Rise or Fall... What it means to make a trade
So far, we have covered a TON of information. By this point, you now know how the Cashout app works, what currency trading is, how to read currency pairs and all about pips and pipettes.
Now we need to cover trading: how it works, and what exactly you are doing when you make a trade.
Trading begins with the exchange rate
If you open the Cashout app and go to the main trading window, you may notice that the exchange rate is in constant fluctuation. It can rise and fall by pips and pipettes every second!
Why does this happen?
As we explained in Lesson 2, exchange rates are constantly moving as banks, governments and goods and services suppliers constantly buy and sell currencies as a part of their day to day business. Some of these institutions are so large, that they can actually move the price of a currency simply by buying or selling a large amount of a single currency. When there is a strong demand for a currency, the exchange rate rises. When there is less of a demand, the exchange rate falls.
This is where you come in. Your job as a trader is to make a decision upon the exchange rate. You have one simple question to ask: “will it rise or will it fall?”
We will get into different strategies for making this decision in later lessons, as this is what much of currency trading is all about, but for now, we will focus on the basics.
As mentioned above, the exchange rate rises when there is more demand for the particular currency. As demand increases so does the price of buying that currency.
When you predict that an exchange rate is going to rise, you “buy”, or “go long” on the said currency. If the exchange rate goes up as you predicted, when you are ready to end the trade, you sell that currency and make a profit. However, if the exchange rate falls, you make a loss.
Here comes an example.
You want to trade the EUR/USD pair. You decide to invest $1000 in the trade with a x100 booster at an exchange rate of 1.08614. (boosters, better known as leverage is covered in the next lesson). For various reasons, you believe that the exchange rate is going to go up, so you buy Euros using USD.
The trade is now open, and you are holding Euros. After some time, the exchange rate actually begins to fall, rather than rise. You decide to cut your losses short and end the trade before you can lose too much money. So you sell your Euros back to USD at a rate of 1.08513. Because the exchange rate fell, you lost $93.08, and have a new balance of $906.92. (You can learn how profits & loss is calculated in lesson XYZ).
To sum up, when you believe that an exchange rate is going to rise, you buy the currency in question, and hold onto it. If the exchange rate rises, you make a profit when you sell back to the base currency. If it falls, you incur a loss.
The exact opposite happens when you believe that an exchange rate is going to fall. In this case, rather than buy the currency in question, you actually “sell”, or “short sell” (trader speak) the said currency. In some cases, you may have just sold something that you don’t actually own (you will see why in the upcoming example), with the idea of buying it back at a different price.
If the exchange rate falls, then you will make a profit. If it rises, then you lose money.
Here is an example. You decide to make a trade of $100,000 AUD/USD at a rate of 0.73370. If you are trading on Cashout (or the majority of trading software), the currency of your trading account is in USD. Because you believe that the exchange rate is going to fall, you sell AUD to hold USD. Don’t worry if you don’t actually own any Australian Dollars, because your broker will lend them to you.
You made the right decision, and the exchange rate does fall. You decide to close the trade at a rate of 0.73355, return the AUD back to the broker, who then pays you a tidy profit of $20.45.
We just covered the most essential aspect of currency trading:
- Your job as a trader is to determine if an exchange rate is going to go up (rise), or go down (fall)
- When you believe that the rate will rise, you buy, or go long, on the said currency.
- When you believe that the rate will fall, you sell, or sell short, on the said currency.
- You make profit on a trade when your prediction is correct: if you say rise, the exchange rate must rise in order for you to make a profit. Otherwise you will lose money. If you say “fall”, the exchange rate must fall.