How do you Trade Forex?
In comparison with other financial markets, the Forex market has neither a physical location nor a central stock exchange. It operates around the clock through a global network of private traders, corporations, and network of banks. This implies that the exchange rates constantly fluctuate and hence offer a variety of trading opportunities.
Make a Forex Trade in Five Simple Steps
Choice of Currency Pair
As a Forex trader, choosing the currency pair you want to trade with is the first decision you need to make. The Forex market has a large selection of large, small and exotic currency pair to choose from. New traders tend to start with currencies they are familiar with before embarking on opportunities in Forex markets that they know less well.
Buy or Sell
After choosing your financial product, you need to determine the direction in which you think the market will move and the current market price. Exchange pairs are quoted as the ratio of one currency (base currency) to another (quote currency), hence,
If you think the base currency will appreciate against the quote currency or appreciate the quote currency against the base currency, you buy the pair.
If you think the quote currency will appreciate against the base currency or depreciate the base currency against the quote currency, you are selling.
Each currency pair has two courses. The first price is called the bid or sell price; the second is called the ask or buy price. The ‘spread’ that is your trading costs is the difference between the two prices.
Issuing Orders
An order is an automatic instruction to trade at a future time when the exchange rates reach a specific predetermined position. With stop-loss and limit orders, losses are limited, and profits hedged.
Monitoring Your Position
When you open a position, your profit/loss varies with each price move. Do not forget to monitor your profit/loss in real time. This allows you to close positions when needed or easily increase stocks.
Smoothing Your Position
Smoothing a position is similar to opening a position. If you originally purchased five units of the financial product, the same number must be sold to close the position. When you terminate a position, your profits and losses are immediately displayed in your trading account.
Are you ready to trade Forex live?
Here are a few examples to help you understand how Forex trading works.
Every month, the economic calendar is filled with significant economic events. One of the key figures that the market is very likely to respond to is non-farm payroll (NFP). It is published monthly by the US Labor Market Statistics Authority and supplies traders with valuable insights into the performance of the US economy.
Long position (buy position) in EUR/USD
Here is an example of a long trade. The US job market seems to be declining. They expect the US Dollar to depreciate against the Euro and expect the US labor market figures to be below analyst estimates. As a result, you decide to purchase a Lot ($100,000) EUR/USD at $1.2101, which equates to a $10 per pip move.
The report is announced, and US employment figures are weaker than the expert’s estimation, leading to a crash in the US dollar. The pair EUR/USD is now trading at 1.2152 USD, and you are reversing the position. The position was opened at $1.2101 and sold at $1.2152. The difference of 51 pips is your profit ($510).
Short position (sale) in USD/JPY
Here is an example of a short trade. Do you recall in that we mentioned that the profit/loss is calculated based on the fourth decimal place? Currency pairs having the Japanese (JPY) are the exception. Here the second decimal place counts.
Assume you take a close look at the USD/JPY on the 1-hour chart in the early morning. The pair trading at JPY 113.63 and the technical indicators suggests a high decrease in price. They sell a mini-lot ($10,000), which equates to a loss/gain of $1 per pip move. This time, you insert your position with stop-loss and take-profit orders to limit your risk while going for work. You place your take profit order at 114.24JPY and the stop-loss at 113.27 JPY.
After work, you’re back home and immediately log in to your account to see what happened to your position. Your balance has increased by $61. The currency pair went down, triggering the take profit order and lifting the stop-loss.
