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Forex trading
Forex trading
by Richard Goldie
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Forex trading
So what is is Forex trading you may ask? Forex is the exchange
you can buy and sell currencies. For example, you might buy
British pounds (by exchanging them to the dollars you had),
then, after pounds / dollar ratio goes up, you sell pounds and
buy dollars again. At the end of this operation you are going to
have more dollars, then you had at the beginning.
The Forex market has much higher liquidity, then the stock
market, as much more money is being exchanged. Forex is spread
between banks all over the planet and as a result it means 24
hour trading.
Unlike stocks, Forex trades are performed with high leverage,
usually it is 100. It means that by investing $1000 you can
control $100,000, and increase potential profits accordingly.
Some brokers provide also so called mini-Forex, where the size
of minimum deposit equals $100. It makes possible for
individuals to enter this market easily.
The name convention. In Forex, the name of a "symbol" is
composed of two parts - one for first currency, and another for
the second currency. For example, the symbol usdjpy stands for
US dollars (usd) to Japanese yen (jpy).
As with stocks, you can apply tools of the technical analysis to
Forex charts. Trader's indexes can be optimized for Forex
"symbols", allowing you to find
winning strategy.
Example Forex transaction
Assume you have a trading account of $25,000 and you are trading
with a 1% margin requirement. The current quote for EUR/USD is
1.3225/28 and you place a market order to buy 1 lot of 100,000
Euros at 1.3228, expecting the euro to rise against the dollar.
At the same time you place a stop-loss order at 1.3178
representing a maximum loss of 2% of your account equity if the
trade goes against you, 50 pips below your order price, and a
limit order at 1.3378, 150 pips above your order price. For this
trade, you are risking 50 pips to gain 150 pips, giving you a
risk/reward ratio of 1 part risk to 3 parts reward. This means
that you only need to be right one third of the time to remain
profitable.
The notional value of this trade is $132,280 (100,000 * 1.3228).
Your required margin deposit is 1% of the total, which is equal
to $1322.80 ($132,280 * 0.01).
As you expected, the Euro strengthens against the dollar and
your limit order is reached at 1.3378. The position is closed.
Your total profit for this trade is $1500, each pip being worth
$10.
About the author:
Richard Goldie is a Forex trader and the author of this article
and the owner of the website: http://www.forex-tradingweb.com/
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