"Hey there! Have you ever wondered how people make money by trading currencies? Well, it's called forex trading! Basically, it's all about trying to guess if one currency will become more valuable or less valuable compared to another currency.
But how do you know when to buy or sell a currency pair? Let's check out some examples to help us figure it out. You see, the value of a currency can change because of different things happening in the economy. It's like when you have a toy that everyone wants, its price goes up, right? Well, it's the same with currencies!
Each currency belongs to a country or a region, and that country's economy plays a big role in determining its value. So, when we do something called fundamental analysis, we look at how well a country's economy is doing. We consider things like how much stuff they make, how many people have jobs, how much they trade with other countries, and even the interest rates they have.
Now, if you're thinking, 'Ugh, economics class was so boring!' Don't worry, my friend! We'll talk more about fundamental analysis in another lesson. So, stay tuned and get ready to become a forex trading pro!"
Okay, so let's talk about this money stuff in a way that's easy to understand. Imagine you have two currencies, the euro and the U.S. dollar. In this example, the euro is like the main currency, kind of like the boss. If you think that the U.S. economy is going to get worse, which is not good for the U.S. dollar, you would do something called a BUY EUR/USD order. This means you're buying euros because you think they will become more valuable compared to the U.S. dollar. On the other hand, if you believe that the U.S. economy is doing well and the euro will become less valuable compared to the U.S. dollar, you would do a SELL EUR/USD order. This means you're selling euros because you think they will become less valuable compared to the U.S. dollar.
Okay, so let's break this down in a way that's easier to understand. Imagine you're playing a game where you can trade different currencies. In this game, the U.S. dollar is like the main currency that everything is based on.
Now, let's say you think that the Japanese government is going to make their money, called the yen, weaker. They're doing this to help their businesses sell more stuff to other countries. So, what you would do is make a trade where you buy U.S. dollars using yen. You're hoping that the U.S. dollar will become more valuable compared to the yen.
On the other hand, let's say you believe that Japanese investors are taking their money out of the U.S. and changing it back to yen. This is not good for the U.S. dollar because it means less people want it. In this case, you would make a trade where you sell U.S. dollars and get yen instead. You're expecting that the U.S. dollar will become less valuable compared to the yen.
So, in simple terms, if you think the U.S. dollar will go up, you buy it using yen. And if you think the U.S. dollar will go down, you sell it and get yen instead.
So, imagine you're at the grocery store and you want to buy just one egg. Well, guess what? You can't! Eggs come in packs of 12, called dozens. It's like a rule or something.
Now, let's talk about forex. It's this thing where people buy and sell different currencies. But here's the thing, you can't just buy or sell one euro. That would be silly! Instead, they have these things called "lots" which are like packs of currency.
There are different sizes of lots. The smallest one is called a micro lot, and it has 1,000 units of currency. Then there's the mini lot, which has 10,000 units. And finally, there's the big one, called the standard lot, which has a whopping 100,000 units!
But here's the catch, the size of the lot you can buy depends on your broker and the type of account you have. Don't worry, we'll talk more about these "lots" later.
"But wait, I don't have enough money to buy 10,000 euros! Can I still trade?"
No worries, you can still trade using something called leverage. Leverage is like a special power that lets you trade even if you don't have all the money upfront. Instead, you just need to put down a small amount of money called margin.
Leverage is a ratio that compares the size of your trade to the actual money you have. For example, if you have 50:1 leverage, it means you only need $2,000 of margin to trade with $100,000. This lets you make big trades with only a fraction of the money you would normally need.
Let me explain with an example. Imagine you think the British pound will go up against the U.S. dollar. You decide to buy 100,000 pounds using a 2% margin requirement. This means you only need $3,000 in your account to make the trade.
So, you buy the pounds when the exchange rate is 1.50000. This means you're buying 100,000 pounds, which is worth $150,000. Since the margin requirement is 2%, $3,000 is set aside in your account for the trade.
Now, here's the cool part. With just $3,000, you control 100,000 pounds! You wait for the exchange rate to go up, and when it reaches 1.50500, you decide to sell. Guess what? You earn about $500!
See, even with a small amount of money, you can make big trades and potentially earn a lot. Just remember to be careful and learn more about margin trading. But for now, you've got the basic idea. Good luck!