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Exactly How Does a Forex Trader Make Money?

The Foreign Exchange or more commonly known as Forex are traders that can make money in two different manners. They can either trade a pair of currencies like the US Dollar against the Euro or commonly known as the USD/EUR. The other way is by trading fluctuations in spot prices of a single currency. Most traders will go with the pairs trading, especially the less experienced traders. This is because it's a lot easier to understand than the spot trading is.

All Forex traders seek what are called pips and that is how they measure the profit of their trades. Every pip in trading is worth $10. So for instance if you are a trader and you made 30 pips in one single lot of USD/EUR trade then you just made $300. If you happened to trade two of your lots then you just made $600 so on and so forth.

Then the trader has to also take into consideration the differences between the bid price and the ask price or the offer price. The ask or offer price is the amount the trader will pay just to initiate the trade. So for instance, if the traders USD/EUR currency pairs is bidding at say $1.40 and the asking price is $1.41 then the difference would be just one pip and the trader will pay $10 for each lot to trade the pair.

The more technical traders will incorporate different chart patterns that will chart the volume of the movements to find their different trades. There will be indicators on these charts that they will use in able to see if there are trends in the market that they want to keep an eye on. A lot of times a trader will use these trends to make their decisions on how to handle their trades.

There are also what are called fundamental traders and they will trade only according to different news events that might influence their currency pairs. They might take the news of how unemployment is doing or if there are any big bank decisions going on. For an example a fundamental trader might be interested in when Chase Bank might be releasing their next interest rate decisions, so that day of trading might have a lot to do with what a certain bank is doing.

Forex traders are also able to buy as well as sell options on just a single currency just like a trader might buy some stocks or bonds. With currency options, they function a lot like the way strike prices might, where expiration dates and the different effects of time decay. This is probably one of the least risky ways to trade in Forex. Although none of it is risk free.

There is also what is called spot trading. This is where a trader who trades spot currencies will more than likely know when a major currency such as the US Dollar is rising or when it's falling against other major currencies and this will help them see if there is a trend that is reflected in the spot price. The trader will go what is called long or short depending upon the overall trend of that currency.

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