Making Forex Trades: How it Works

You saw an example of buying and selling Mexican Pesos with American Dollars to make a quick buck in the first chapter of this forex tutorial. Now that you’re this far into the series on how to trade, we’re going to take the tutorials to the next level to show you what making money in forex is all about.

Ready to learn how to trade? Great!

How Forex Works

We know that you make money in forex by buying and selling currencies. When you make a trade, you’re simply converting one currency to another. Which currency you buy and which one you sell depends on the currency pair, as well as the position you take.

The first currency in a currency pair is known as the “base currency”. In the GBPUSD currency pair, the Great British Pound is the base currency. The second currency you see is the “counter currency.” It is the US Dollar in the GBPUSD pair.

So, if the current rate for the GBPUSD pair were 1.65, then you know that you can buy one unit of the base currency (the GBP) for $1.65 US Dollars. You also know that you can sell GBP and receive $1.65 Dollars for each Pound you own. Simple enough, right?

Let’s go through it again:

To put the trade into words:

• If you buy the GBPUSD pair, then you’re buying Great British Pounds with US Dollars.
• If you sell the GBPUSD pair, then you’re selling Great British Pounds to buy US Dollars.

An Example Forex Trade

Here’s an example trade that will help you make sense of the matter. This example trade is one in which the trader is buying GBPUSD pair:

In this scenario, a trader purchases 5,000 Great British Pounds for $8,000 US dollars at the exchange rate of 1.6000 Dollars per Pound. Later, after the exchange rate changes, the trader sells his or her 5,000 Pounds back for dollars at a rate of 1.7400. The trader receives a total of $8,700 back for the 5,000 Pounds.

After subtracting the original investment of $8,000 US dollars, the trader earns a fantastic profit of $700 US dollars.

While the process of buying and selling can appear to be complex at first, you should note that forex requires that you understand only basic mathematics: adding, subtracting, multiplying and dividing. If you’re not entirely clear on the whole math thing, don’t worry—the next section will firm up the many concepts we threw at you in this article.