How to Trade Forex?

Individual traders open positons on currency pairs. E.g. AUDUSD. The trader is able to sell the pair as easy as buying it.

Individual traders open positons on currency pairs. E.g. AUDUSD. The trader is able to sell the pair as easy as buying it. Let’s say you believe the AUDUSD will increase in value. You buy the pair, you’re buying the AUD and selling the USD at the same time. The base currency is AUD and the terms currency is USD. Terms really means what it is, the terms of the contract excluding the contracts margin. The margin of the position will be in your accounts base currency, in this example your base is AUD so the margin requirement will be in AUD. The profit and loss will be in USD value the terms. The Base signifies the total you’re buying in AUD. For this example let’s say 100 000AUD or 1 lot. When trading with Eightcap the platform calculates the terms values for you so you don’t need to worry about calculations of conversions as the margin is worked out by value and not by a physical conversion. This way is simple and traders will not be stuck with ledger FX balances that need to be manually converted back to the accounts base currency.

Forex Quote

Before we can take a trade we need to understand a forex quote, spreads and pips.

Looking at the orange boxes on the above order we can see the sell and buy prices. The fourth number (2) and (3) stand for a pip the fifth number is a fraction of a pip. If the price changes from .77133 to .77143 that is a one pip increase. The difference between these two quotes is called the spread. The Spread is a fee a trader pays to the broker. Once you open a trade you’re trade starts minus the spread. On the above order the spread is .00004 or .4 of a pip. The tighter spreads makes it faster and requires less market movement for your trade to become profitable.

Forex Trade break down.

Order Ticket

We use an order ticket to place trades. Looking at the order ticket, symbol allows us to choose the pair we would like to trade.  Volume stands for the amount of base currency we would like to trade.

Volume; 1 = 1 LOT 100 000 base currency .1 = 0.1 of a LOT 10 000 base currency .01 = 0.01 of a LOT 1000 base currency.

Volume Profit and Loss 

1 (1 Lot) equals $10 per pip movement in USD value (terms currency)

.1 (.1 Lot) equals $1 per pip movement in USD value (terms currency)

.01 (.01 Lot) equals 10 cents per pip movement in USD value (terms currency) (the terms value will be automatically calculated to your accounts base currency)

Now we know volumes we’re ready to take a position. We see a price or signal that gives us a value point in the market we decide to buy the AUDUSD. We select 1 lot and click buy the market at 0.77126. We have bought 100,000 AUD our risk is $10USD (value) per pip. Our trade works out, the market increases to 0.7732.6, we decided to close our trade. Our net profit is 0.0020 or 20 pips. 20 pips x $10 equals a profit of $200USD. The spread was passed before our gain was made so the actual profit was 20.4 pips. Margins will be explained below in the leverage section.

On the above order you will see market execution. There are three ways you can open a forex trade when trading with Eightcap.

Order Types

Market allows the trader to accept a live quote and enter the market instantly.

Limit allows the trader to enter market on a predetermined price that’s below (buy Limit) or above the market (Sell Limit). Limit orders are seen as value entries as the price is at a better level.

Stop allows the trader to enter market on a predetermined price that’s below (sell Stop) or above the market (buy Stop). Stop orders require price to fall through or break though the entry price.

 

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