Forex Trading Basics
Let's get familiar with the basics:We always trade Forex in pairs with each currency’s value being compared to another:The Base currency - the first currency (on the left)The Quote currency - the second currency (on the right)
By selling the base currency, we are buying the quote currency. When we buy a pair, we actually buy the base by selling the quote. In our example - buying 1 GBP In exchange for selling 1.4135 USD. When we sell a pair, we are doing the opposite.
When you see a currency pair quoted you’ll see two different prices listed:
The Ask price is the price the broker is asking me to pay to buy the base currency.
The Bid price is the price (in the quote currency) which Forex brokers will pay me if I want to sell the base currency.
The Exchange rate is the ratio between the values of the two currencies. Let's look at another quote as an example:
Base Currency = EUR
Counter = USD
Bid price = 1.3272
Ask price = 1.3276
When selling Euros, 1 Euro = 1.3272 USD
When buying Euros, 1 Euro = 1.3276 USD
Spread = 1.3276 - 1.3272 = 0.0004
If we buy a pair it means that we sell the Quote currency in order to buy the Base currency. We do it when we believe that the value of the base currency will increase (relative to the Quote currency). If we sell a pair it means that we believe that the value of the Base currency will fall (relative to the Quote currency).
In a standard account a single pip is worth approximately $10
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By selling the base currency, we are buying the quote currency. When we buy a pair, we actually buy the base by selling the quote. In our example - buying 1 GBP In exchange for selling 1.4135 USD. When we sell a pair, we are doing the opposite.
When you see a currency pair quoted you’ll see two different prices listed:
The Ask price is the price the broker is asking me to pay to buy the base currency. The Bid price is the price (in the quote currency) which Forex brokers will pay me if I want to sell the base currency. The Exchange rate is the ratio between the values of the two currencies. Let's look at another quote as an example:
Base Currency = EUR
Counter = USD
Bid price = 1.3272
Ask price = 1.3276
When selling Euros, 1 Euro = 1.3272 USD
When buying Euros, 1 Euro = 1.3276 USD
Spread = 1.3276 - 1.3272 = 0.0004
If we buy a pair it means that we sell the Quote currency in order to buy the Base currency. We do it when we believe that the value of the base currency will increase (relative to the Quote currency). If we sell a pair it means that we believe that the value of the Base currency will fall (relative to the Quote currency).
What you also need to know
Lot - the standard level of deposit per single trade. There are 3 main sizes:Micro lots = 1,000 currency units (e.g. 1,000 Euros)
Mini lots = 10,000 currency units
Standard lots = 100,000 currency units
In a mini account a single pip is worth approximately $1Standard lots = 100,000 currency units
In a standard account a single pip is worth approximately $10
Long Position - A Buy action (expecting the currency to go up)
Short Position - A Sell action (expecting the currency to go down)
Let's see an example on EUR/USD:
Where to put your stop loss:
When buying (going for long positions)- place your stop loss sell order beneath the actual support level of the present trend.
When selling (going for short positions) - place your stop loss buy order above the actual resistance level of the present trend.
Avoid these common mistakes:
Don’t place your stop loss too close to the present market price of the pair. Allow price movements, don’t suffocate the currency.
Don’t place your stop loss on the exact support/resistance levels
Give the price a chance to come back to the positive zone
Don’t change your stop loss orders in the middle of your trade. Stick to your trading plan and don’t let your emotions take control of your trading!
Take Profit orders: These are automated exit orders, determined in advanced by the trader. If the price reaches this level the position will close automatically, and the trader will collect their earnings. The purpose of this is to ensure a certain level of profit (even if there is a chance to earn more).The big advantage of using Stop Loss and Take Profit orders is that by doing so, you can avoid sitting in front of your computer all day, watching your trades! With these orders in place you know that if the price hits one of these 2 target levels, the position will close automatically.
Short Position - A Sell action (expecting the currency to go down)
Let's see an example on EUR/USD:
Your Action | EUR | USD |
You purchase 10,000 euros at an EUR/USD exchange rate of 1.2880(BUY position on EUR/USD) | +10,000 | (*) -12,880 |
3 Days later, you exchange your 10,000 euros back into us dollars at the rate of 1.4880 (SELL position on EUR/USD) | -10,000 | (**) +14,880 |
You exit the trade with a $2,000 profit(EUR/USD increased 2,000 pips in 3 days! In our example, 1 pip is worth 1 us dollar) | 0 | +2,000 |
* 10,000 Euros x 1.2880 = $12,880
** 10,000 Euros x 1.4880 = $14,880
Trading orders
Stop Loss orders: These are extremely important and useful orders! We advise all of you to get used to adding a "stop loss" to each and every position you open. It prevents any additional losses beyond a particular price level. In fact, it is an automated selling order which will be executed once the price reaches a particular level. When the market goes against you, a Stop Loss can be crucial for shielding you from heavy losses. Stop Loss is available on every trading platform. To activate it, give a stop loss order to your broker.Where to put your stop loss:
When buying (going for long positions)- place your stop loss sell order beneath the actual support level of the present trend. When selling (going for short positions) - place your stop loss buy order above the actual resistance level of the present trend.Avoid these common mistakes:
Don’t place your stop loss too close to the present market price of the pair. Allow price movements, don’t suffocate the currency. Don’t place your stop loss on the exact support/resistance levels Give the price a chance to come back to the positive zone Don’t change your stop loss orders in the middle of your trade. Stick to your trading plan and don’t let your emotions take control of your trading!Take Profit orders: These are automated exit orders, determined in advanced by the trader. If the price reaches this level the position will close automatically, and the trader will collect their earnings. The purpose of this is to ensure a certain level of profit (even if there is a chance to earn more).The big advantage of using Stop Loss and Take Profit orders is that by doing so, you can avoid sitting in front of your computer all day, watching your trades! With these orders in place you know that if the price hits one of these 2 target levels, the position will close automatically.
More Forex lingos to remember
Volatility - the Forex market can be very volatile. The greater the volatility, the greater the risk factor in trading. But the greater the potential opportunity also! When markets are volatile traders need to be careful of painful losses, while looking out for powerful new trends. The less stable a country is, the higher the volatility of its currency will be.Pip - the smallest price movement taking place. The fourth decimal. For example, if the EUR moved from 1.4431 to 1.4432, it moved up 1 pip. Profits and losses are calculated either by the value of money involved or by the amount of pips, depending on how you would rather look at your positions.
Forex language is the language of pips!
Spread - The difference between the Bid Price (Sell) and the Ask Price (Buy).
Margin - The amount of capital we will have to deposit as a ratio of the amount of money we wish to trade with.For example, assume we deposit 10 dollars at 5% margin, it means we trade with $200 ($10 is 5% of $200). This is similar to depositing an amount of capital with your broker and then receiving a loan in return (but without having to pay interest).
Leverage your money
The level of credit you get on your currency investment from your broker. In other words, the ratio between the size of your deposit and the amount of money you trade with. Leverage supersizes the impact of your trades, multiplying the potential for earnings or losses. If your trade goes as planned, you win big time. However, if the market goes against you, you can lose it all.X10 leverage means that in exchange for $1,000 deposit you will be able to trade with $10,000 (Don’t worry, you can’t really lose $10,000 on this trade, only the capital you deposit). Back to our example, a 10% uptrend will double your capital, while 10% downtrend will erase it.
Example:
Let's assume we’re going long on EUR/GBP (we buy EUR/GBP). The ratio between the two currencies is 1:1. After a couple of hours the ratio jumped to 1.1 in favor of the euro. In these couple of hours we earned 10% of our total investment. If we invested 1,000 euros, how much are we profitable right now? You guessed right! 100 euros.
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