17- How to open a trade in MetaTrader?

Now you are ready to start trading. Launch your MT4 trading terminal (the procedure for MT5 is very similar). Use the login and password provided to you by FBS during the registration. If you forgot this info, you can check the registration email sent to you by the company or set a new password in your personal area.

Sometimes it takes more than one attempt to log in. If your first attempt failed, click “File” and then “Login to Trade Account”. Carefully fill in your login info making sure that you use the correct name of the server.

Check that you got connected: the columns in the lower right corner should be green and blue. If you see the speed of your internet connection there, all in fine: it means that you are getting live market quotes. It’s time to start trading!

To trade, you need to give your broker a command to open a trading position for you. Such a command is called an "order".

There are several ways to make a “New Order” window pop up:

1. Choose “Tools” – “New order” in the program menu.
2. Right-click on the chart; go into “Trading” – “New order”.
3. Double-click on the name of the trading instrument in the “Market Watch” window.
4. Click on the “New Order” button in the toolbar above the price chart.
5. Press F9 key on the keyboard.

The “New Order” window will appear. Here you need to choose the parameters of your trade.

Customization of Trade Parameters

“Symbol” is the asset you want to trade. By default, the symbol on the active chart is chosen for trading, but you can pick another asset from the drop-down list. A corresponding tick chart will appear in the left pane.

The next is step is to determine the size of your position and write it in the field “Volume”. In MetaTrader you set position size in lots: 1.0 is equal to 1 lot, or 100,000 units. You can read up on how to choose a position size in the article How to determine position size?.

Then it’s time to set the “Stop Loss” and “Take Profit”. These fields are blank by default. You can enter this information right away or later or choose not set these levels at all.

Stop loss (SL) is an exchange rate at which your trade will be automatically closed if the price goes in an adverse direction. Thus, SL limits your possible loss: in the worst case, you won't lose more than the amount you chose as a stop loss. 

Take profit (TP) is an exchange rate where your trade will be automatically closed if the price goes in your favor. In other words, it’s your profit target.

If stop loss and take profit values are set, they will appear on the chart as horizontal lines at the corresponding price levels, making it easy for you to monitor open trades. If SL and TP levels were set too close to the current price, you will see an error message: “Incorrect S/L or T/P”. You will need to move the levels farther from the current price and repeat the request.

The next important field is “Type”. There are 2 types of orders – market orders and pending orders. The main difference between these 2 types is that market orders are automatically opened at the current market price while pending orders can be set for a specific price in the future.

If you choose market execution, your trade will open as soon as you hit the button “Sell by market” or “Buy by market”. If you choose a pending order option, you will be able to choose entry levels in advance. In this case, the trade will automatically open once the price level that you have chosen is reached, and you won’t need to be in front of the monitor when it happens. Read about the types of pending orders Types of orders.

If “Sell” and “Buy” buttons are inactive, it means that you have chosen an incorrect order volume for this account type. Please check your settings for order volume and compare them to the trading conditions stated on our website.

The open order can be viewed in the Terminal window by clicking on the Trade tab.

How to close an order?

If you have set stop loss and take profit levels, the trade will automatically close once the price reaches one of these levels. If you want to close a trade at any time, highlight the trade in the Trade tab of the Terminal, right-click and select “Close Order”. Another way is to double-click the trade in the Terminal. A window appears prompting you to confirm that your trade should be closed. Click “Close #####” (the yellow horizontal bar at the bottom of the window) to close the trade. 

Open position can also be closed by an opposing position or, in other words, a reverse position for the same symbol. To do this, open an Order window, select “Close by” in the “Type” field, choose a position and press “Close”. It allows closing two positions at the same time. If the position sizes in lots differ, only one of two opposite positions will remain. The volume of this position will equal to the difference between lots of the two closed positions, and its direction and open price (short or long) will correspond with those of the larger (in volume) of two closed positions.

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16- How to determine position size?

Choosing the volume of a trade is a big challenge for beginner traders. Let’s sort it through!

There are several ways to choose the size of your position.

1. Fixed lot size

The idea here is that a trader uses the same trade volume in lots for every trade. This way is simple to understand for those who have only recently started trading. It’s recommended to choose small trade sizes. It’s possible to change the position size if the size of your account significantly changes. The pip value will be the same for you all the time.

Example

You have $500 on your account. With 1:100, this amount will be enough to make 50 trades of 0.01 lot each. Each trade will require $10 margin.

If you use the same lot size every time, your account can show stable growth. This is a good option for those who can’t easily adjust to the exponential growth of their trade sizes because of higher stress levels which are associated with it. More experienced traders, however, may want to have an approach with greater flexibility and bigger potential account expansion.

2. Percentage of equity

In this case, you choose the size of your position as the percentage of your equity. If your equity increases, so do your position sizes. This, in turn, can lead to geometric growth of your account. At the same time, it’s necessary to remember that the declines of your account after losing trades will be bigger as well.

The recommendation is not to use more than 1-2% of your deposit for one trade. This way even if some of your trades aren’t successful, you won’t lose all your money and will be able to keep trading.

Here’s a formula of the position size in lots:

Lots to trade = Equity * Risk(%) / Contract Size *  Leverage

Example

You have $500 and decide that the acceptable risk level is 2% of your account. With 1:100 leverage, your need to choose ($500 * 0.02) / 100,000 * 100 = 0.01 lots.

With $1000 on your account, you will be able to trade ($1000 * 0.02) 100,000 * 100 = 0.02 lots.

This approach is not the best option for smaller accounts. It may happen that if you have a large loss, the risked percentage will be too small to act as a margin even for the smallest lot size. As a result, you will be forced to break your risk management rules and allocate more money to keep trading. Moreover, as this approach doesn’t take into account what’s happening on the price chart, the size of Stop Loss it allows may be too big.

As the position size depends on equity, the loss will make position size smaller, so that it will be harder for a trader to recover the account after a drawdown. At the same time, if the account becomes too big, the size of each trade way turn to be uncomfortably big as well.

3. Percentage of equity with a stop loss

Here you base your position size not only on the predetermined percentage risk per trade but also on your stop loss distance. Let’s break this process in 3 steps.

Step 1. The recommendation stays the same: don’t risk more than 1-2% of your deposit/equity for one trade.

If your equity is $500, 2% risk will cost you $10.

Step 2. Establish where the stop loss should be for a particular trade. Then measure the distance in pips between it and your entry price. This is how many pips you have at risk. Based on this information, and the account risk limit from step 1, calculate the ideal position size.

If you want to buy EUR/USD at 1.1100 and place a stop loss at 1.1050, your trade risk is 50 pips.

Step 3. And now you determine position size based on account risk and trade risk. In other words, you need to determine the number of lots to trade that will give you the risk percentage you want with the stop distance that fits your trading system.

The important thing is to adjust your position size to meet the desired stop loss and not the other way round. Your risk will be the same in every trade, but the position size may be different because stop loss distances may vary.

Remember that a 1,000-unit lot (micro) is worth $0.1 per pip movement, a 10,000-unit lot (mini) is worth $1, and a 100,000-unit lot (standard) is worth $10 per pip movement. This applies to all pairs where the USD is listed second, for example, the EUR/USD. If the USD is not listed second, then these pip values will vary slightly. Note that trading on a standard lot is recommended only for professional traders.

Use the formula:

Lots to trade = Equity * Risk% / (Stop Loss in Pips * Pip Value) / 100

Example

As it turns out, you will be able to trade $500 * 0.02 / (50 * $0.1) = $10/$5 = 2 micro lots. The outcome is in micro lots because the pip value used in the calculation was for a micro lot.

Your next trade may only have a 20 pip stop. In this case, your position size will be $10/(20x$1) = $10/$20 = 0.5 mini lots, or 5 micro lots.

If you use this method, your position sizes will increase proportionally to the increase in your account (the opposite will happen if your equity decreases) and will be adjusted for the situation on the charts. As with the simple equity percentage technique, however, this option may also leave little room for maneuver if your account is small. In addition, this method won’t suit you if your trading strategy doesn’t involve knowing the exit levels in advance.

Conclusion

So, what is our ultimate recommendation for choosing a position size? It’s actually that you should pick the option you feel most comfortable with. As you can see, all techniques have their advantages and drawbacks, so the method that works well for one trader may not suit another. Much will depend on your trading strategy: does it imply big profit but the risk of big drawdowns as well or does it offer multiple opportunities of smaller profit? That will matter for your decision.

Although all these calculations related to position sizing may seem unpleasant, it’s in your best interest to get to the bottom of them. Knowing how to choose the right position size will make you a more disciplined trader and provide you with sound risk management. This is the way to maximizing your profit and minimizing your loss!

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15- Leverage and margin

“Leverage” and “margin” are key definitions every trader should know. 

Leverage

Leverage allows you to trade with more money than you have on your account. How much more? Different brokers offer different leverage sizes. You can check the leverage provided by FBS in the “Trading” section of the website.

For example, if you have a leverage of 1:100, you will need to provide only 1% of the desired trade size and the rest 99% will be added by the broker to make your trade work. If you choose leverage of 1:50, you will need to provide 2% of the trade size (1/50 = 0.02). 

Why do brokers give traders leverage? Notice that the sizes of lots on Forex are quite big. The minimum position size in 0.01 lot. For EUR/USD currency pair that accounts for 1,000 euro. Not everyone will want to trade with such amounts of money, especially at the beginning. As a result, brokers provide traders with the opportunity to invest only a small part of the money to finance such a trade. 

Example. You want to trade 1 lot in USD/CAD. 

Situation 1. You provide $100,000 (1 standard lot) and make your trade. You don’t borrow money from the broker. 

Situation 2. You can spare only $100. In this case, you will need a 1:1000 leverage. With this leverage, your broker will provide the remaining $99,900 to help you open the trade.   

You can choose the size of leverage you would like to use. The bigger the leverage, the more profit you will get from each pip the price moves in your favor. As a result, skilled traders may use bigger leverages in order to make profits faster and/or in larger quantities. Think of a leverage as of a springboard that will allow you to make a bigger jump and get closer to victory. 

At the same time, you should always be aware that your risks also increase with leverage. If you opened a buy trade but the price is going down, each pip the price moves against you will bring you a bigger loss the bigger the leverage you are using. As a result, you should be careful and choose a reasonable leverage size. The most common leverage among Forex traders is 1:100. 

Margin

You may be wondering how brokers survive if they allow traders to borrow so much money from them. The answer is that brokers are protected because of the margin. Margin is an amount of money you need to have on your account to open and maintain a leveraged trade. 

When we explained leverage, we showed you the situation where to control $100,000 with $100 you need 1:1000 leverage. In this example, $100 is what is called “margin”. You can see that the margin size depends on your desired trade size (i.e. how many lots you want to trade) and on the leverage you have chosen (you can specify the leverage for your account in your personal area with FBS). All in all, the bigger the leverage you use, the smaller the margin you will need to make a trade.

In your terminal “Trade” window you can see columns “Balance”, “Equity”, “Margin”, and “Free margin”. So, the margin is the amount of money you have already used: this sum finances your current open trades. The amount of money you can still use for new trades is reflected in the “Free margin” area. Your free margin will always be equal to “Equity” less “Margin”. 

Brokers usually define the “margin call” level. This level represents a certain percentage of margin. If you have a losing trade and your equity falls to that level, you will get a warning from the broker that you need to close your trade or deposit more money to meet the minimum margin requirement. The trading server may also make a decision to close the trade. 

There’s also a level called “stop out”. It comes in sight if you keep losing money in an unsuccessful trade. If your losses pull your equity to that level, then the broker will be entitled to close your trading position without any warnings.

At FBS, a margin call is at 40% and lower. It means that you’ll get a margin call if your account equity drops to 40% of the margin and lower (in our example, 40% of $100 is $40). A stop out equals to 20% at FBS, so your trade will be automatically closed if your equity drops to $20 (20% of the margin and lower). 

Margin is needed for your broker’s security in case the market goes against your position. It’s in your interest as a trader to avoid margin calls. If you are careful and abide by the rules of risk management, you will be able to do that and trade with profit.

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14- How much money do I need for Forex trading?

If you want to become a Forex trader and are wondering how much money you should spend on trading, you have come to the right place. In this article, we explain what is the minimal amount of money you will require to trade currencies.

To begin with, remember that there are demo accounts that allow you to practice trading without investing a single dollar. The size of a demo account with FBS can be up to $1 million. The demo account will allow you to practice opening orders and setting position sizes.

If you are ready to trade using the real account and make real money, you should know that the amount of money you need to start trading depends on the account type you choose.

For example, to trade on the micro account you will need to deposit at least $5. You will be able to open orders the volume of which starts from 0.01 lots and use decent leverage. If you plan to open many trades, consider a standard account with a 0.5-pip floating spread. This type of account requires a minimal investment of $100. Notice that you can open one account of each type. In order to be able to open up to 10 accounts of any type, you need to verify your personal area, change confirmation method from email to SMS, and make sure that the total deposit to all accounts in your personal area is $100 or more.

Your deposit determines your trade size

The minimum trade size with FBS is 0.01 lots. A lot is a standard contract size in the currency market. It’s equal to 100,000 units of a base currency, so 0.01 lots account for 1,000 units of the base currency. If you buy 0.01 lots of EUR/USD and your leverage is 1:1000, you will need $1 as a margin for the trade. If you deposited $5 on the micro account, you deposit will cover this margin and you will be able to open another 4 trades of this size. Each pip of price movement will either bring you or cost you $0.1.

Let’s consider some good options for a beginner trader. The examples we bring here are safe and sound from the point of risk management.  

Deposit = $100

The amount of risk for a single trade should be below 5%, no matter how big your deposit is. Let’s go with a 3% risk ($3). If you trade 0.01 lots, you can have a Stop Loss of up to 30 pips — this is more than enough for an intraday position. The recommended risk/reward ratio is ⅓, so the potential profit for this trade will be 90 pips ($9).

Deposit = $500

What if your deposit is $500? With 3% risk ($15), your trade size can be 0.15 lots. In this case, each pip of profit/loss will account for $1.5. With a bigger position size, you’ll be able to earn money faster! There will be 10 points for a Stop Loss. If you need a wider Stop, you can trade 0.1 lot: this will make each pip cost $1. Stop Loss will be 15 points. With 5% risk ($25), you can allow a 25-pip SL. The profit in this case (if your Take Profit is 3 times bigger) will be $75.

Deposit = $1000

If your deposit is $1000, you, of course, will be capable to open even bigger trades. The risk of 3% for a trade ($30) and 1:1000 leverage will allow you to trade 0.3 lots. The risk of 10% ($100) will allow you to trade 1 lot. In this case, 30 pips of profit will account for a gain of $300. The optimal risk of $30 a trade will allow you to trade 0.1 lots with the SL of 30 pips. The potential gain will be $90.

Another important thing: remember about Margin Calls and Stop Outs. Margin Call is an allowed margin level of 40% and lower. At this point, the company is entitled but not liable to close all open positions of a client due to the lack of free margin. Stop Out is a minimum allowed level of margin (20% and lower) at which the trading program will start to close client’s open positions one by one in order to prevent further losses that lead to negative balance (below $0).

If you abide by the rules of risk management and don’t put your entire deposit in trading at once, you’ll be safe from Margin Calls and Stop Outs.

Conclusion

As you see, you need at least $5 to start trading. The rest is up to you! Make an estimate of your knowledge and experience and also think about your goals. How much money would you like to earn? How often will you trade? The bigger the deposit, the bigger position sizes, the more you will earn from one trade. All of that should be weighed against the background of risks. 

Please make sure that you spend only your spare money on trading and not the money that covers your basic life needs. Trading offers great opportunities to profit, but it’s risky and losses are possible.

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13- Economic calendar

Fundamental factors are not an abstract concept. Traders face them daily in a form of economic news, published in the economic calendar.

Let’s have a look at the economic calendar. For each date, you can see a list of scheduled economic releases corresponding one of the major Forex currencies. Pay attention to the release time: make sure that you have made adjustments for your time zone. You can see that all events have different impact: the higher this impact is, the stronger move of the market is expected, so you can focus on the most important events.

Most news in the calendar represent economic indicators and have numerical values. The previous reading is available in advance. The forecast is the median forecast of 20-240 economists surveyed by big agencies like Bloomberg, Reuters, etc. The actual reading is the reading published by the official source (the nation’s statistics agency or an analytical center).

For most indicators, if the actual reading is higher than the forecast one, it’s positive for the currency in question. Unemployment indicators are the exception: for them the lower the reading, the better for the currency. 

How to use Calendar

By the way, there are different ways to use the economic calendar. Some market players trade “the news". It means that they open positions in accordance with their expectations for a change in economic indicators (for example, eurozone GDP is expected to improve – we buy the euro). Others, on the contrary, avoid the news as trading them is associated with risks of too rapid price movements. Such traders prefer to wait until the market “digests” the news and enter the already shaped trend.

No matter what strategy you choose, we strongly recommend you follow the news in order to be aware of the market moving impulses. Some data releases increase volatility and cause sudden moves on the market. The best example is the US nonfarm payrolls (NFP). The release of this indicator may lead to the unexpected closure of your position under a stop-loss order.

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12- Swap and rollover

There’s a difference between a trade that lasts several hours and a trade you keep open overnight. This difference is a swap.

A swap is an interest fee that is either paid or charged to you at the end of each trading day if you keep your trade open overnight. The procedure of moving open positions from one trading day to another is called rollover. If a trader extends his position beyond one day, he/she will be dealing with a cost or gain, depending on prevailing interest rates.

Let’s study an example.Imagine you bought EUR/USD. Your goal wasn’t to exchange money, you wanted to benefit from a speculative trade. In other words, you don’t need a specific amount of actual currency delivered to you, you only want the exchange rate to change in the direction of your bet because this will bring you profit. As a result, your order simply gets transferred to another day without the delivery of a real currency.

How are swaps calculated?

When you buy EUR/USD, ipso facto buy EUR and sell USD. When you sell USD you don’t own it, you borrow and pay interest on this credit if you keep a position open overnight.

If the interest rate for the euro is 0.5% and the interest rate for the US dollar is 2%, after a 0.5% — 2% = -1.5%.

You will have to pay the amount of the swap during the rollover.  

In other words, your position will earn the interest rate of the currency that you have bought, and you will owe the interest rate of the currency that you sold. The difference in interest rates is what is called a swap.

When you sell EUR/USD, you buy USD and sell EUR. In case of rollover, there will be a positive swap of 1.5% (2% — 0.5% =1.5%).

Most brokers perform the rollover automatically by closing open positions at the end of the day, while simultaneously opening an identical position for the following business day. During this rollover, a swap is calculated. Brokers can also add their own charges to swaps.

The examples above show the basic logic of swap calculations. In reality, things are more precise as the interest rates are divided by 365 (to get an interest rate for 1 day) and there are other parameters in the swap’s formula like your account currency, volume, and price of a trade, as well as broker’s commission.

3-day swap

There’s one exception is how much you pay for rollover. Swap is 3 times bigger than usual if you keep your position overnight from Wednesday to Thursday. It happens because of the impact of the futures market. A swap involves pushing back the value date on the underlying futures contract. If a position was opened on Wednesday, the value date will be Friday. If a position is kept open overnight from Wednesday to Thursday, the value date will be moved forward to Monday, i.e. by 3 days, because there’s no trading during the weekend. As a result, the interest is charged for 3 days instead of just one.

Where to check swap sizes?

You can look up swaps long and short at your broker’s website. The specification of currency pairs usually represents swap as the number of base currency units for each currency pair on a 1-lot position.

It’s also possible to check swaps in Metatrader. The trading terminal automatically calculates and reports all swaps for you. You will be able to see swaps on your open position (if you keep it open for longer than 1 day) when you open a “Terminal” window and click on the “Trade” tab. The swap will influence the value of your profit.

You can also right click on the symbol of a currency pair in the “Market watch” window and choose to see “Specification”. A window with information about this trading instrument will pop up and it will contain swaps among other figures.

Should you take swaps into account?

If you trade only intraday without rollovers, swaps aren’t your concern at all. Even if you keep a trade open for several days (up to 2 weeks) and trade one of Forex majors, your gain/loss from swaps will likely be small compared to the outcome of your trade (your profit or loss). As a result, many traders do not pay attention to swaps.  

Swaps will become important if you hold an open position for longer than 2 weeks and if you trade exotic currencies that may have high interest rates.

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11- Calculating profits

If you entered EUR/USD long at 1.0500 and prices moved higher to 1.0550, it means that you made 50 pips. Congratulations! You’ve earned some money. OK, you might say, but how much? Good question! Let us calculate your profits.

There is a simple formula for this:

1 pip in the decimal form / the current exchange rate of the quote currency to the US Dollar = value per pip.

In our case:

0.0001/ 1 = 0.0001 (rounded up). It means that you will get this sum for every pip of your profitable trade.

As you can see is not a large sum of money. Well, it’s because it is the value of a pip per unit, but traders operate with a bigger number of units — so-called lots.

Calculate the profit using the FBS calculator

What is a lot?

A lot is an order of a certain number of units. Historically, spot Forex trading was only available in specific amounts of base currency called lots. A standard size of a lot equals to 100,000 units of a base currency. Later on, when Forex market opened for traders with smaller capital, a mini and even a micro lot became available.

Calculating 1 pip value for different currency pairs

You may see that the smallest lot is a micro lot (1,000 units of a base currency, it is often referred to as 1K). You can trade 1 000, 2 000, 3 000 or 124 000 units so long as it can be multiplied by 1K. Each 1K is referred to as a lot.

So, if you as in the last example open a long trade with one standard lot on EUR/USD, you will be buying 100,000 units. In this case, your profit will be not 0.00009478 USD for 1 pip the price goes in your favor, but 0.00009478 USD *(multiplied) 100,000 which is approximately 9.4787 USD. You may also open trade with mini (10,000), or even micro (1,000) lots. In this case, your profits will be something like 0.94786 USD and 0.09478 USD per 1 pip accordingly.

You should remember that the US Dollar is a quote currency in many pairs (EUR/USD, GBP/USD etc.). It means that the exchange rate of the quote currency to USD equals to 1.

• For such pairs one pip will always cost $10 when we trade a 

  100 000 — unit contract (1 standard lot):100 000 * 0.0001 / 1 = $10 (pip value for EUR/USD)

• For the pairs where the US Dollar is a base currency (USD/CHF, USD/CAD), pip value depends on the exchange rate:

  100 000 * 0.0001 / 1.0195 = $9.8 (pip value for USD/CHF)

• For the pairs that include the Japanese yen the pip value is calculated as follows:

  100 000 * 0.01 / 120.65 = $8,28 (pip value for USD/JPY)

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10- What are pips and lots?

Lot

A lot is a number of currency units. A standard lot equal to 100,000 units of a base currency/your account currency. It means that if you want to trade EUR/USD, you will need $100,000. There are two other well-known lot sizes. They are a mini lot (equal to 10,000) and a micro lot (equal to 1,000 units).

To open a trade, you will need to decide how much money to put into it. The term ‘lot’ is closely linked to such notions as ‘leverage’ and ‘pip’. Let’s get deeper into this topic.

Leverage

A great benefit of trading at the Forex market is leverage. As we already said, a standard lot is $100,000, but it doesn’t mean that you have to invest this huge amount of money by yourself. Your broker can help you. The standard leverage is 1:100. It means that if you want to trade one standard lot of the pair, you have to deposit just $1,000. Your broker will invest the remaining $99,000.

There are other sizes of the leverage depending on a broker. You can check the leverages provided by FBS: FBS Leverage.

Pip

Reading analytic articles or news you definitely saw such phrase “the pair rose/declined by … pips”. What is the pip and how does it affect the amount of money you earned?

A pip means “Percentage in Point”. It represents the smallest change a currency pair can make. Usually, a pair is counted in four decimal points, for example, a quote of GBP/USD is given like this: 1.3463. However, there are some pairs that have 2 decimal points. For example, the US dollar/Japanese yen is quoted like 109.70. A pip is represented by the last decimal of a price/quotation.

If EUR/USD changed from 1.0800 to 1.0805, this would be a change of 5 pips. If USD/JPY changed from 120.00 to 120.13, this would be a change of 13 pips.

Note that some Forex brokers also count the 5th and the 3rd decimal places respectively. They are called “pipettes” and make the spread calculation more flexible.

One Pip

Let’s learn how to count a value of one pip.

We will use the USD/JPY pair as an example. The exchange rate is 110.80.

(0.01 (a pip)/110.80(an exchange rate) X 100,000 (a standard lot) = $9,03 per pip

Let’s count a pair where the USD is not a base currency. For example, EUR/USD. The exchange rate is 1.15.

(0.0001/1) X 100,000 = $10 per pip

Pip, Lot and Leverage all together

You have learned what leverage, lot, and pip are. Now it’s time to use your knowledge.

Imagine you trade the EUR/USD pair with 100,000 lot size. You deposited $1,000. Your leverage is 1:100. You made a buy trade at 1.15, the pair went up and you closed your position at 1.1550. It means you earned 50 pips.

Above we have calculated that for EUR/USD 1 pip = $10.

You earned 50 pips, so it means that your profit would be $500.

However, you should remember that the amount of your profit will depend on a lot size, a number of lots you trade, a currency pair and your account currency.

Imagine you traded without a leverage. You deposited $1,000. 0.0001 X 1,000 = 0.1 per pip

As a result, you would earn just $5.

Now you know how leverage, lot, and pip are linked. And you even can calculate your profit. It’s time to practice your knowledge! OPEN YOUR ACCOUNT

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9- Transaction, profit, loss. Types of orders

The decision to buy or sell the currency pair depends on your expectations of the future price. If you think that EUR/USD will rise, you buy the pair or, in other words, open a long position on this pair. If you think that the EUR/USD will fall, you sell the pair or, as traders say, open a short position on this pair. As some time passes and the price of EUR/USD changes, you close the position and get the profit if the price changed in line with your expectations. If the price moved in the opposite way, you have a loss on this transaction.

To perform these operations, you need to place orders – give special commands to your broker in the trading terminal. There are several different types of orders, the main are market orders, pending orders, take profit orders and stop loss orders. Let’s see what are their functions.

Market orders – buy and sell – are designed to open positions at the current market price. The position will be opened immediately after you place such order. Pending orders, on the other hand, allow you to choose entry levels in advance. In this case, the trade will automatically open once the price level that you have chosen is reached, and you won’t need to be in front of the monitor when it happens.

If you think that the price of the currency pair will rise and then reverse to the downside, place Sell Limit above the current price. If you expect the currency pair to decline and then reverse to the upside, place Buy Limit below the current price. If you think that selling will intensify once the price breaks a certain level on the downside, place Sell Stop below the current price. If you expect that buying will intensify once the price breaks a certain level on the upside, place Buy Stop above the current price.

In order to close profitable positions, use an order type called Take Profit. In order to close unprofitable position use Stop Loss order. For example, you enter a stop order 50 pips away from your entry point. As soon as the market moved 50 pips against you, your stop order would automatically close you out of that trade protecting you from losing more than 50 pips.

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8- Bid and Ask price. Spread

How much will it cost you to trade on Forex? The most common way for a broker to ask a trader to pay a fee for the opportunity to trade on the currency market is spread. Here we will explain how spreads work.

A spread is a conventional concept for financial markets. It simply represents the price difference between the price at which a trader may purchase or sell an underlying asset.

You have definitely experienced spread already when you came to a bank or an exchange office to get foreign currency. The bank always shows two quotes of currency – the one at which it agrees to buy it from you and the one at which it is ready to sell it to you. The spread between these two prices forms the bank’s revenue from the foreign exchange operations it performs for you.

Bid-Ask spread

There are 2 types of currency prices at Forex are Bid and Ask.

The price we pay to buy the pair is called Ask. It is always slightly above the market price.

The price, at which we sell the pair on Forex, is called Bid. It is always slightly below the market price.

The price we see on the chart is always a Bid price. Ask price is always higher than the Bid price by a few pips. Spread is the difference between these two prices. In other words, it is a commission you pay to your broker for every transaction.

SPREAD = ASK – BID

For example, the EUR/USD Bid/Ask currency rates are 1.1250/1.1251. You will buy the pair at the higher Ask price of 1.1251 and sell it at the lower Bid price of 1.1250. This represents a spread of 1 pip.

When you click the “New Order” button, a window will appear where you will be able to set the details of your trade. The window will also show the current Bid and Ask prices.

Types of spread

The types of spread depend on the policy of the broker. A spread can be fixed or floating.

Fixed spreads

Fixed spreads remain the same no matter what market conditions are at any given time. This way you know for certain in advance how much you will pay for a trade. Another good thing is that the broker won’t be able to widen the spread even if the market conditions change.

Floating spreads

Floating or variable spreads, on the contrary, are constantly changing. They will widen or tighten based on the supply and demand of currencies and the overall market volatility. Floating spreads usually increase during the times of important economic releases and during the bank holidays when the amount of liquidity in the market declines. Variable spreads eliminate experiencing requotes and when the market is calm they can be lower than the fixed ones.

How to choose the optimal spread

The optimal type of spread depends on your preferences as a trader. In general, traders with smaller accounts and who trade less frequently will benefit from fixed spread pricing. Traders with larger accounts who trade frequently during peak market hours (when spreads are the tightest) and want fast trade execution will benefit from variable spreads.

Notice that FBS offers trading accounts with fixed and with floating spread, so you can choose the option you like best or have several different accounts.

Calculating costs

Note that the cost of spread on Forex is usually negligible in comparison with the expenses on the stock or options markets. As spread is quoted in pips, a trader can easily calculate the cost of every trade by multiplying the spread in pips by the value of 1 pip. How to calculate profit?.

Spread is an important parameter to consider when you choose a broker. Make sure that you are comfortable with the offered spreads. Notice that you can always test the company’s trading conditions without investing your money by opening a demo account.

The shorter the periods of your trade, the more important is the size of a spread. For instance, if you hold a position open for several minutes and your gain is 10 pips, a 3-pip spread would mean that you pay 30% of your profit for the execution of this trade. If you keep your trade open for a day, there will likely be a bigger change in the price – let’s say you would earn 100 pips. In this case, you will pay only 3% of your profit as a spread.  

The more popular is the currency pair, the smaller is the spread. For example, spread for EUR/USD transaction is usually very small or, as traders say, tight.

How to check spread in MetaTrader

As it was mentioned before, by default MT shows only the Bid price. To add the ask line to your chart, right-click anywhere on your chart and select “Properties”. Then click on the “Common” tab and check the “Show Ask line” box.  Click on the “OK” button and the ask line will appear on smaller timeframes (on higher timeframes the Bid line will cover the Ask line).

If you still cannot see the ask line, then check to see that it is the right color. Go back into your properties and check to see that the grid (i.e. the Bid line) and ask lines are the correct color.

You will also be able to see the live Bid/Ask prices for all available trading instruments if you click “View” and then choose “Market Watch”. If you want to see spread for a particular symbol, right-click anywhere in the Market Watch window and select “Spread”. Note that MT4 quotes spread in MetaTrader4 points. To find the spread’s size in pips, you will need to divide the numbers you see by 10.   

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7- Currency pairs. Base and quote currencies. Majors and crosses

Currencies on the FX market are always traded in pairs. In order to find out the relative value of one currency, you need another currency to compare. When you buy one currency, you automatically sell another currency.

Currency pairs in Forex are given in abbreviations. For instance, EUR/USD stands for the euro versus the US dollar, and USD/JPY stands for the US dollar versus the Japanese yen. If you buy EUR/USD, you are buying euros and selling dollars. If you sell EUR/USD, you are selling euros and buying dollars.

Base and quote curencies

The first currency in the pair is called the base currency, while the second currency is called the quote or counter currency. The price of the base currency is always calculated in units of the quote currency.

For example, the exchange rate for the EUR/USD pair is 1.1000. It means that one euro costs 1.1000 US dollars (one dollar and 10 cents).

Majors, Crosses, Exotic pairs

Currency pairs are usually divided into majors, crosses, and exotic pairs. All the major pairs include the US dollar and are very popular among the traders: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD etc.

Crosses consist of two popular currencies, but do not include the US dollar. The most common crosses include the euro, the yen, and the British pound: EUR/GBP, EUR/JPY, GBP/JPY, EUR/AUD etc.

Exotic currency pairs consist of one major currency and one currency, representing the developing (Brazil, Mexico, India etc.) or small (Sweden, Norway etc.) economy. Exotics are rarely traded on Forex and usually have less attractive trading conditions. 

 

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6- Demo accounts

You don’t have to spend your own money on Forex right away. Most brokers offer practice demo accounts, which will let you test out the Forex market with virtual money using real market data. Using a demo account is a good way to learn how to trade. You will be able to practice by pressing the buttons and grasp everything much faster. Choose Demo upon registering an FBS account. 

Open Demo Account

Advantages and Disadvantages

As we said above, a demo account will let you practice your skills without wasting real money. Even if you make a mistake, you won’t lose anything. It sounds tempting but there are pitfalls.

First of all, demo accounts offer a bigger amount of money than a trader will use during a real trade. A trader can choose any amount of money for practice. However, people often choose more than they will really trade with. They take extra money for mistakes. But on the real (live) account, traders won’t have money for their faults. Moreover, with a big capital, the trader doesn’t understand real losses as they are easier recouped by a big capital than by a small one.

Secondly, another important disadvantage of the demo account is the lack of real emotions. It can be described by psychology. When you have nothing to lose, you do not experience fear. Fear influences trader’s behavior and not many traders can control their emotions. As a result, it doesn’t make much sense to practice your skills when you do not know how you will behave in a stressful situation.

How to get a benefit from a demo account?

However, if you follow several rules, the demo account can be a really useful tool for practice.

1. Choose the same capital as the one you will have on the real account.
2. Try to imagine that the money you have on the demo account is real and profits and losses are real too.
3. Remember that if you failed to gain profit on a demo account, you will not be able to do it on the real one, so try to grasp the key elements of trading while you use the demo account.

When should use the demo account?

Furthermore, there are situations when you definitely should use the demo account. 

1. If you have no idea how to trade on a trading platform. A demo account will help you learn its features and avoid accidental trades.
2. If you want to start using a new trading strategy and want to see whether it works for you. You can use demo account for backtesting of this strategy: you apply this strategy to the chart and see whether it could have led to profitable trades in the past. After that, you may try the strategy in real time. This, of course, won’t give you 100% guarantee that the strategy is good, but it’s better than nothing.
3. If you decided to use an automated trading program, you can test it on the demo account. Trading program is a robot/expert advisor that is not affected by emotions. It does not matter whether you implement it on demo or real accounts.
4. If you came to the Forex market just to check your skills and play on the exchange rates. When you do not take trading seriously, it can lead to the great losses on the real account. If you see it as a game, play it on the demo one.

Making a conclusion, we can say that demo account is a good option for training. You can test your strategies without losing money if they are unprofitable. But you should remember about the weaknesses of demo trading.

Pay attention to the fact that the minimum real deposit at FBS starts from just $1. This means that you can start trading with small amounts of money and thus limit your risks, while still having a chance to reap profits on the live account!   

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Beginner: 5- How to trade?

To 'trade Forex' means to buy or sell different currency pairs.

For example, the current price of EUR/USD is 1.1000. If you expect the euro to appreciate against US dollar, you buy EUR/USD. This is a common Forex transaction. To perform it, you need to open a trading program (MetaTrader 4 or MetaTrader 5), click on a “new order” and then choose 'buy'.

As some time passes and the price of EUR/USD rises, you close the position and get the profit. The amount of profit depends on how much the rate of this currency pair has increased as well as on the size of your position.

If your assumption was wrong and EUR/USD declined after you bought it, you will have a loss. Same as with profit, the size of your loss will depend on how much the rate of this currency pair has fallen during this time and the size of your position.

Traders who expect the prices to rise are called ‘bulls’, while those who expect a decline are referred to as ‘bears’. A buy trade is also known as a ‘long position’, while sell trade is also called a ‘short’ position.  

Currency pairs tend to move in trends, i.e. to rise or fall for significant periods of time. “A trend is your friend” is a common saying among traders. If you see a series of higher highs, it’s an uptrend and you should focus on buying. If you see a sequence of lower lows and lower highs, it’s a downtrend and it’s necessary to consider selling. The idea of trend trading is to open positions at the start of the trend and get a big profit as it progresses.

It’s sensible to buy at a lower price and sell at a higher price. Notice though that one currency is always strengthening against another. The same is also true: one currency is always weakening against another. As a result, you have an equal opportunity to buy or sell to enter the Forex market. All you need to do is to analyze the chart and the economic potential of the currencies that form a pair and make a forecast about which direction it will move next.

The currency pair rates are volatile and constantly changing. Whichever movements were on the chart in the past, don’t worry that you’ve missed your trade. Right now is your chance to make money on the Forex market!

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Beginner: 4- What technical tools do I need for trading?

All you need to trade currencies is internet access. Trading platforms for FX are called MetaTrader 4 and 5 (MT4 and MT5). You can be easily downloaded from here. FBS offers such software for different operating systems, including the ones for mobile devices. You can also watch a short video instruction on how to download and login to MetaTrader.

A trading platform is the workplace of a trader. You will use it to view and analyze the chats of financial instruments and make your trades. Below you can see the example of the terminal window.

MT4 vs. MT5

One of the frequently asked questions is what to choose – MetaTrader 4 or MetaTrader 5?

A common misconception is that MT5 is an upgrade of MT4. This is not really true. MT4 is geared for Forex trading and also contains CFDs, whereas MT5 also provides traders with access to stocks. At the same time, it can be said that MetaTrader 5 offers a wider range of features. Let’s make a comparison.

• Timeframes

MT5 offers a greater number of timeframes. For example, there are 11 different types of minute charts and 7 hourly timeframes. All in all, 9 timeframes are available in MT4 versus 21 timeframes in MT5. If you are keen on analyzing and trading multiple timeframes, consider MT5.

• Pending orders

MT4 has 4 types of pending orders: Buy Limit, Buy Stop, Sell Limit and Sell Stop. In MT5, there 2 additional orders: buy stop-limit and sell stop-limit.

• Technical analysis

MetaTrader 4 has 30 built-in indicators, over 2 000 free custom indicators and 700 paid ones, as well as 24 analytical objects. MT5 offers 38 technical indicators and 44 graphic objects, which are available for a comprehensive market analysis. It’s also possible to download additional indicators. All in all, both programs have a big variety of analytical tools.

• Economic calendar

Unlike MT4, MT5 has a built-in economic calendar. To access it click “View” and choose “Toolbox”.

Hedging, i.e. the ability to open multiple positions (buy and sell) at the same time for the same symbol, is allowed is both terminals. Both versions of the program allow traders to use automated, i.e. to develop, test and apply Expert Advisors (trading robots) and technical indicators.

To make a conclusion, MetaTrader 4 is simpler to use and is the best choice for beginners who want to focus on the Forex market. It has become a standard for the industry and many traders like its interface. MetaTrader 5 can be the best choice for those who require in-depth analysis and a wider range of trading instruments.

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Beginner: 3- When is Forex market open?

FX market is open 24 hours a day, 5 days a week. There are trading sessions which correspond to the time during which stock markets are open in a particular region of the world. Usually, trade volume is higher at the intersection of the sessions. FX day always begins in Australia and New Zealand and then spreads to Asia. After that it’s the turn of Europe and, finally, the United States and Canada join in.

You can trade anytime you wish during the working week. You can open your currency position for a couple of hours or even less (intraday trading) or for a couple of days (long-term trading) – just as you see fit.  

Approximate time of trading sessions (GMT)

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Beginner: 2- The advantages of Forex market

Why become of Forex trader? There are many reasons to try out Forex trading. Some of them are listed below.

• You can get extremely big returns in comparison with your initial deposit.
• You don’t need a large amount of money. In fact, you can start with only 1 USD.
• You get a vast knowledge and experience in finance.
• You have your own business and depend only on yourself.
• You are free to manage your time as you wish. 

How much money can one make trading Forex?

How much money can you really make trading Forex? There are a lot of websites that claim to double or triple their money every month. However, in practice professional traders return 20-80% a month, so a return of 20-30% is both a realistic and a reasonable expectation. Remember that currency trading is like any investment vehicle, and having realistic expectations for what you can make is going to set you up to succeed more than thinking that you can get rich quickly with only a $50 investment.

What are the risks?

Please do remember that Forex trading is very risky. Forex should be traded with only risk capital. In other words, trade with money you can afford to lose.

At the same time, there is no need to be afraid of the risk. As the trader, you have to take a reasonable risk, which is exceeded by potential reward, and make efforts to decrease risk. You will find the information on risk management further. Watch What is Forex risk management?

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Beginner: 1- What is Forex?

Forex, FX – short for ‘foreign exchange’ – is trading currencies of different countries against each other. Forex is one of the largest global financial markets for trading various currencies. It assists international trade and investments via foreign exchange transactions. In 2016 daily FX volume accounted for $5.1 trillion, according to data from the Bank of International Settlements (BIS).

There are many different players in the FX market. Some trade to make profits, others trade to hedge their risks and others simply need foreign currency to pay for goods and services. The main participants of trading are commercial banks, that’s why currency quotes are set at the interbank market. Apart from large commercial and central banks and multinational companies, there are also many risk-seeking investors who are always ready to engage in different sorts of speculations. Among them are typical retail traders – individuals, who trade on the daily/weekly basis to snatch lots of money. Many of them scrutinize economic and political news, statistical releases and public engagement of influential persons to decipher the future movement of currency’s prices. Others rely on technical indicators without paying any heed to what is happening in the world of finances. You as well are able to become a Forex and join this class of currency entrepreneurs.

Forex market is decentralized. In other words, there is no physical location where investors go to trade currencies. Forex traders use the internet to check the quotes of various currency pairs from different dealers. Financial centers around the world – London, New York, Tokyo, Hong Kong and Singapore – function as anchors of trading between a wide range of different types of buyers and sellers. To obtain access to interbank currency market you will need to turn to a Forex broker. 

FX trading is typically done through brokers. Brokers are companies providing individuals like you with access to the interbank market where all the trading takes place. In other words, a broker gives you a special software program, where you can see live currency quotes and are able to place orders to buy/sell currencies with just a few clicks. When you decide to stop your trade, the broker closes the position on the interbank currency market and credits your account with the gain or loss. It will take you only a couple of minutes to open an account with the Forex broker of your choice and begin your trading career. As a reward for the services, a trader pays to his broker spread or commission.

When choosing a broker, pay attention to the company’s goodwill, age and regulation. FBS is providing high-quality services to its clients since 2009 and is widely recognized as one of the market leaders. Its worldwide success doesn’t prevent the company from being extremely customer-driven and meeting the needs of every single trader. FBS support is always ready to help you and is available 24/7. In addition, it’s important which trading conditions a broker offers. In particular, compare the execution speed, spreads, swaps and commission. FBS can boast split-second execution, spreads from 0 pips, 100% deposit bonus for trading, free deposit insurance and many other benefits for traders. We do aim to give you the best of Forex!

This tutorial is created to acquaint you with Forex basics and explain you in simple terms how to trade currencies. This will be your first step in becoming a successful Forex trader. Please check our next courses to further develop your trading skills.

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Forex Trading: A Beginner's Guide

Forex is a portmanteau of foreign currency and exchange. Foreign exchange is the process of changing one currency into another currency for a variety of reasons, usually for commerce, trading, or tourism. According to a recent triennial report from the Bank for International Settlements (a global bank for national central banks), the average was more than $5.1 trillion in daily forex trading volume.1

Key Takeaways

• The foreign exchange (also known as FX or forex) market is a global marketplace for exchanging national currencies against one another.
• Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the largest and most liquid asset markets in the world.
• Currencies trade against each other as exchange rate pairs. For example, EUR/USD.
• Forex markets exist as spot (cash) markets as well as derivatives markets offering forwards, futures, options, and currency swaps.
• Market participants use forex to hedge against international currency and interest rate risk, to speculate on geopolitical events, and to diversify portfolios, among several other reasons.

What Is the Forex Market?

The foreign exchange market is where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from France, either you or the company that you buy the cheese from has to pay the French for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A French tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.

One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney—across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.

A Brief History of Forex

Unlike stock markets, which can trace their roots back centuries, the forex market as we understand it today is a truly new market. Of course, in its most basic sense—that of people converting one currency to another for financial advantage—forex has been around since nations began minting currencies. But the modern forex markets are a modern invention. After the accord at Bretton Woods in 1971, more major currencies were allowed to float freely against one another. The values of individual currencies vary, which has given rise to the need for foreign exchange services and trading.

Commercial and investment banks conduct most of the trading in the forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors.

Spot Market and the Forwards & Futures Markets 

There are actually three ways that institutions, corporations and individuals trade forex: the spot market, the forwards market, and the futures market. Forex trading in the spot market has always been the largest market because it is the "underlying" real asset that the forwards and futures markets are based on. In the past, the futures market was the most popular venue for traders because it was available to individual investors for a longer period of time. However, with the advent of electronic trading and numerous forex brokers, the spot market has witnessed a huge surge in activity and now surpasses the futures market as the preferred trading market for individual investors and speculators. When people refer to the forex market, they usually are referring to the spot market. The forwards and futures markets tend to be more popular with companies that need to hedge their foreign exchange risks out to a specific date in the future.

More specifically, the spot market is where currencies are bought and sold according to the current price. That price, determined by supply and demand, is a reflection of many things, including current interest rates, economic performance, sentiment towards ongoing political situations (both locally and internationally), as well as the perception of the future performance of one currency against another. When a deal is finalized, this is known as a "spot deal." It is a bilateral transaction by which one party delivers an agreed-upon currency amount to the counter party and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present (rather than the future), these trades actually take two days for settlement.

Unlike the spot market, the forwards and futures markets do not trade actual currencies. Instead they deal in contracts that represent claims to a certain currency type, a specific price per unit and a future date for settlement.

In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.

In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange. In the U.S., the National Futures Association regulates the futures market. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterpart to the trader, providing clearance and settlement.

Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets in order to hedge against future exchange rate fluctuations, but speculators take part in these markets as well.

Note that you'll often see the terms: FX, forex, foreign-exchange market, and currency market. These terms are synonymous and all refer to the forex market.

Forex for Hedging

Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market. Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed.

To accomplish this, a trader can buy or sell currencies in the forward or swap markets in advance, which locks in an exchange rate. For example, imagine that a company plans to sell U.S.-made blenders in Europe when the exchange rate between the euro and the dollar (EUR/USD) is €1 to $1 at parity.

The blender costs $100 to manufacture, and the U.S. firm plans to sell it for €150—which is competitive with other blenders that were made in Europe. If this plan is successful, the company will make $50 in profit because the EUR/USD exchange rate is even. Unfortunately, the USD begins to rise in value versus the euro until the EUR/USD exchange rate is 0.80, which means it now costs $0.80 to buy €1.00.

The problem the company faces is that while it still costs $100 to make the blender, the company can only sell the product at the competitive price of €150, which when translated back into dollars is only $120 (€150 X 0.80 = $120). A stronger dollar resulted in a much smaller profit than expected.

The blender company could have reduced this risk by shorting the euro and buying the USD when they were at parity. That way, if the dollar rose in value, the profits from the trade would offset the reduced profit from the sale of blenders. If the USD fell in value, the more favorable exchange rate will increase the profit from the sale of blenders, which offsets the losses in the trade.

Hedging of this kind can be done in the currency futures market. The advantage for the trader is that futures contracts are standardized and cleared by a central authority. However, currency futures may be less liquid than the forward markets, which are decentralized and exist within the interbank system throughout the world.

Forex for Speculation

Factors like interest rates, trade flows, tourism, economic strength, and geopolitical risk affect supply and demand for currencies, which creates daily volatility in the forex markets. An opportunity exists to profit from changes that may increase or reduce one currency's value compared to another. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs.

Imagine a trader who expects interest rates to rise in the U.S. compared to Australia while the exchange rate between the two currencies (AUD/USD) is 0.71 (it takes $0.71 USD to buy $1.00 AUD). The trader believes higher interest rates in the U.S. will increase demand for USD, and therefore the AUD/USD exchange rate will fall because it will require fewer, stronger USD to buy an AUD.

Assume that the trader is correct and interest rates rise, which decreases the AUD/USD exchange rate to 0.50. This means that it requires $0.50 USD to buy $1.00 AUD. If the investor had shorted the AUD and went long the USD, he or she would have profited from the change in value.

Currency as an Asset Class

There are two distinct features to currencies as an asset class:

• You can earn the interest rate differential between two currencies.
• You can profit from changes in the exchange rate.

An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate. Prior to the 2008 financial crisis, it was very common to short the Japanese yen (JPY) and buy British pounds (GBP) because the interest rate differential was very large. This strategy is sometimes referred to as a "carry trade."

Why We Can Trade Currencies

Currency trading was very difficult for individual investors prior to the internet. Most currency traders were large multinational corporations, hedge funds or high-net-worth individuals because forex trading required a lot of capital. With help from the internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets, either through the banks themselves or brokers making a secondary market. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.

Forex Trading Risks

Trading currencies can be risky and complex. The interbank market has varying degrees of regulation, and forex instruments are not standardized. In some parts of the world, forex trading is almost completely unregulated.

The interbank market is made up of banks trading with each other around the world. The banks themselves have to determine and accept sovereign risk and credit risk, and they have established internal processes to keep themselves as safe as possible. Regulations like this are industry-imposed for the protection of each participating bank.

Since the market is made by each of the participating banks providing offers and bids for a particular currency, the market pricing mechanism is based on supply and demand. Because there are such large trade flows within the system, it is difficult for rogue traders to influence the price of a currency. This system helps create transparency in the market for investors with access to interbank dealing.

Most small retail traders trade with relatively small and semi-unregulated forex brokers/dealers, which can (and sometimes do) re-quote prices and even trade against their own customers. Depending on where the dealer exists, there may be some government and industry regulation, but those safeguards are inconsistent around the globe. 

Most retail investors should spend time investigating a forex dealer to find out whether it is regulated in the U.S. or the U.K. (dealers in the U.S. and U.K. have more oversight) or in a country with lax rules and oversight. It is also a good idea to find out what kind of account protections are available in case of a market crisis, or if a dealer becomes insolvent.

Pros and Challenges of Trading Forex

Pro: The forex markets are the largest in terms of daily trading volume in the world and therefore offer the most liquidity.2 This makes it easy to enter and exit a position in any of the major currencies within a fraction of a second for a small spread in most market conditions.

Challenge: Banks, brokers, and dealers in the forex markets allow a high amount of leverage, which means that traders can control large positions with relatively little money of their own. Leverage in the range of 100:1 is a high ratio but not uncommon in forex. A trader must understand the use of leverage and the risks that leverage introduces in an account. Extreme amounts of leverage have led to many dealers becoming insolvent unexpectedly.

Pro: The forex market is traded 24 hours a day, five days a week—starting each day in Australia and ending in New York. The major centers are Sydney, Hong Kong, Singapore, Tokyo, Frankfurt, Paris, London, and New York.

Challenge: Trading currencies productively requires an understanding of economic fundamentals and indicators. A currency trader needs to have a big-picture understanding of the economies of the various countries and their inter-connectedness to grasp the fundamentals that drive currency values.

The Bottom Line

For traders—especially those with limited funds—day trading or swing trading in small amounts is easier in the forex market than other markets. For those with longer-term horizons and larger funds, long-term fundamentals-based trading or a carry trade can be profitable. A focus on understanding the macroeconomic fundamentals driving currency values and experience with technical analysis may help new forex traders to become more profitable.

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10 Ways To Avoid Losing Money In Forex

The global forex market boasts over $4 trillion in average daily trading volume, making it the largest financial market in the world. Forex's popularity entices traders of all levels, from greenhorns just learning about the financial markets to well-seasoned professionals. Because it is so easy to trade forex - with round-the-clock sessions, access to significant leverage and relatively low costs - it is also very easy to lose money trading forex. This article will take a look at 10 ways that traders can avoid losing money in the competitive forex market.

1. Do Your Homework – Learn Before You Burn 

Just because forex is easy to get into doesn't mean that due diligence can be avoided. Learning about forex is integral to a trader's success in the forex markets. While the majority of learning comes from live trading and experience, a trader should learn everything possible about the forex markets, including the geopolitical and economic factors that affect a trader's preferred currencies. Homework is an ongoing effort as traders need to be prepared to adapt to changing market conditions, regulations and world events. Part of this research process involves developing a trading plan. 

2. Take the Time to Find a Reputable Broker 

The forex industry has much less oversight than other markets, so it is possible to end up doing business with a less-than-reputable forex broker. Due to concerns about the safety of deposits and the overall integrity of a broker, forex traders should only open an account with a firm that is a member of the National Futures Association (NFA) and that is registered with the U.S. Commodity Futures Trading Commission (CFTC) as a futures commission merchant. Each country outside of the United States has its own regulatory body with which legitimate forex brokers should be registered.

Traders should also research each broker's account offerings, including leverage amounts, commissions and spreads, initial deposits, and account funding and withdrawal policies. A helpful customer service representative should have all this information and be able to answer any questions regarding the firm's services and policies.

3. Use a Practice Account 

Nearly all trading platforms come with a practice account, sometimes called a simulated account or demo account. These accounts allow traders to place hypothetical trades without a funded account. Perhaps the most important benefit of a practice account is that it allows a trader to become adept at order entry techniques.

Few things are as damaging to a trading account (and a trader's confidence) as pushing the wrong button when opening or exiting a position. It is not uncommon, for example, for a new trader to accidentally add to a losing position instead of closing the trade. Multiple errors in order entry can lead to large, unprotected losing trades. Aside from the devastating financial implications, this situation is incredibly stressful. Practice makes perfect: experiment with order entries before placing real money on the line.

4. Keep Charts Clean 

Once a forex trader has opened an account, it may be tempting to take advantage of all the technical analysis tools offered by the trading platform. While many of these indicators are well-suited to the forex markets, it is important to remember to keep analysis techniques to a minimum in order for them to be effective. Using the same types of indicators – such as two volatility indicators or two oscillators, for example – can become redundant and can even give opposing signals. This should be avoided.

Any analysis technique that is not regularly used to enhance trading performance should be removed from the chart. In addition to the tools that are applied to the chart, the overall look of the workspace should be considered. The chosen colors, fonts and types of price bars (line, candle bar, range bar, etc) should create an easy-to-read and interpret chart, allowing the trader to more effectively respond to changing market conditions.

5. Protect Your Trading Account 

While there is much focus on making money in forex trading, it is important to learn how to avoid losing money. Proper money management techniques are an integral part of successful trading. Many veteran traders would agree that one can enter a position at any price and still make money – it's how one gets out of the trade that matters.

Part of this is knowing when to accept your losses and move on. Always using a protective stop loss is an effective way to make sure that losses remain reasonable. Traders can also consider using a maximum daily loss amount beyond which all positions would be closed and no new trades initiated until the next trading session. While traders should have plans to limit losses, it is equally essential to protect profits. Money management techniques, such as utilizing trailing stops, can help preserve winnings while still giving a trade room to grow.

6. Start Small When Going Live 

Once a trader has done his or her homework, spent time with a practice account and has a trading plan in place, it may be time to go live – that is, start trading with real money at stake. No amount of practice trading can exactly simulate real trading, and as such it is vital to start small when going live.

Factors like emotions and slippage cannot be fully understood and accounted for until trading live. Additionally, a trading plan that performed like champ in backtesting results or practice trading could, in reality, fail miserably when applied to a live market. By starting small, a trader can evaluate his or her trading plan and emotions, and gain more practice in executing precise order entries – without risking the entire trading account in the process.

7. Use Reasonable Leverage 

Forex trading is unique in the amount of leverage that is afforded to its participants. One of the reasons forex is so attractive is that traders have the opportunity to make potentially large profits with a very small investment – sometimes as little as $50. Properly used, leverage does provide potential for growth; however, leverage can just as easily amplify losses. A trader can control the amount of leverage used by basing position size on the account balance. For example, if a trader has $10,000 in a forex account, a $100,000 position (one standard lot) would utilize 10:1 leverage. While the trader could open a much larger position if he or she were to maximize leverage, a smaller position will limit risk. 

8. Keep Good Records 

A trading journal is an effective way to learn from both losses and successes in forex trading. Keeping a record of trading activity containing dates, instruments, profits, losses, and, perhaps most importantly, the trader's own performance and emotions can be incredibly beneficial to growing as a successful trader. When periodically reviewed, a trading journal provides important feedback that makes learning possible. Einstein once said that "insanity is doing the same thing over and over and expecting different results." Without a trading journal and good record keeping, traders are likely to continue making the same mistakes, minimizing their chances of become profitable and successful traders.

9. Understand Tax Implications and Treatment 

It is important to understand the tax implications and treatment of forex trading activity in order to be prepared at tax time. Consulting with a qualified accountant or tax specialist can help avoid any surprises at tax time, and can help individuals take advantage of various tax laws, such as the marked-to-market accounting. Since tax laws change regularly, it is prudent to develop a relationship with a trusted and reliable professional that can guide and manage all tax-related matters.

10. Treat Trading As a Business 

It is essential to treat forex trading as a business, and to remember that individual wins and losses don't matter in the short run; it is how the trading business performs over time that is important. As such, traders should try to avoid becoming overly emotional with either wins or losses, and treat each as just another day at the office. As with any business, forex trading incurs expenses, losses, taxes, risk and uncertainty. Also, just as small businesses rarely become successful overnight, neither do most forex traders. Planning, setting realistic goals, staying organized and learning from both successes and failures will help ensure a long, successful career as a forex trader.

The Bottom Line

The worldwide forex market is attractive to many traders because of its low account requirements, round-the-clock trading and access to high amounts of leverage. When approached as a business, forex trading can be profitable and rewarding. In summary, traders can avoid losing money in forex by:

• Being well-prepared
• Having the patience and discipline to study and research
• Applying sound money management techniques
• Approaching trading activity as a business.

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