How to trade Forex?

1) Understand risks associated with forex trading

You should begin by reading the risk disclaimer, it's a good start to undestand that investing on forex can be very rewarding but is very risky,
it's why you should never invest money you cannot afford to loose.

if you never traded on forex, you should really consider to open a demo account and test it for while, it's very important to familiarize with the market.

TraderCafe.net focus trades that match mini-account and low starting amount specificities, initial investment should not exceed 1000$ (you can start with 200$ ; 300$ ). In any case, you should always developp and apply a strategy that fits your aversion to risk.

Trading signals are only provided to point your attention to interesting market condition but never give you any order to buy/sell, it's always your own decision.

2) What is a trade?

For information on forex terminology (short, long, etc), see glossary.

A trade is a transaction you perform on the trading platform of a broker, it consists in taking a short or long position on a currency pair and then closing this positon with a profit or loss depending on the market movement occuring on that pair.

Each currency is assigned an abbreviation :
EUR -> Euro ; USD -> US Dollar ;GBP -> British Pound ;JPY -> Japanese Yen ;CHF -> Swiss Franc ;AUD -> Australian Dollar ;CAD -> Canadian Dollar ;NZD -> New Zealand Dollar ;SGD -> Singapore Dollar

Base currency is the first currency in the pair. Quote currency is the second currency in the pair.
USD / JPY = 120.25
-> Base currency / Quote currency = Rate

This abbreviation specifies how much you have to pay in quote currency to obtain one unit of the base currency (in this example, 120.25 Japanese Yen for one US Dollar). The minimum rate fluctuation is called a point or PIP.
Most currencies, except USD/JPY, EUR/JPY, CHF/JPY and GBP/JPY where a pip is 0.01, have 4 digits after the period (a pip is 0.0001), and sometimes they are abbreviated to the last two digits. For example, if EURUSD is traded at 1.2389/1.2394 the quote may be abbreviated to 89/94.

The currency pairs on Forex are quoted as the Bid and Ask (or Offer) prices:
Pair = Bid / Ask
USD / JPY = 120.25 / 120.30

Thanks to the leverage(*) on forex account, you don't have to buy/sell that rate (=quote) but you buy/sell lots using a leverage(*) such as 100/1 or 200/1 (mini-account).

In order to define the number of lots to buy/sell, you'd better use a pip calculator as FxStreet Pip Calculator where you just have to enter the lot size on your account.
Usually, mini-account have 1 lot = 10000units which mean 1$ by pip for EUR/USD and 0.92$ by pip for USD/JPY
but you should consider opening a micro-account(1lot=1000units) or an account where you can trade any lot size (up to 1 unit), this will allow proper money management and strategies taking care of market volatility.

To trade $10,000 of currency, with a margin of 1%, an investor will only have to deposit $100 into his or her margin account. The leverage(*) provided on a trade like this is 100:1. leverage(*) of this size is significantly larger than the 2:1 leverage(*) commonly provided on equities and the 15:1 leverage(*) provided by the futures market. Although 100:1 leverage(*) may seem extremely risky, the risk is significantly less when you consider that currency prices usually change by less than 1% during intraday trading. If currencies fluctuated as much as equities, brokers would not be able to provide as much leverage(*)..

As Forex accounts use leverage(*), you have also to take care about the possibility of a margin call :
As your are investing more than you have, the broker need to secure any trade through the margin mecanism. The minimum security (Margin) for each lot will very from broker to broker. In the exampleof a mini-account (200/1) the broker requires a one percent margin. This means that for every $10,000 traded(leveraged(*) amount) the broker need to freeze $50 as security on the position.

For example, on a mini-account with a leverage(*) 200/1 (margin=0.5%) , a lot size of $10,000 and an initial deposit of $300.
As the value for a pip is $1/pip, if you buy 1 lot EUR/USD, it will remains $250 as available margin and therefore your trade can move 250pips in the wrong direction before a margin call is issued (forcing you to close position).
The available margin is impacted/reduced by each new trade but is repopulated when the trade is closed.

it's why we advice to work mith micro account allowing smaller lot size so less risk for a margin call while working with little initial deposit.

Once you know what pair and what size, you can place your market or limit order with its stop loss and its take profit limit:

3) Thus, what is an order?

You can place a market order if you want to enter a new position and execute an order immediately at the market price, which is either the displayed bid or ask price on your screen. You may use the market order also to exit an existing position (buy or sell).

Most of the time, at Tradercafe.net, we suggest using limit order to enter the market (It lets more time to analyse a trade signal):

The limit order will only be filled if the market trades at that price or better. A limit-buy order is an instruction to buy the currency pair at the market price once the market reaches your specified price or lower, and is lower than the current market price. A limit-sell order is an instruction to sell the currency pair at the market price once the market reaches your specified price or higher, and it is higher than the current market price.
The limit order is also used to set your profit objective

You will also use Stop orders : A stop order is an order that becomes a market order only once a specified price is reached. It can be used to enter a new position or to exit an existing one. A buy-stop order is an instruction to buy a currency pair at the market price once the market reaches your specified price or higher, which is higher than the current market price. A sell-stop order is an instruction to sell the currency pair at the market price once the market reaches your specified price or lower, which is lower than the current market price.
Stop orders are used to limit your losses but also can be used to protect profits (you shift your stop when your trade become profitable) or to trigger a buy/sell entry higher/lower than market price.

So, by example, if the EUR/USD is quoting 1.4712/1.4715 and want to buy the pair at 1.4625 (when it will be reached) with a target at 1.5000 while limiting your risk to 1.4530 the order become :
Limit order Buy 1.4625 SL 1.4530 TP 1.50 (SL = Stop Loss) (TP = Take profit limit)

So, it's time to choose a broker where you can place these kind of orders...

3) Choose a Broker

Choosing a forex broker isn't difficult, but don't rush the decision. Check out a few, and always get a demo account first to make sure you're happy with the way everything works before sending off your opening balance. Main points to consider will be : Spread - Execution - Trading platform - Support.

See our recommended broker page for further details.
Once tested through a demo accout, you should consider to begin with a mini-account (low amout for opening and low position size).

We included a glossary at the bottom of this page so as to better understand specific terms.

3) Define your own strategy and money management approach

Successful trading is not an easy job and in a market like foreign exchange one miscalculation can lead to huge amount of losses. But then there are traders and speculators who make a fortune and profits in the same forex market. So what is it that they are doing different? They have a forex trading strategy , which they implement to get ahead of everyone else. Even you can create your own Forex strategy but for that you will need to understand certain key components of forex trading.

The foreign exchange market is comprised of traders, money managers, investors and speculators and all striving towards one goal, how to maximize their profit on investment. So whether you are a trader, investor or speculator, you need to get maximum knowledge about forex trading, about the strong currency pairs, the various market conditions, and the entire process. Once your research is complete, you will be in a better position to formulate the right trading strategy. Here are what we believe to be some of the key areas that will make your strategy strong and help you to trade more confidently.

Trading Amount and Limiting risk: The forex trading market is volatile and can change suddenly. These changes however exciting and positive can also incur losses if you are not careful. The first part of our forex trading strategy should be to start with a small investment. Risk is necessary but losing your hard-earned money is not.
You should define a position sizing according to the risk allowed for each trade which will depend on the profit/loss ratio (reward-to-risk) you defined and on your account size/type.
Anyway, the sum of all your open position sould never exceed a 5% of your account risk (mini-account basis).
You can’t expect to make a profit with every trade. It is like a game of chess and you need to know what the next move should be and how it will affect trading.

Identify Market conditions : Your forex strategy should encompass the existing market conditions and the future conditions too. You should look at the current trend, compare it with similar trends from last year or the year before and based on that judge how it will perform in the future. A clear picture is extremely necessary for successful trading.
Test on the charts and on demo account.

Apply your strategy rigorously : Once defined an acceptable profit/loss ratio that fits your strategy, you should always enter stop loss and limit orders in the same time you enter the trade, do not use mental stop loss instead.
You should also protect profitable trade when possible or use a trailing stop mecanism (depending on your broker).
While in the trade, make only little adjustements on stop and limit to reflect current market conditions if necessary but do not close a trade by fear, always keep your strategy in mind.
The best way to achieve this is the set and forget method, you place you order and you don't look at the chart each 5 minutes.
It is also adviced to keep a log of all your trades in order to refine your strategy when necessary.

Have a look at market events : You should also take care of important market events (see a market calendar) that can have huge impact on currencies and read news, analysis in order to detect such events.

Glossary

• Ask : The price requested by the trader. This usually indicates the lowest price a seller will accept.