How to trade Forex

What is Forex (FX)?

Foreign exchange is the largest financial market in the world – transactions worth trillions of dollars take place every day, traded by a global network of banks, dealers and brokers. Due to the sheer volume of currency traders and the amount of money exchanged, price movements can happen very quickly. This means there are many currency trading opportunities, but it also makes forex market incredibly volatile.

Understanding the basics

In order to trade forex, you have to trade two individual currencies against each other (for example EUR/USD – the euro vs US dollar). In this pairing, EUR is known as the base currency, and USD as the quote currency.

You would speculate on whether the base currency will strengthen (appreciate) or weaken (depreciate) against the quote currency. If you think the base currency will appreciate, then you should go long (buy), and if you think the base currency will depreciate, you should go short (sell).

After choosing whether to go long or short, the currencies will fluctuate based on multiple factors until you decide to close the position. This will determine the profit or loss you make on the trade.

What is a Pip?

A pip is a term used in the currency market to represent the smallest incremental move an exchange rate can make. Depending on context normally one basis point is 0.0001, as is the case of EUR/USD, GBP/USD. In example if the EUR/USD moves from 1.2561 to 1.2562 it is one pip.

If you trade the full contract (100k of currency) the EUR/USD and GBP/USD are worth approximate $10. In other words if you have a trade with 50 pips in profit, it means the gain is $500. ($10 per pip x50 pips). If you trade a mini account is 1/10th of the size, 50 pips will worth $50.

Example how to set a position size on your account:

The account size is $2000.
The amount you are risking = 2%, of $2,000 = $40
Value per pip for 1 standard lot on EUR/USD = $10/pip
Stop Loss = 100 pips = $40
Position size 0.04 lot = 40/(100*10).

Different types of orders

Market Orders

This order type is often the first execution order that traders come across. Just as its name implies, this is an order that’s executed at market and is immediate. This means that if you want to enter or exit the market instantly, you can use a market order to trade at the next best available price. However, you might want to note that in a fast-moving market where price can change in seconds, the price can alter substantially between the time the order is placed and the time that it’s completed/filled. This is called slippage. The difference between the bid/ask price is known as the spread, which is essentially the broker’s fee/commission.

To set a market order, you have to click on the New Order window and to specify the order execution conditions: the currency pair (USD/CAD in example), the volume, the stop loss and take profit targets. Be sure you set order type Market Execution and select Sell or Buy button open a new order.

Pending Orders

A pending order allows traders to buy and sell securities at a pre-defined price in the future. This type of order is used to execute a trade if price reaches the pre-defined level; the order will not be filled if price does not reach this level. There are four types of pending orders available in trading platform MT4.

Buy limit – to buy when the ask price gets equal to the specified value. Herewith, the current price is higher than the value of the set order. Typically, the orders of this type are set in reliance on the assumption that the instrument price, having declined to a certain level, will stop its fall and start to grow. It is impossible to set buy limit orders above the current ask price, you have to use buy stop orders for this.

Sell limit – to sell when the bid price gets equal to the specified value. Herewith, the current price level is lower than the value of the set order. Typically, the orders of this type are set in reliance on the assumption that the instrument price, having risen to a certain level, will stop its uptrend and start to decline. It is impossible to set sell limit orders below the current bid price, you have to use sell stop orders for this.

Buy stop – to buy when the ask price gets equal to the specified value. Herewith, the current price level is lower than the value of the set order. Typically, the orders of this type are set in reliance on the assumption that the instrument price will overcome some level and continue to grow. It is impossible to set buy stop orders below the current ask price, you have to use buy limit orders for this.

Sell stop – to sell when the bid price gets equal to the specified value. Herewith, the current price level is higher than the value of the set order. Typically, the orders of this type are set in reliance on the assumption that the instrument price, having dropped to a certain level, will continue to decline. It is impossible to set sell stop orders above the current bid price, you have to use sell limit orders for this.

To set a pending order, you have to click on the New Order window and change the order type from Market Execution to Pending Order.

Right after you choose the Pending Order option, some fields will appear for you to specify the order execution conditions: the currency pair, the volume and rate of the position you open, the order type, stop loss and take profit, and, if necessary, to your comment to the order and the expiration date, after which the pending order will be automatically removed. After setting up the required parameters, press the Place button to place the order with the specified execution conditions. You can see the order you set in the Terminal field, the Trade tab. To change the conditions of the pending order or to delete it, you have to give the order a right click and select Modify or Remove the Order in the pop-up menu.

Take-Profit Orders

A take-profit order automatically closes an open order when the exchange rate reaches the specified threshold. Take-profit orders are used to lock-in profits when you are unavailable to monitor your open positions. For example, if you are long USD/JPY at 109.21 and you want to take your profit when the rate reaches 110.00, you can set this rate as your take-profit threshold.  If the bid price touches 110.00, the open position is closed by the system and your profit is secured. Your trade is closed at the current market rate.  In a fast moving market, there may be a gap between this rate and the rate you set for your take-profit.

Stop-Loss Orders

A stop-loss automatically closes an open position when the exchange rate moves against you and reaches the level you specify. For example, if you are long USD/JPY at 107.40, you could set a stop-loss at 107.00 – then, if the bid price falls to this level, the trade is automatically closed. It is important to understand that stop-loss orders can only restrict losses, they cannot prevent losses. Your trade is closed at the current market rate.  In a fast moving market, there may be a gap between this rate and the rate you set for your stop-loss. It is in your best interest to include stop-loss instructions for your open positions. Think of them as a very basic form of account insurance.

Influencing factors on the forex market

There are a number of reasons why forex pairs move so much (this movement is known in the industry as volatility). A few volatility-causing factors you should be aware of when forex trading:

  • Financial news events

Large financial news events such as budgets and interest and unemployment rate announcements can significantly increase volatility in the markets. It can be more apparent in the local currencies where the announcement is being made.

  • Political economic stability

The welfare of a country or nation can have a major impact on the performance of a currency. If a country is struggling economically, it’s extremely likely its associated currency will be too.

  • Natural disasters

As horrible as they are, natural disasters can affect a currency’s wellbeing as well as people’s lives. Should an earthquake or tsunami occur, expect some sort of volatility to be generated in the currency associated with that region.

Examples of Forex trades

The current monetary policy is in favour of a strong dollar and we anticipate a bearish move on the AUD/USD.

We decide to go short 1 lot (100,000 units) of AUD/USD at a price of 0.74500. The margin required to open the position will be (using 200:1 leverage):

100,000 x 0.74500 / 200 = 372.5 USD

After some time the market moves in our direction, and is now trading at 0.73700.
We decide to take our profits and close the position.

The profit made on this position will be:

0.74500 – 0.73700 = 80 pips.

1 lot = 10 USD per pip.

Therefore, the total profit we made is 80 x 10 = 800 USD.

After a positive news update on UK employment, we anticipate a rise in the price of GBP/USD (also known as ‘cable’).

We decide to go long 3 lots of GBP/USD at 1.4020. The margin required to open the position will be (using 200:1 leverage):

300,000 x 1.4020 / 200 = 2103 USD

Straight after we enter the position the market pushes against us and is now trading at 1.3985.We decide to close the position at a loss. The amount we lost is: 1.4020 – 1.3985 = 35 pips.

3 lots = 30 USD per pip.

Therefore, the total loss for this trade is 35 x 30 = 1050 USD.

How much you can earn following Forex Husky strategy?

Your account size

Your each position's risk

Forex Husky strategy generated 6709 pips in 05.2016 – 05.2017.

Profit

= 100 pips =

6709 / 100 * =

Account`s total balance increased from to