Many new traders will opt to try out options over other financial instruments. They’re easy to trade and offer a fixed profit return. Besides options, IQ Option also offers other financial instruments. Among these are forex which will be my focus in this guide today.
The Foreign Exchange (Forex or fx) market is the largest in the world today with over $1 trillion being exchanged daily. This market involves exchanging different currencies.
The fx market developed as a result of trade and other financial transactions occurring between countries, institutions and individuals. For an fx transaction to occur, you must sell one currency to buy another or buy one currency by selling another. This means fx transactions involve currency pairs. For example if you’re trading EUR/USD and 1.80086, it simply means that you can buy 1 Euro for 1.80086 US Dollars.
Where do forex prices come from?
Forex prices are usually determined by supply and demand. I use the term “usually” because there are other forces such as central banks, governments and even forex brokers who might manipulate forex prices.
But let’s stick to supply and demand. Each currency pair has a bid and ask price. The bid price is the amount someone is willing to sell the currency at a specific time. The ask price on the other hand is the amount someone is willing to pay for a particular currency at a specific time.
Now knowing who sets the prices isn’t that important for traders. Why?
Trading forex on IQ Option doesn’t require you actually own the currency you’re buying or selling. Your primary objective is knowing how to profit from buying and selling currency pairs.
I’ll cover this next.
How do you make money trading forex on IQ Option?
Trading forex involves buying and selling a currency pair. For example, if EUR/USD is trading at 1.1576/1.1578 it means that you can buy 1 EUR for $1.1576 or sell 1 EUR for $1.1578.
Now, if you decide to buy 1EUR for $1.1576 you’re hoping that its price will rise in the future allowing you to sell at a profit. Conversely, if you sell 1EUR for $1.1578, you’re hoping that the price will fall in the future allowing you to buy it back at a lower price.
The difference between your buying or selling price and the price at which you’ll buy or sell the currency for in the future will be your profit or loss.
So if you bought the EUR/SD pair at 1.1576 and the price rises to 1.1580, your profit would be $0.004.
That’s a small amount for most traders. But consider if you bought 100 lots. Your profit would be multiplied by 10000 earning you a profit of $40.
Note: A lot comprises 100 units. So if you bought 1 EUR/USD lot, it simply means you bought 100 EUR.
Who are you trading against in the forex market?
The forex market comprises dozens of different actors. Remember that the value of a currency is largely affected by its supply and demand. This means that when buying or selling a currency pair, you’re essentially competing against small actors such as independent traders. You’re also competing against big actors such as banks and governments.
But this shouldn’t be a cause for concern. No actor is big enough to control the forex markets therefore giving you an equal opportunity to make money as a small trader.
Forex vs Options markets
I’ve written the IQ Option Forex vs IQ Option Options Which is More Profitable?
This comprehensive guide will teach you more about the differences between these two markets. However, here’s a rundown of the 6 major differences you’ll encounter when trading forex on IQ Option.
Forex doesn’t have a set expiry time
When trading options, you’ll have to decide when the trade will expire. This can be as little as 1 minute or more that 1 month.
Forex on the other hand has no fixed expiry time. The trade is only exited if you manually close it, or if the price reaches a pre-set stop loss or take profit point. This means a trade can remain open for minutes, hours or even days.
The stop loss is a tool that’s used to limit the amount a forex trade can end up losing. For example, if you invest $100 in a trade, you can set your stop loss at 10%. This means that if the trade goes against you and your invested amount falls to $90, Iqoption will automatically close the trade.
When trading forex, losing trades can eat into your account balance. This means that if you invested $100, your losses can exceed this amount. Stop losses allow you to protect your account balance and limit losses on each trade.
Take profit works the same way as the stop loss. There’s one major difference though. The take profit feature automatically closes the trade when a specific profit amount is reached.
For example, if you invest $100 and set your take profit at +$50, the trade will automatically close when a $50 profit is made.
This feature makes it easy to lock in and secure profits made on each trade. Imagine a trade where you had the opportunity to make $50 but the markets reversed. The profits you’d have earned start to dwindle simply because you didn’t take profits when the markets were favorable.
IQ Option offers leverage to forex traders. What this simply means is that you are able to multiply the profitability of every trade. For example, if you trade using $100 and apply the leverage of X50, this essentially means you’re trading with $5000. In turn, the profits you make on your trade will be 50 times higher than if you had simply traded using $100.
Although leverage can be a great way to increase your profits, you should use it with caution. Always use it alongside other tools such as stop losses and take profit.
Forex trading is a bit different. Trade exit is determined by one thing – price. Unless the price reaches your strike price, the trade will remain open. This means that it can take minutes, days or even weeks before the trade exits. You can however manually exit the trade if you want to on the IQ Option platform.
Many forex traders therefore choose to trade currency pairs where price fluctuations are likely to occur during a trading session. This way, they’re sure that their strike price (take profit or stop loss) are going to be hit at a specific point. So if you want to trade forex, it’s recommended that you trade when the currency pairs you invest in are likely to be affected by a news item.
Options traders will get a fixed return per trade. Forex traders on the other hand have the chance to earn returns exceeding 100%. The reason for this is that how much profit you make as a forex trader largely depends on how far the price moves. The further the price moves according to your prediction, the higher the profit potential.
Now couple this with leverage and you have the opportunity to make profits that can be as high as 500% or more. This makes forex trading a good way to make huge returns in the financial markets.
There’s a downside however, your losses can also be much higher than the amount you invest per trade especially if you’ve not set any stop losses.
Now that you’ve go a basic understanding about how the forex market works, your next step involves trading the forex markets. The Ultimate IQ Option Forex Trading Guide for Beginner Traders is a post you’ll want to read to get you started.
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