To simplify the operations in the Forex market, there are only 3 decisions someone can make in the market:
- STAY OFF THE MARKET
Staying off the market
Is the most important decision you will take in the Forex market. It’s about 80% of the decisions taken.
It’s taken in cases where the direction of the currency is unknown and can be easily predicted. In these cases it’s safer to stay away till the direction of the currency is known.
And put in mind that it’s best to ride on the wave, you can’t swim against the tide; you will drown.
Example for buying (Long, Bullish)
The following is a fictitious scenario to explain how the Forex works and how to benefit from it.
Imagine for a moment you are a smart investor. As a smart investor you analyze all information you get and use your experience to know speculate on how the price will move in the future.
You happen to be in the car market and you had information that says the prices of cars will rise from 100,000 LE to 110,000 LE within the next month. As a smart investor, you must decide what to do with only 10,000 LE and no car?
The wise move in this scenario is to Simply go to the car Factory (broker) and make a deal with him; you will put deposit money 10,000 LE (your capital) to book a car and within a month you will go to the market and find a buyer who will buy the car with a price higher than you agreed with the trader (100,000)
If you find a person that will take it with 110,000 LE then you made profit worth 10,000 and you will have your capital back 10,000. In other words, the total money you have earned will be 20,000 LE.
It’s an easy and simple way to trade and make money and it happens in most of the world.
That is the positive scenario, but what if your expectations were wrong and the price went down to 95,000 LE?
Then you will lose money and if you got a person who will take the car with the market price 95,000 LE then you have lost 5000 of your capital, and the money you will have is only 5000. So the total money you will have is 5000 (5000 loses – 10,000 capital)
What if the prices went down to more than 90,000 LE, which means that you will owe the car factory (broker) money, so you will pay him??? The answer will be no, you will just leave. And your account will be closed with the factory.
It will stay running only if you fund your account with extra money to keep on trading.
Example for selling (short, Bearish)
This example is very important and has changes the understanding of the money market completely. Making profit only happens when the direction of the market is upwards but you will also be making money when the direction of the market is downwards.
Let’s continue with the example for the car. Suppose you had reliable information that the car will be cheaper next month from 100,000 LE to 90,000 LE.
As a smart Investor, what is the right decision that you will take to make profit?
- First you will go to the factory with the capital you have (10,000) and book a car.
- You will then ask the factory to give you the car with the market price which is (100,000)
Your account with the factory will be 110,000 LE (the price the car was sold + the capital), which means you owe the factory (A CAR)
- After a month, your expectations occurred and the prices of the cars decreased to 90,000 LE in the market.
- Go to the factory and ask him to buy a car with the current price of the market (90,000).
- After making your order, you will have a profit of 10,000 LE and another 10,000 LE (capital).
But, what will happen if the price of the car increases and the market is going up?
Answer: It will make LOSSES.
In this situation another important question arises, what will the factory (broker) gain if he gives you this service???
The answer is very simple; the factory (broker) will take a commission for his services.