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,
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 :
Base currency is the first currency in the pair.
Quote currency is the second currency in the pair.
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.
The currency pairs on Forex are quoted as the Bid and Ask (or Offer) prices:
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.
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 :
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.
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.
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.
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 :
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.
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.
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.
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.
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.
Ask : The price requested by the trader. This usually indicates the lowest price a seller will accept.
Base currency : The currency that the investor buys or sells (i.e. EUR in EURUSD).
Bear : Someone who believes prices are heading down. A bear market is one in which there has been a sustained fall in prices and which does not look like it will recover quickly.
Bid : The price offered by the trader. This usually indicates the highest price a purchaser will pay.
Bid/Ask : The Bid rate is the rate at which you can sell. The Ask (or offer) rate is the rate at which you can buy.
Bull : Someone who is optimistic about the market. A bull market is characterised by enthusiastic and sustained buying.
Broker : A party that mediates between a buyer and a seller.
Cross : When trading with currencies, the investor buys one currency with another. These two currencies form the cross: for example, EURUSD.
Cross rate : An exchange rate that is calculated from two other exchange rates.
Depreciation/decline : A fall in the value of a currency.
FX, Forex, Foreign Exchange : All names for the transaction of one currency for another,
e.g. you buy GBP 100.00 with USD 150.25 or sell USD 150.25 for GBP 100.00.
Interbank : Short-term (often overnight) borrowing and lending between banks, as distinct from a banks business with their corporate clients or other financial institutions.
Interest rate differential : The yield spread between two otherwise comparable debt instruments denominated in different currencies.
leverage(*) (gearing) : The investor only funds part of the amount traded.
Limit Order : An order to buy or sell at a fixed price. A person can also place a limit order with discretion. This enables the broker to buy or sell within a small range, usually 1/8 or 1/4 of a point.
Long : To buy.
Long position : A position that increases its value if market prices increase.
Lot Size : The number of base currency, underlying asset or shares in one lot defined in the contract specifications. For details refer to the Table 2.
Lot : It is an abstract notion of the number of base currency, shares or other underlying asset in the trading platform.
Margin : The deposit required when entering into a position as well as to hold an open position. Your margin status can be monitored in the Account Summary.
Money Management : A term that was frequently use to describe position sizing, but has so many other connotations that people fail to understand its full meaning or importance. For example, it also refers to: 1) managing other people's money; 2) risk control; 3) managing one's personal finances; 4) achieving maximum gain; and many other concepts.
Open position : A position in a currency that has not yet been offset. For example, if you have bought 100,000 USDJPY, you have an open position in USDJPY until you offset it by selling 100,000 USDJPY, thus closing the position.
Order : A buy or sell entry (including stops) in OmniTrader's portfolio. An order carries much the same definition in OmniTrader as it does with financial brokers.
Pips : A pip is the smallest unit by which a Forex cross price quote changes. So if EURUSD bid is now quoted at 0.9767 and it moves up 2 pips, it will be quoted at 0.9769.
Position : Traders talk of taking a position which simply means buying or selling currency cross. Position can also refer to a trader's cash/securities/currencies balance, whether he or she is short of cash, has money to lend, is overbought or oversold in a currency, etc.
Reward-to-Risk Ratio (=Profit/Loss ratio) The average return on an account (on a yearly basis) divided by the maximum peak-to-trough drawdown. Any reward-to-risk ratio over three that is determined by this method is excellent. It also might refer to the size of the average winning trade divided by the size of the average losing trade.
Risk : Trying to control outcomes to a known or predictable range of gains or losses. Risk management involves several steps which begin with a sound understanding of one's business and the exposures or risks that have to be covered to protect the value of that business. Then an assessment should be made of the types of variables that can affect the business and how best to protect against unwelcome outcomes. Consideration must also be given to the preferred risk profile whether one is risk averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk and whether a natural hedge exists that can be used. Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.
Short position : A position that benefits from a decline in market prices.
Short : To sell.
Speculative : Buying and selling in the hope of making a profit, rather than doing so for some fundamental business-related need.
Spot : A Spot rate is the current market price of an asset.
Spot market : The part of the market calling for spot settlement of transactions. The precise meaning of spot will depend on local custom for a commodity, security or currency. In the UK, US and Australian foreign-exchange markets, spot means delivery two working days hence.
Spread : The difference between the bid and the ask rate (you pay that difference so the spread should be the lowest possible).
Stop Order : An order placed which is not at the current market price. It becomes a market order once the security touches the specified price. Buy stop orders are placed above the present market price. Sell stop orders are placed below the present market price.
Technical Analysis : The study of historical price movements using mathematical formulas in an attempt to predict future prices. The types of data used include: price, volume, open interest, and market capitalization data.
Trading : Opening a position in the market, either long or short, with the expatiation of either closing it out at a substantial profit or cutting losses short if the trade does not work out.