at the same time.
Take GBP/USD for example:
- GBP (British Pound) is the base currency.
- USD (US Dollar) is the quote currency.
If the quote is 1.21228, that means 1 GBP = 1.21228 USD.
So when you buy GBP/USD, you’re buying GBP and selling USD.
When you sell GBP/USD, you’re selling GBP and buying USD.
Long vs. Short: Trading in Both Directions
One powerful thing about forex trading is that you can make money whether the market goes up or down.
- Going Long (Buy): You think the base currency will increase in value.
- Going Short (Sell): You think the base currency will decrease in value.
Trader’s Tip: “Long = Buy”, “Short = Sell”
Let’s say you expect the Japanese yen to strengthen against the US dollar. You would short USD/JPY, hoping the USD falls in value compared to JPY.
What Does “Flat” Mean?
If you have no open trades, you’re considered flat or square.
- If you’re in a trade, you’re either long or short.
- Once you close the trade, you’re flat again.
Traders often say, “I’m square for the day,” meaning they’ve closed all positions.
The Bid, Ask, and Spread
When you open your trading platform, you’ll see two prices for each pair:
- Bid Price: The price you can sell the base currency.
- Ask Price: The price you can buy the base currency.
- Spread: The difference between the bid and ask. This is essentially the broker’s fee.
Example:
EUR/USD = 1.34568 / 1.34588
Spread = 0.00020 or 2 pips
So if you buy EUR/USD at 1.34588 and it only rises to 1.34568, you’re still down because of the spread.
How to Actually Make Money Trading Forex
To consistently profit in forex trading, you need three ingredients:
- Analysis – Understand what moves currency prices using technical and/or fundamental tools.
- Risk Management – Protect your capital using stop-loss, position sizing, and discipline.
- Strategy – Develop a repeatable method to identify trade opportunities.
Forex trading isn’t gambling—it’s skill, patience, and preparation.
Can You Really Make Money?
Yes, you can make money trading forex. But it’s not easy. It takes time, learning, and real-world practice.
Start with a demo account, study price charts, manage your risk—and keep learning. The more prepared you are, the better your chances of success.