Forex Recipe

Making profit in Forex trading revolves around one basic principle, buying cheap and selling high. The ideal goal of a forex trader should be to invest in some currency that will give profit while selling it in future. With a little twist however you can also make money in forex trading by selling high and then buying low. Surprised? Let’s explore.

This happens because it is irrelevant in forex trading if the price of the currency is going up or coming down. You can make profit in both the situations. Here comes the concept of playing either Bull or a Bear.

Bull is one who expects that the prices will go up and bear is one who thinks it is going to go down. The same terminologies are followed for almost all financial markets. So when we buy low and sell high we play bullish. This is also referred to as taking a long position for a specific currency pairs. For example, with EUR/USD, we will buy Euro and sell USD.

Therefore, when the price breaks through the downtrend line, it can be assumed that the price will continue going up. The ideal stand will be to place a buy order, which will be executed automatically through the trading platform. You would need to place a stop loss at a predetermined location that would cover the risk exposure.

The situation is reversed when you take a bearish position. It is selling first and buying thereafter. As the prices in the forex market is continuously going up and down, one must take a bearish position at specific instances. Taking cue from the earlier example when the USD is no more weakening against Euro, it would be appropriate to sell EUR/USD (which means selling the Euro and buying the USD at the same time). This is also referred to as shorting of the market. At this point you are selling Euro at the current market price agreeing that you are going to buy it at a later time. Because of the volume of the forex market, you will always find a trader willing to sell you a lot when you plan to buy Euro.

For example, if at the point of sell the price of a currency is 1.210 and then it drops to 1.200, you plan to buy. So you end up with 10-pip difference, which in case of a mini account is equivalent to $10 minus the spread of $2 would be a gain of $8. This you earned by selling first and then buying back later.

Tags: bear, bull, forex trading, long, short

This entry was posted on Thursday, August 21st, 2008 at 6:52 am and is filed under Forex for Beginners. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.