One of the most difficult things for forex beginners to understand is how you make profits trading currencies. At the same time, since we don't charge commissions, many people don't understand how we make money either.
Here are the answers!
How do you make money?
Let's take an example based on the graph below:
* You open an Classic Account with €2,000
* You think the Euro will go down against the US dollar
* You decide to sell 200,000 Euros once the bid price reaches 1.2850 US dollars
* Because you are on 1:100 margin, this costs €2,000 – we provide the other €198.000
* There is no margin left in your account at this point
* The Euros you sold are worth $257.000 US dollars
* You decide to buy Euros once they go down to an ask price of 1.2750 US dollars
* The Euro ask price reaches 1.2750 US dollars and you buy
* This costs $255,000 US dollars
* You have now sold 200.000 Euros for $257.000 and bought them for $255,000
* The difference is $2,000 US dollars or €1568 Euros
* Your profit for a €2,000 investment is €1568 Euros – a 74.43% return!
Forex trading
Here's another example:
* This time you think the Euro will go up
* You open a Cent Account with 20 US dollars
* You decide to buy 1500 Euros when the Euro ask price goes down to $1.2750
* It does and the cost is $1912.50
* Because you have 1:100 margin this only costs you $19.12 – we provide the rest
* The Euro then goes up to 1.2850 US dollars
* You sell your 1500 Euros for $1927.50
* Your profit is $15.00 – a 75% return on your $20 investment!
How do we make money?
You've made money trading Euros and dollars. We don't charge any commission, so how do we make money?
Notice in the example above that we talked about bid prices and ask prices. These aren't the same:
* The bid price is what you pay when you're buying currency
* The ask price is what you get when you're selling - and is less than the bid price
The difference between the two is known as the spread. This is where we make our profit. In the first example above, the spread is 0.0002 or two points, and so our profit is about $30 on $200,000.
Managing your risk
In the examples above, the dollar moved in the direction you expected. However, it could move in the opposite direction, and you could lose money. There are a number of things you can do to manage this risk:
* Change the default 1:100 margin for your account - 1:10 for low risk or 1:500 for high risk
* Manage your money by spreading it over several investments
Use a number of other risk management methods
Here are the answers!
How do you make money?
Let's take an example based on the graph below:
* You open an Classic Account with €2,000
* You think the Euro will go down against the US dollar
* You decide to sell 200,000 Euros once the bid price reaches 1.2850 US dollars
* Because you are on 1:100 margin, this costs €2,000 – we provide the other €198.000
* There is no margin left in your account at this point
* The Euros you sold are worth $257.000 US dollars
* You decide to buy Euros once they go down to an ask price of 1.2750 US dollars
* The Euro ask price reaches 1.2750 US dollars and you buy
* This costs $255,000 US dollars
* You have now sold 200.000 Euros for $257.000 and bought them for $255,000
* The difference is $2,000 US dollars or €1568 Euros
* Your profit for a €2,000 investment is €1568 Euros – a 74.43% return!
Forex trading
Here's another example:
* This time you think the Euro will go up
* You open a Cent Account with 20 US dollars
* You decide to buy 1500 Euros when the Euro ask price goes down to $1.2750
* It does and the cost is $1912.50
* Because you have 1:100 margin this only costs you $19.12 – we provide the rest
* The Euro then goes up to 1.2850 US dollars
* You sell your 1500 Euros for $1927.50
* Your profit is $15.00 – a 75% return on your $20 investment!
How do we make money?
You've made money trading Euros and dollars. We don't charge any commission, so how do we make money?
Notice in the example above that we talked about bid prices and ask prices. These aren't the same:
* The bid price is what you pay when you're buying currency
* The ask price is what you get when you're selling - and is less than the bid price
The difference between the two is known as the spread. This is where we make our profit. In the first example above, the spread is 0.0002 or two points, and so our profit is about $30 on $200,000.
Managing your risk
In the examples above, the dollar moved in the direction you expected. However, it could move in the opposite direction, and you could lose money. There are a number of things you can do to manage this risk:
* Change the default 1:100 margin for your account - 1:10 for low risk or 1:500 for high risk
* Manage your money by spreading it over several investments
Use a number of other risk management methods
