How to Trade Forex

So, you think you are ready to trade? Make sure you read this section to learn how you can go about setting up a Forex account so that you can start trading currencies. We'll also mention other factors that you should be aware of before you take this step. We will then discuss how to trade Forex and the different types of orders that can be placed. 

Opening an Online Forex Brokerage Account
Trading Forex is similar to the equity market because individuals interested in trading need to open up a trading account. Like the equity market, each Forex account and the services it provides differ, so it is important that you find the right one. Below we will talk about some of the factors that should be considered when selecting a Forex account. 
 

Research different brokerages. 

Take these factors into consideration when choosing your brokerage:

  • Look for someone who has been in the industry for ten years or more. Experience indicates that the company knows what it's doing and knows how to take care of clients.

  • Check to see that the brokerage is regulated by a major oversight body. If your broker voluntarily submits to government oversight, then you can feel reassured about your broker's honesty and transparency.

               Some oversight bodies include:

  • United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)

  • United Kingdom: Financial Conduct Authority (FCA)

  • Australia: Australian Securities and Investment Commission (ASIC)

  • Switzerland: Swiss Federal Banking Commission (SFBC)

  • Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)

  • France: Autorité des Marchés Financiers (AMF)

 

  • See how many products the broker offers. If the broker also trades securities and commodities, for instance, then you know that the broker has a bigger client base and a wider business reach.

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  • Read reviews, but be careful. Sometimes unscrupulous brokers will go into review sites and write reviews to boost their own reputations. Reviews can give you a flavor for a broker, but you should always take them with a grain of salt.

  • Visit the broker's website. It should look professional, and links should be active. If the website says something like "Coming Soon!" or otherwise looks unprofessional, then steer clear of that broker.

  • Check on transaction costs for each trade. You should also check to see how much your bank will charge to wire money into your forex account.

  • Focus on the essentials. You need good customer support, easy transactions and transparency. You should also gravitate toward brokers who have a good reputation. [4]


Trading Platform: You need a trading platform from which you can place your trades, which are then sent to the broker for settlement. Also, a trading platform is essential for you to conduct your technical analysis and also to see the current market prices. Most retail brokers offer the MT4 (short for MetaTrader 4) trading platform, which is free of cost. You can also open a demo trading account and practice trading with virtual money to gain the experience required before trading with real money.


Request information about opening an account. You can open a personal account or you can choose a managed account. With a personal account, you can execute your own trades. With a managed account, your broker will execute trades for you.


Fill out the appropriate paperwork. You can ask for the paperwork by mail or download it, usually in the form of a PDF file. Make sure to check the costs of transferring cash from your bank account into your brokerage account. The fees will cut into your profits.

Activate your account. Usually the broker will send you an email containing a link to activate your account. Click the link and follow the instructions to get started with trading.

Understand Currency Pairs and Their Specifics

You are surely aware that Forex trading involves predicting whether the value of one currency in a respective currency pair is going to grow or decrease. Therefore, you’ll need to select the currency pair that you’re going to be trading.

  • It would be wise to pick one of the major currency pairs, especially if you’re new to forex trading.

  • If you know a bit more about the two currencies of the respective pair and the financial situation in the respective countries, that would be even better.

  • You don’t have to limit yourself to just one currency pair, but trading more than few is probably not a good idea either.

Major currency pairs are more frequently traded, brokers usually offer higher leverage and lower market spread on those pairs and therefore they are a lot more suitable for traders who are not yet ready to take major risks. Plus, currencies of which major pairs are consisted tend to be a lot less volatile, which means that you are not likely to lose a large amount of money.

In many cases, it would be smart to trade one of the pairs which include your country’s currency, it is not necessary. Perhaps you come from a country with an unstable currency, or you know more about other currencies. It is important to do a bit of research and aim to find a strong reason why you think that a certain currency would gain or lose value.

Don’t trade too many currency pairs at once, but trading a few might be a good solution. As the old saying goes, it is never smart to put all eggs in one basket. Investment diversification is usually a good idea.

Forex Trading Hours: While you might have heard that the Forex markets never sleeps, it actually does. Firstly, you won’t be able to trade on weekends (Saturday and Sundays). But for the rest of the week, the Forex market operates 24 hours a day. This is due to the fact that Forex trading is global. At any point in time, you will always find an overlap of a new market session while the previous market closes. What time of the day or which market session you trade plays a big role if you are an intra-day trader or a scalper.

Now that you have a basic overview of the Forex markets, here are some final pointers to remember before you start trading for yourself.

Decide to buy or sell ?

In Forex trading, it is possible to either buy or sell any currency pair. Most trading platforms, give you this option. You Buy when you think that price will go up and you sell when you think that price will fall. There is a common terminology used in Forex trading, which is Buy Low, Sell High; which is an important point to remember.

Once you have picked a market, you need to know the current price it is trading at, which you can do by bringing up an order ticket in the platform. All Forex is quoted in terms of one currency versus another. Each currency pair has a ‘base’ currency and a ‘quote’ currency. The base currency is the currency on the left of the currency pair and the counter currency is on the right.

Put simply, when trading foreign currencies, you would:

BUY a currency pair if you believe that the base currency will strengthen against the quote currency, or the quote currency will weaken against the base currency. 

Your profits will rise in line with every increase in the exchange price.

With every fall in the exchange price below your open level, will net you a loss.

SELL a currency pair if you believe that the base currency will weaken in value against the quote currency, or the quote currency will strengthen against the base currency.

Your profits will rise in line with each point the exchange price falls.

With every increase in the exchange price above your open level, will net you a loss.

 

What is a pip?: A pip (abbreviation from price interest point) is the smallest change of the value of traded currency. If you’re trading US dollars, the pip is usually $0.0001. An increase of 1 pip is a very small change, which wouldn’t make a particular impact if you’re trading a small number of currency units, but if you trade, say 10 lot sizes worth 100,000 units, then an increase of one pip could yield a profit worth $100.

Similar to a “tick” in futures trading or a “point” in stock trading, a “pip” is the basic unit by which forex pricing fluctuations are measured. The term is an acronym for “percentage in point.”

The pip is usually the fourth decimal place for major currencies, expect for pairs which include the Japanese yen, in which case it might be the second decimal. Some brokers set the pip at the fifth and third decimal spot respectively. Often a unit smaller than the pip is also offered, called a pipette.

  • When making an estimate that a currency is going to grow against another, try to predict by how many pips, at least roughly, will it be. That way, you’ll be able to calculate the expected gains, which will help you decide what leverage you should use and what lot size you should trade.

  • Always remember that in times of crisis or expected market fluctuations, the value of currencies may change significantly, even in the course of one day.

  • Some currencies are generally more volatile than others and if you’re thinking of trading them, beware of that.

Reading quotes: Forex quotes are presented in a Bid and Ask price (both of which vary by a few pips and from one broker to another). The Bid price is the price at which you can buy and the Ask price is the price as which you can sell. So, a EURUSD quote would look like this 1.31428(Bid)/1.31420(Ask).

 

What is a Spread?: Spread is nothing but the difference between the Bid and Ask price. So in the above example, for 1.31428/1.31420, the spread would be 8 Pips.

Commissions and fees charged for trade execution are a constant in trading atmospheres, as is having a “bid/ask spread” built into the pricing structure. The “bid/ask spread,” or simply “spread,” is one method by which forex dealers earn commissions from a trader’s action in the market.

The size of the bid/ask spread is dependent upon several factors. The specific Forex dealer, trading volume and the currency pairing actively traded can affect the size of the bid/ask spread. In addition to the spread, it is not uncommon for other transactional fees to be passed on to the trader by the broker.

In terms of transaction costs and trader profitability, the lower the better. It is up to the individual trader to decide which spread and fee structure is most conducive to sustaining a profitable trading operation.

What is a Lot?: A lot is a unit by which you place your trade. In financial terms, a lot is also referred to as a contract. There are preset lots (or contract sizes) that you can trade. For example a standard lot is nothing but 100,000 units (known as 1 lot). 

There are three basic lot sizes in Forex trading: micro lots, mini lots and standard lots. Each lot size represents a different amount of leverage to place upon the funds in a trading account.

  

  • A nano lot is the smallest lot value. One micro lot represents 100 units of capital in the trading account. In the case of an account funded by USD and the desired trade involves a USD-based pair, a trade size of one nano lot applies a small amount of leverage to the trade. For the trade, each pip is equal to US$0.01.

  • A micro lot is the smallest lot value. One micro lot represents 1,000 units of capital in the trading account. In the case of an account funded by USD and the desired trade involves a USD-based pair, a trade size of one micro lot applies a small amount of leverage to the trade. For the trade, each pip is equal to US$0.10.

  • A mini lot represents 10,000 units of capital in the trading account. Given an identical scenario as above, a trade of one mini lot on a USD-based pair yields a pip value of US$1. The leverage placed on the trade is 10 times that of the micro lot.

  • A standard lot is the largest lot size. One standard lot increases leverage tenfold over one mini lot, accounting for 100,000 units of capital. Assuming a USD account and trade denomination, a trade size of one standard lot renders a US$10 pip value.

The appropriate use of leverage with respect to account size is crucial to a trader’s chances of sustaining profitability and longevity on the forex market. A good rule of thumb regarding the use of leverage is the use less than 10-to-1 leverage.

Leverage is a double-edged sword as it can dramatically amplify your profits and can also just as dramatically amplify your losses. Trading foreign exchange with any level of leverage is high risk and may not be suitable for all investors as losses can exceed deposited funds.

 

 

What is a Leverage?: Leverage is the amount by which you can request your broker to magnify (or increase) your trade value. Leverage is often quoted in ratios such as 1:50, which means that when trading on a 1:50 leverage, your $100 is magnified to $50000.  Leverage is important both in terms of making profits as well as managing risks and therefore, your trades.

With leverage, you won’t need to have capital worth $50,000 in order to trade $50,000 on the Forex market. If the leverage is at least 50:1, you will be able to trade $50,000 with a capital of just $1,000.

The leverage provided by forex brokers is much higher than the leverage provided by other brokers, like equities and futures market leverage. Equities leverage often is only as high as 2:1.

Always bear in mind that trading with leverage is risky, although it is not as risky as it may seem. 100:1 sure does sound like a lot, but the value of conventional currencies usually doesn’t change dramatically in the course of one day.

In fact, fluctuations on most days usually don’t exceed 1%. The leverage allows you to earn a lot more than you usually would if you were to simply purchase currency units, but it also increases your potential losses. When the currency value moves in a course contrary to what you assumed, you may lose a lot more.

In order to prevent huge losses, brokers offer instruments like ‘stop’ and ‘limit’ which allows traders to set an automatic limit that would prevent them from losing too much money. Make sure that you understand how leverage works, as well as the instruments that might prevent large investment losses.

When it comes to lot sizes, you should probably start with smaller sizes first. The standard size usually includes 100,000 currency units, but there are also smaller sizes called mini, micro and nano, which contain 10,000, 1,000 and 100 currency units respectively. Some operators offer separate standard and micro accounts, where the latter are suitable for people who want to trade smaller amounts.

  • Be careful about leverage and don’t trade with leverage until you are sure you understand how it works.

  • Use the automatic instruments that would stop you from losing more money than you’ve invested.

 

 

Reading charts: The ability to understand and read the charts is very essential to trading. Depending on your approach, you can choose between a line, bar or candlestick charts and trade accordingly (for example trading based on candlestick patterns). 

 

Order Types: Besides buy and sell, another point to remember the types of orders. There are two basic order types: Market orders and pending orders. When you click on ‘Buy’ or ‘Sell’ you are basically buying (or selling) at the current market price. A limit order on the other hand tells the broker that you want to buy or sell only at a particular price. 

Adding orders

An order is an instruction to automatically trade at a point in the future, when prices reach a specific level predetermined by you. You can utilize stop and limit orders to help ensure that you lock in any profits and minimize your risk when your respective profit or loss risk targets are reached.

Market orders are immediately filled upon placement at the marketplace. When a trader places a trade using a market order, the order is filled at the best available market price. Essentially, the trader is immediately buying or selling into the market. In volatile market conditions, using market orders for a trade’s entry into the marketplace can be risky. Substantial slippage can be realized, with the filled order price varying greatly from the initial market order price.

 

While not compulsory, given the volatility in FX markets using and understanding risk management tools such as stop loss orders is essential.

A stop loss order is an instruction to close out a trade at a price worse than the current market level and, as the name suggests, is used to help minimize losses. There are two types of stop loss orders - standard and guaranteed. 

 

A standard stop loss order, once triggered, closes the trade at the best available price. There is a risk therefore that the closing price could be different from the order level if market prices gap. A guaranteed stop loss however, for which a small premium is charged, guarantees to close your trade at the stop loss level you have determined, regardless of any market gapping.

A limit order is an instruction to close out a trade at a price that is better than the current market level and is used to help lock in price targets.

Standard stop losses and limit orders are free to place and can be implemented in the dealing ticket when you first place your trade, and you can also attach orders to existing open positions. 

Monitor and close your trade

Once open, your trade’s profit and loss will now fluctuate with each move in the market price. 

You can track market prices, see your unrealized profit/loss update in real time, attach orders to open positions and add new trades or close existing trades from your computer or app on your smartphone and tablet. 

Closing your trade

When you are ready to close your trade, you simply need to do the opposite to the opening trade. Supposing you bought 3 CFDs to open, you would sell 3 CFDs to close. By closing the trade, your net open profit and loss will be realized and immediately reflected in your account cash balance. 

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