How does one actually make money at forex? | Forex Factory

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How does one actually make money at forex?

  • #1
  • First Post: Dec 1, 2006 1:39pm Dec 1, 2006 1:39pm
Hi all...this is a question that has been bugging me a lot lately and I need help figuring it out. I know the basic principle of forex follows all business laws if you want to make money. That is, buy low then sell high and vice versa. However, here is the problem that I am having.

Say I buy a 1 pound for 1.5 USD. Now say that the 1 pound can buy a sandwich for arguments sake. I hold on to my pound for about 1 week and now the pound is worth 2 USD. I sell the pound and in effect I have made .50 cents USD. However, that 1 pound can still only buy a sandwich, so in effect, the value of my money has not changed right? A pound is still a pound and the fact that I have made .50 has not changed the relative value of that sandwich.

Can someone help me with this?
  • #2
  • Dec 1, 2006 1:50pm Dec 1, 2006 1:50pm
One year in the 90s Xerox did quite well in Brazil, except they forgot to hedge their currency exposure. Resulting in more than a 1 billion dollar loss (if I remember correctly) from Brazil's currency fluctuations.

You can have your accounts denominated in currencies other than the USD at some brokers.
  • #3
  • Dec 1, 2006 2:01pm Dec 1, 2006 2:01pm
If USD drops to 1.5 on the next morning, than you'll buy 1.33 pounds that maybe enough for you to by the coke along.
  • #4
  • Dec 1, 2006 7:37pm Dec 1, 2006 7:37pm
You forgot about using the leverage my friend....

The 5000 pips you won on your trade should be multiplied by the leverage you are using to give you above average gains erasing the drop in the purchasing power of your base currency....That's one thing...

Another important thing you didn't consider while posting your assumption, what happens if the contrary happens, i.e. you shorted the GBP at 1.5 USD & the GBP drops to 1 USD & you make 50 cents or 5000 pips....This way, you are actually making money as profits and at the same time your base currency is getting stronger in purchasing power, i.e. you are winning on all fronts...Seems a good bargain to me...


Thanks,

Nader
  • #5
  • Dec 2, 2006 1:23am Dec 2, 2006 1:23am
One way in which I believe you are you looking at this wrong is that you worried about the relative value of the pound when you should be considering the relative value of the dollar in this situation.

Doing what you said would mean you started with US dollars, sold them to buy the pound, then reversed and sold the pound to buy back your US dollars. You started with $1.50, which may have also bought a sandwich, and now you have $2.00, which may buy a sandwich and a coke as someone else said.

The pound is no longer your money, the dollar is, and you have $.50 more than you did a week ago. You could care less what a pound will buy you, you don't own any.
  • #6
  • Dec 2, 2006 8:40pm Dec 2, 2006 8:40pm
so are you basically making money because the value of goods takes a while to devalue and you have extra money from selling your lots? I can kinda understand it when the USD strengthens because that would be my base currency in this example but having a little trouble understanding it when the USD weakens.
  • #7
  • Dec 2, 2006 9:44pm Dec 2, 2006 9:44pm
You care whether or not you made a profit on the trade, not whether your own currency loses value or not. An appreciating currency doesn't help if you lose most of it through bad trades.
  • #8
  • Dec 3, 2006 2:59am Dec 3, 2006 2:59am
SunTrader has it right. Don't worry about the relative value of the currency.
Inflation or deflation would have to be ridiculously high to impact you in such a short time. If you aren't buying goods or services from another country, your ok. More than likely, the dollar is going to buy the same thing today as it will next week. If you are able to make an extra $.50, then you should be able to buy 50% more. It doesn't matter if the relative value of your base currency is appreciating or depreciating against other currencies at this point, as long you were correct in which way it would go and made a profit.

You kind of had it right that it will take a while for goods to devalue, but that isn't why you made money. You made money simply because you were on the right side of the trade.

Once you grasp this concept, then do some reading on puchasing power parity. That should help you understand when and how to consider it's relative value.
  • #9
  • Dec 4, 2006 9:38am Dec 4, 2006 9:38am
I guess its hard to grasp this concept because it seems that the relative value of the currency is the same whenever I sell it so to me it seems like I have less purchasing power, which is not necessarily true since I have made more currency from the sale.
  • #10
  • Dec 4, 2006 10:00am Dec 4, 2006 10:00am
I suggest that you read "narafa"'s post once more (http://www.forexfactory.com/forexfor...41&postcount=4).

The secret to making money in Forex is leverage. Let me give you an example.

Suppose you have $10000 in your account with a 100:1 leverage. If you purchase a lot of GBPUSD for 1.9000 you spend $1900 of your account. Now if the price increases to 1.9100 and you sell the lot you make $1000 profit. The value of your account is decreased by 1% though so it is $11000*99% now. So your actual profit is $810 but you still had made money.

I tried to make it as simple as possible.
  • #11
  • Dec 4, 2006 11:22am Dec 4, 2006 11:22am
Quoting vder
I guess its hard to grasp this concept because it seems that the relative value of the currency is the same whenever I sell it so to me it seems like I have less purchasing power, which is not necessarily true since I have made more currency from the sale.
Hi vder,

I think your problem is to compare the price action with economic understanding .. I suggest you throw away the economic understanding such as purchasing power relative between the currencies, but to focus on the profit / loss you made in this transaction ....

Put it in this way, focus on the profit or loss from the fluctuation of the price since you initiated the buy/sell action ....

Hope this helps a little to change the direction of your thinking ...

.
  • #12
  • Dec 4, 2006 3:37pm Dec 4, 2006 3:37pm
thanks for the responses guys, the picture is getting clearer. Aparsai, I dont understand how my account decreases in value by 1% when the trade goes my way. Can you explain this please?

thanks.
  • #13
  • Dec 5, 2006 6:44am Dec 5, 2006 6:44am
Quoting vder
thanks for the responses guys, the picture is getting clearer. Aparsai, I dont understand how my account decreases in value by 1% when the trade goes my way. Can you explain this please?

thanks.
The purchasing power of your account decreases not the actual amount because the USD is now worth 1% less (in that example). I tried to show you that even if the purchasing power goes down you are a winner.

Good Luck,
Al
  • #14
  • Dec 5, 2006 4:03pm Dec 5, 2006 4:03pm
hey aparsai...how is the USD worh 1% less now? wouldnt it be .01 (the change in the currency) / 1.90 (the old price of the british currency) = .5%?

so my profit would theoretically be 1000 (in profit) * .5% (the devaluation) = $995 in approximated profit? I guess the economic value would not really play into consideration only unless prices in goods and services automatically changed once price fluctuated up and down thus keeping a true relationship in price balance between pairs.

I guess i just need to change my perspective.
  • #15
  • Dec 5, 2006 4:31pm Dec 5, 2006 4:31pm
Quoting vder
hey aparsai...how is the USD worh 1% less now? wouldnt it be .01 (the change in the currency) / 1.90 (the old price of the british currency) = .5%?

so my profit would theoretically be 1000 (in profit) * .5% (the devaluation) = $995 in approximated profit? I guess the economic value would not really play into consideration only unless prices in goods and services automatically changed once price fluctuated up and down thus keeping a true relationship in price balance between pairs.

I guess i just need to change my perspective.
You are right about the first part. I miscalculated - sorry about that. Yes the purchase power of USD comparing to GBP is 0.5% lower but you need to multiply it by your account balance not just the profit. Your account is $11000 dollars which now has a purchase power of $10945 dollar comparing to its purchase power before the raise. So your actual gain would be $945.

Having said that, I beleive that thinking about the purchase power in this way is not that much reasonable. I mean if USD is .5% less priced to GBP doesn't really mean that its purchase power is also .5% less. The actual purchase power of USD is defined by other factors like CPI or eventually inflation. I hope somebody who knows more about economy helps me out with this. I'm not that much into economics.

Good Luck,
Al
  • #16
  • Last Post: Apr 2, 2007 12:12am Apr 2, 2007 12:12am
so the problem would be, : how to profit more than inflation?
even if that sandwich is now more expensive, you can buy burger which is may be cheaper since the ingridient is a bit differ.

in gtf, you can change your base currency too, so it is like 1:1 leverage trading. and then you can trade with that 1:1 leveraged currency to trade the ussual one (1:100 to 1:400 leverage) ( with conversion again ).

most broker set up USD as base currency thou.
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