About Forex Trading

What is Forex Trading

Forex is short for foreign exchange and this is one of the most liquid trading systems the world of traders have ever seen. This involves buying and selling of different currencies against each other. For example in the US the currency in circulation is the US Dollar. The FX symbol for it is the USD. In Europe the currency in circulation is the Euro and the symbol is EUR. A trader can buy EUR by selling USD or buy USD by selling EUR.

The Role of Leverage in Forex Trading

One does not just buy one EUR or one USD. Trades are made in Micro lots, Mini lots and Standard lots. A micro lot is 100 units of the currency, a mini lot is 1000 units and a standard lot is 10,000 units of the currency. What makes FX trading attractive and highly profitable is the leverage offered by the brokers. They allow you a leverage as high as 1:500. This means that you can start trading with a minimum deposit of 100 EUR and still buy 10,000 USD Approximately (100×500 = 10,000). Remember, leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.

How a trade works

Using the USD and the EUR as our example, when a trader deposits 100 EUR he can buy one standard lot of USD if he thinks the value of the USD against the EUR is going up. The currencies move in increments of PIPs, which is 1/10,000th of the value of the currency. If the trader has bought one standard lot and the currency moves up by 5 PIPs (which could happen in a matter of seconds) he has gained 5 USD (0.0005 x 10000 =5). This could also work against the trader if the value of the currency being traded moves in the opposite direction.

While it is possible to jump in and jump out of a trade within seconds because the liquidity of the market is high this is not recommended for all traders. It is highly recommended to devise a strategy and test it out on a demo account first. These strategies should include using indicators and signals offered by the brokers. If a trader can master a pair of signals like the RSI or the Bollinger Bands or the MACD he can make a lot of profitable trades. But this could take a lot of research.

How to trade Wisely

There are many brokers available but it is important to choose a broker wisely. Determine the minimum deposit and withdrawal amounts and the procedures and if the broker is licensed. The spreads should be fixed as opposed to varying as this is where you could lose a lot of money. Look for a registered broker offering fixed 2 pip spreads. These are the most stable systems. A one pip spread broker may not be able to execute your trades and you will lose out on a number of trades.

Always trade with stop loss orders. This will ensure you lose a stipulated amount should the market move against you. This is a very important factor in FX trading. Develop a strategy and stick to it. This will be the reason for your success. You need to keep in mind that stop orders may incur slippage depending on market conditions.

When looking up a broker you should find out the SPREAD – the number of pips the broker will take for each trade. This is the way they make money. If the SPREAD is 3 PIPS and you place an order to buy you will buy 3 pips higher than the current amount.

PIPS is Percentage in Points and this 1/10000th of the currency. So one USD pip will be 1/1000the of a cent!

MARGIN – the amount of money you need to deposit with the broker to trade. If you deposit 100 USD you an only trade with 50 USD if the margin is 50 percent. This means if leverage is 1:500 and you deposit 100 USD and the margin is 50 percent you can trade 50×500 – 25000 USD. We remind you that trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.

LEVERAGE – the broker will allow the trader to set his or her LEVERAGE. This means that for each USD deposited the trader can trade from 1 to 500 times the amount. LEVERAE is denoted as 1:100, 1:200, 1:300 up to as much as 1:500. Don’t forget that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.