How to Trade Forex?
How to trade Forex
Before you can start trading forex, you must first choose a broker and a platform you wish to trade with. By trading with Eightcap, clients are given access to market-leading software MetaTrader 4 (MT4) and MetaTrader 5 (MT5). The software can be accessed via a computer or your mobile device once you’ve opened an account and have been verified by the broker. From here, you will need to deposit a margin (deposit) into your account before you can start buying or selling currency pairs.
Forex trading steps
Once an account is opened and funded, traders can then choose a currency pair and the type of leverage they wish to use to speculate on price movements. When placing a trade in forex, you are opening a position, whether it’s to buy or sell. Unlike stock trading, selling a currency pair is just as easy as buying.
- To begin with, you would choose a currency pair to speculate on. Currency pairs in MetaTrader 4 and MetaTrader 5 are located on the left-hand side of the screen, under the ‘symbols’ tab. They are represented by six letters with the first three letters belonging to the base currency you are about to trade. E.g. EURUSD represents the Euro and the United States dollar with the Euro being the base currency.
- Next you would place a trade – or open a position – on your chosen currency pair. This can be done by clicking on the buy or sell tabs shown at the top left of the chart (as seen below). Once you click on this, an order box will appear. The number that appear in the order box will be explained later on.
- Once you place the trade, it will appear at the bottom of your screen under ‘order’ along with you account balance, equity and free margin.
Buying vs Selling Forex
Before opening a position, it’s important to understand the difference between buying and selling a currency pair.
Let’s take the AUDUSD for example, which is the Australian dollar vs United States dollar. If you believe the value of the Australian dollar will rise against the USD, you would open a position to ‘buy’ the currency pair. On the flipside, if you believe the AUD will decrease in value and the USD will strengthen, you would open a position to ‘sell’ the currency pair.
If you decide to buy the pair, you’re buying the Australian dollar and selling the United States dollar at the same time. The base currency is the AUD and the terms currency is the USD.
The terms currency can be thought of as the terms of the contract, excluding the margin. That’s because the margin is always quoted in the base currency (AUD) while the profit and loss is in the terms currency (USD). The base signifies the total you’re buying in Australian dollars.
For example, let’s say you want to trade 100 000 AUD or 1 lot. When trading with EightCap, MetaTrader 4 and MetaTrader 5 will calculate the terms value for you, so there is no need to do manual calculations and conversions.
Before opening a position to buy or sell a currency pair, you should look at the forex quote. A forex quote is the price the currencies are being bought – or sold – minus the spread. The prices are highlighted in the red boxes below.
Within the red boxes, the fourth number in the sequences (2) and (3) is the pip – or point in percentage. The fifth number is a fraction of a pip. If the price changes from .77133 to .77143, it’s an increase of 1 pip. The difference between these two quotes is called the spread.
The spread is a fee or commission a trader pays to the broker for using their platform. Once you open a trade, your trade starts minus the spread. On the above order, the spread is .00004 or .4 of a pip. Tighter spreads make it faster and requires less market movement for your trade to become profitable
When opening a position, you are placing an order through MetaTrader to buy or sell a currency pair. As mentioned earlier, the order ticket will appear when you click on the red or blue boxes at the top of your chart. You can also place an order by clicking on TOOLS NEW ORDER at the very top of the page. Within the order ticket, there are a few details to be completed before clicking ‘sell’ or ‘buy’.
This drop-down option on the order ticket allows the trader to accept a live quote and enter the market instantly.
A limit order allows the trader to enter market on a pre-determined price that’s below (buy Limit) or above the market (Sell Limit). Limit orders are value entries as the price is at a better level.
This is the amount of base currency you would like to trade. Volume is represented as lots. For example:
1 lot is equivalent to 100,000 of the base currency.
= 0.1 of a LOT or 10,000 base currency.
= 0.01 of a LOT or 1,000 base currency.
Volume Profit and Loss
Profit and loss in terms of volume is represented in the ‘terms’ currency. Let’s take the AUD/USD as an example:
(1 Lot) equals $10 per pip movement in USD value (terms currency)
(.1 Lot) equals $1 per pip movement in USD value.
(.01 Lot) equals 10 cents per pip movement in USD value.
Now you understand what the volume is and how it’s represented, you’re ready to open a position. Staying with the AUD/USD pair, once you identify a trend, signal or price you like, you may opt to buy the currency pair. Remembering if you buy the pair, you believe the AUD will increase in value, while selling the USD.
- Using the above order ticket as an example, you select 1 lot and click buy the market at 0.77126.
- We have now bought 100,000 AUD and our risk is $10USD (value) per pip.
- Ten minutes later, your trade moves in the direction you were hoping for and the market increases to 0.7732.6. So, you decided to close the trade.
- Your 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.
Referring back to your ticket order, there is also an option for a stop loss. This option allows traders to enter the market on a pre-determined price that’s below (Sell Stop) or above the market (Buy Stop). Stop orders require the price to fall or break though the entry price. Examples are in the charts below:
Monitoring your trade
The forex market is the most liquid financial market in the world and because of this, traders must monitor their positions regularly and carefully. Simple news, economic or political announcement can result in a currency being bought or sold-off heavily. Sometimes a currency may drastically move for no reason at all (e.g. a flash crash). Using a stop loss can help prevent major financial losses.
Before you start trading forex, you should have a basic understanding of these terms.
In a forex pair, the base currency is the first currency code to appear. For example, in the AUD/USD pair, the AUD is the base currency. The base currency represents how much of the ‘terms’ currency is needed for 1 unit.
Also called the quote currency or the counter currency, this is the second currency code in a forex pair.
This is the value of a nation’s currency when compared to another currency.
This is when traders buy and hold a position.
This is when traders open a position to sell a currency.
Another term for ‘buy’.
Another term for ‘sell’.
The difference between the buy and sell price, usually represented as pips.