How To Trade Forex

Speculate on the price movements of the world’s largest financial market, 24 hours a day.

Forex trading allows you to speculate on price movements in the global currency market. Currency values rise and fall in relation to each other and in response to national and international economic, financial and political events. There is no difference in profit or loss potential if a currency rises or falls in relation to its trading partners. Forex is a market without an up or down bias in pricing. Traders can as readily sell a currency as buy it.

Currency pairs are quoted in what is called a ‘two-way price’ and are traded against each other. For instance the Euro is most often traded against the US Dollar. A price of 1.44 10-13 indicates that the trader may sell euros, or ‘go short’ at 1.4410 and buy euros or ‘go long’ at 1.4413. 1.4410 is called the ‘bid’ and 1.4413 is the ‘offer’ or ‘ask’. In retail trading systems the trader either buys or sells the base currency, in this case the euro.

The first currency in any pair, for example the eur/usd or the usd/chf is the base currency. Trades and positions are calculated in that currency. For the eur/usd trades are made in euros but for the usd/chf trades are conducted in US Dollars. Of the seven most popular pairs mentioned above the base currencies are as follows: eur/usd—Euro; usd/jpy—US Dollar; gbp/usd—Sterling; usd/chf—US Dollar; usd/cad—US Dollar; aud/usd—Australian Dollar; nzd/usd --New Zealand Dollar.

Trading with Margin

Forex is a leveraged product enabling you to trade by paying a small fraction of the equity that would be needed to fund a trade. This means you can potentially magnify your returns on an investment. Remember though that higher leverage can result in losses that exceed your initial deposit.

Example of a winning trade

To continue with the euro example above if a trader goes short or sells the euro at 1.4410 the value of the euro, that is the trading rate, will have to decline against the dollar in order for the trader to profit. The amount of the profit or loss depends on the size of the position. If the rate drops to 1.4400 the calculation for a 10,000 ‘mini lot’ trade is as follows. Opening rate 1.4410 – closing rate 1.4400 = .0010 profit points, position size 10,000 X points .0010 =$10.

For a buy or ‘long’ trade the euro rate must move higher for the trader to profit. If the trader buys at 1.4413 and exits at 1.4420 the profit calculation is this: Opening rate 1.4413 – closing rate 1.4420 = .0007 profit points, position size 10,000 X points .0007 =$7. In each case the trader would probably say that he made 10 or 7 points or pips.

Example of a losing trade

In a losing trade the loss calculation is the same but the rate has moved in the opposite direction. For the short position at 1.4410 above if the euro moves up to 1.4420 instead of down the loss calculation is this: Opening rate 1.4410 – closing rate 1.4420 = -.0010 loss points, position size 10,000 X points -.0010 =-$10. In this case the trader would probably say that he lost 10 points or pips.

For the buy or ‘long’ trade at 1.4413 a loss if the rate moves down 7 points is this: . Opening rate 1.4413 – closing rate 1.4407 = -.0007 loss points, position size 10,000 X points -.0007 =-$7. In this case the trader would probably say that she lost 7 points or pips.