Making money in real life
Example of Vegetable Trading
Let's say you're a vegetable trader with $100. How can you increase it to $120?
Answer: By buying 100 bundles of vegetables at $1 each and selling them to consumers at $1.20 each.
Detailed explanation of the trading process:
- You exchanged $100 for 100 bundles of vegetables
- Increased the price of each bundle to $1.20
- You exchanged 100 bundles back for $120
So after this trading process, you made a profit of $20 (not counting the effort spent buying and reselling).
Similarly in the Forex Market
Similarly, but in the forex market, the traded products are currencies.
Let's take another example: suppose the exchange rate between EUR and USD is 1:1, meaning 1 EUR equals 1 USD.
You have 100 USD, and if you have information or predict that EUR will rise to 1.2 USD.
The steps to make money would be:
- You exchange 100 USD for 100 EUR (since the initial rate is 1:1)
- You wait for the EUR/USD rate to reach 1.2:1 (meaning 1 EUR = 1.2 USD)
- You exchange back 100 EUR for 120 USD
So after this exchange process, you've made 20 USD (before deducting fees for the trading platform acting as intermediary...).
What if things go wrong and EUR loses value compared to the initial rate?
If at step 2, EUR decreases in value, where 1 EUR equals only 0.8 USD, then when you sell back 100 EUR, you'll only get 80 USD. Thus, you lose 20 USD.
In the forex market, you can also profit when EUR decreases through short selling!
How does short selling work?
- You borrow 100 EUR at the 1:1 USD rate and immediately sell it for 100 USD. Now you owe 100 EUR and have 100 USD.
- When EUR price drops to 0.8 USD, you spend 80 USD to buy 100 EUR
- Use the 100 EUR you just bought to repay the debt... So you've made 20 USD profit.
Currency Pairs Concept in Forex
As in the example above, trading in the forex market involves currency trading. Specifically, you predict the exchange rate between currency pairs, then decide to buy or short sell.
When buying EUR/USD (step 1), it means you're buying EUR and selling USD.
When closing a buy position for EUR/USD (step 3), it means you're selling the EUR you bought and getting back USD.
A buy order ends with a sell order. And vice versa!
Definition
A currency pair is the exchange rate between two different national currencies, representing the value of one currency relative to another.
Example: EUR/USD pair
In a currency pair, the first listed currency is called the base currency, and the second currency is called the quote currency - profits or losses are calculated in terms of the quote currency.
Major Currency Pairs
There are four currency pairs called major pairs that are most frequently traded:
- EUR/USD
- USD/JPY
- GBP/USD
- USD/CHF
Among these, EUR/USD is the most traded pair.
Besides these pairs, there are other heavily traded pairs like USD/CAD, AUD/USD, NZD/USD
Other Currency Pairs
Besides the major pairs, there are less frequently traded pairs such as:
Minor pairs
- EUR/GBP
- EUR/JPY
- GBP/JPY
- GBP/CAD
- CHF/JPY
- EUR/AUD
- NZD/JPY
Exotic pairs
- AUD/NOK (Australian Dollar/Norwegian Krone)
- AUD/PLN (Australian Dollar/Polish Zloty)
- AUD/SEK (Australian Dollar/Swedish Krona)
- AUD/SGD (Australian Dollar/Singapore Dollar)
- CAD/SGD (Canadian Dollar/Singapore Dollar)
- CHF/SEK (Swiss Franc/Swedish Krona)
- CHF/SGD (Swiss Franc/Singapore Dollar)
- EUR/CZK (Euro/Czech Republic Koruna)
- EUR/HUF (Euro/Hungarian Forint)
- EUR/NOK (Euro/Norwegian Krone)
- …
Why Should New Traders Trade Major Currency Pairs?
The answer is high liquidity.
Liquidity represents the flexibility to convert from one asset to another.
Vì có tính thanh khoản cao nên bạn có thể mua, bán ở bất kỳ mức giá nào.
Khi bạn mua thì luôn có người bán cũng như khi bạn bán thì luôn có người mua. Rất ít khi gặp tình trạng nhảy giá (slippage).
Due to high liquidity, you can buy and sell at any price level.
When you want to buy, there's always a seller, and when you want to sell, there's always a buyer. Price slippage rarely occurs.
Slippage là gì?Additionally, because of the large trading volume with major currency pairs, the difference between buying and selling prices is low (low spread).
Spread là gì?With low spread, your transaction fees for each trade will also be lower.