How to trade Forex
Are you new to forex trading and want to find out more about how to trade forex? Then this article if for you. This article is aimed at providing some basic information about how to trade forex.
Knowing what Currency Pairs are is essential for those who want to learn how to trade forex. The term currency pair refers to the pairing of two different currencies. A good example of a currency pair is the Euro versus the Dollar, known as the EUR/USD pair.
These currency pairs can be traded in either a buy (up) or sell (down) direction. In the example of the EUR/USD, traders can choose to either BUY or SELL the pair. Whenever a forex trader places a BUY trade on the EURUSD, they are actually buying Euros and selling US Dollars at the same time. Conversely, when a trader places a SELL trade on the EURUSD they are selling Euros and buying US Dollars at the same time.
The first currency in a currency pair is known as the Base currency. The second currency is known as the Quote currency. For example, in the EURUSD pair the Euro will be the Base currency and the USD the quote currency. Forex Traders are actually speculating whether one currency’s value will either go up or down against the other. Even though this seems simple enough it is far from easy to determine.
Every currency pair on your trading platform will have a specific price. The price is the current exchange rate between the two currencies in that specific currency pair. The exchange rate between the two currencies is always quoted in the Quote currency. For example, if the price for EURUSD is 1.40 it means that it will cost me $1.40 for every 1 Euro.
Thus, when a trader places a buy trade on EURUSD they are speculating that the exchange rate will go up. Correspondingly, when a sell trade is placed we are speculating that the exchange rate will go down.
Different currencies will have different strength and weakness depending on the fundamental outlook and sentiment. The reason why the exchange rate goes either up or down is because there is always different strength and weakness between currencies.
If a trader expects that the Euro will lose strength against the US Dollar the trader will sell the EURUSD pair. If they expect the Euro to gain strength against the US Dollar they will buy the EURUSD pair.
Price Movement Measurement
The terms “pip” or “point” or “pipette” is something that every trader will come across when they start trading. This is a very important thing to understand as a beginner trader. For this reason, make sure to read up on this and feel comfortable with it before you start trading. Whenever the value in the exchange rate between two currencies change, the value of that change is measured in points or pips.
When referring to normal currency pairs, a pip usually refers to a 4th decimal change in the exchange rate value as quoted on your trading platform. For a point or pipette it is normally a change of the 5th decimal value of the exchange rate.
For example, if the current exchange rate for GBPUSD is 1.38488 and moves to 1.38489, it has moved up by exactly 1 point. Similarly, if it moves from 1.38488 to 1.38498, it has moved up by exactly 1 pip.
Thus, if you got the math right you would have noticed that 10 points is equal to 1 pip. For all pairs that contain the Japanese Yen a pip would be a movement on the 2nd decimal and a point a movement on the 3rd decimal. The reason for this is because pairs with the JPY is normally quoted in 3 decimal places compared to the normal 5 decimal places.
Trading Volume / Lot Size / Trade Size
All Forex orders are placed with various available lot sizes or trade sizes. There are three main trading volumes available to trade. They are know as Standard Lots, Mini Lots and Micro Lots. A Standard lot comprises of a 100 000 units of the base currency, a mini lot comprises of 10 000 units of the base currency and a micro lot comprises of a 1000 units of the base currency.
Every 1 pip movement in price on a standard lot trade size will roughly be worth $10 per 1 pip. On a mini lot trade size it will be roughly worth $1 for each pip movement and on a micro lot it will be roughly worth $0.10 per pip.
As the precise individual currency values changes all the time this is only a rough average and will be different from pair to pair.
The size of your trading account will determine what volume or lot size you can afford to trade with. A good forex trading course and proper forex training should teach you how to calculate the perfect volume size or lot size for every individual trade you take.
Knowing which volume you can afford to trade with is a very important step in trading. As a beginner who is interested in knowing how to trade forex, a good understanding of lot sizes and trading volume is crucial to your success.
In forex trading, it is possible to trade a currency pair in both a rising and falling market. This means that you can either buy or sell a currency pair. There are a number of ways to do that on the Metatrader 4 platform. We suggest that you school yourself in this platform before you start to trade.
The easiest way of placing a buy or sell trade is by opening a market execution order. This means the trader literally opens a buy or sell trade with the touch of a button. Then there are also pending orders. Pending orders can be a little trickier as they are not executed immediately by the trader. Rather, they are set up to automatically open a buy or sell trade only when the price reaches a specific price level.
Pending orders are helpful as the trader does not have to be present at the screen for the order to be opened. The platform will automatically open up a trade when it reached a certain price point.
Stop Loss & Take Profit
Your journey of learning how to trade forex would not be complete without knowledge regarding Stop Losses and Take Profits. Apart from knowing how to open up trades, it is also very important to know how to close trades. A trader can either manually close any open trade by simply closing the trade from your Terminal window on Metatrader 4. Alternatively, you can set up certain predetermined levels where you want your platform to automatically close your trades.
The first example of this is called a stop loss. A Stop Loss will automatically close a trade upon reaching a specified or predetermined loss level. For example, let us suppose that a trader opens a trade and decides that he does not want to lose more than $100 on that trade. He will then set his Stop Loss at a level that will automatically close his trade at a loss of $100. Thus, a Stop Loss is there to protect a trading account from big losses.
The second auto close is known as a take profit. Just like a Stop Loss, a Take Profit will automatically close a trade upon reaching a specified or predetermined price level. For example, let us suppose that a trader opens a trade and decides that he wants to close his trade at a certain profit amount. He will then set his Take Profit at the desired profit level. The platform will automatically close the trade when it reaches that profit amount. Traders normally prefer taking their profit at a certain level to minimize the risk of the market turning against them.
The optimal place of where and when to place a Stop Loss and Take Profit can mean the difference between long term success or failure. Thus, we strongly advise to educate yourself regarding this subject. Make sure to pay special attention or ask about this topic when you enroll in a forex trading course.
Knowing how to manage your risk is probably one of the most important aspects in trading. When a trader learns how to trade Forex, risk management should be on the very top of their list. There is vast amounts of material available regarding this subject, and for a very good reason.
Many people shy away from forex trading because they fear the risk involved. However, without the risk there would not be reward. If you execute proper risk management you should be able to withstand multiple losing trades in a row without it damaging your account. You cannot be successful as a trader if you do not learn to manage the risk.
There is a way in which it is possible to manage your risk so even a series of losing trades will ever be able to make or break you. Those who practice good risk management accept that trading is a long term business. They also fully acknowledge that Forex is not a get rich quick scheme. If a trader can manage his risk, the profits will come by themselves. Remember, in Forex Trading it is much more difficult to keep money than it is to make money.
Follow the Leader
As a beginner trader, do not try to trade against trending markets. This is where Fundamental Analysis will aid a trader immensely. Fundamental Analysis will help you understand the sentiment in the market and allow you to better pick your trades. You have to always try and trade in the same direction as the institutional traders are trading.
Majority of institutional traders use the Fundamentals when choosing their trade direction. As long as you stick to trading in line with the relevant trends in the market you will have a much higher probability of success.
For now, just stick to trading in the direction of the trend. The trend is your friend. Knowing how to trade forex is not as easy as placing trades whenever you feel like it. You need to establish in which direction the market is trading and follow the market in your trades. Going against the trend is like jumping in front of a moving train.
We hope that this article has given all those who are new to forex a good basic understanding of how to trade forex. There are many things beginners need to consider and understand before starting to trade.
Copyright © 2016 Jaba Investments (Pty) Ltd. All rights reserved