To avoid having to tie up all their capital when opening one position, most forex traders use leverage. With leverage, you only have to put up a fraction of your position's full value to open a trade.
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The amount you are required to put up is known as your margin. The first step to opening a forex trade is to decide which currency pair you wish to trade. There are over 80 to choose from. There are three main categories of forex pair: majors , minors or major crosses and exotics. There are two main ways to trade forex: derivatives, such as CFDs, or spot forex trading. They both enable you to go long and short on currency pairs, but in slightly different ways. Spot FX is when you buy and sell currencies — for instance by buying US dollars and selling euros.
What is Forex Trading?
You open your trade by deciding how much of the base currency you want to buy or sell. Forex derivatives are markets that enable you to speculate on the price movements of forex pairs without buying or selling any currencies. In addition to choosing how to trade forex, you can pick a different market for each currency pair. The two main types of forex market are spot and futures. All forex is quoted in terms of one currency versus another.
The base currency is the currency on the left of the currency pair and the quote currency is on the right. Essentially, when trading foreign currencies, you:.
What is Forex?
BUY a currency pair if you believe that the base currency will strengthen against the quote currency, or the quote currency will weaken against the base currency. SELL a currency pair if you believe that the value of the currency pair will decrease — meaning the base currency will weaken in value against the quote currency, or the quote currency will strengthen against the base currency. The spread is the difference between the buy and sell prices of a forex pair. The difference between them is the spread, which covers the cost of the trade.
Risk management is crucial for successful forex trading — and a key element of risk management is the use of orders.
What is Forex? | Plus
There are two main types of order: stop loss orders and take profit orders sometimes called a limit. Both act as instructions to automatically close a position when its price reaches a specific level predetermined by you. A stop loss order is an instruction to close out a trade at a price worse than the current market level and, as the name suggests, is used to help minimise losses.
There are three types of stop loss orders: standard, trailing and guaranteed. A standard stop loss order , once triggered, closes the trade at the best available price. There is a risk therefore that the closing price could be different from the order level if market prices gap.
A guaranteed stop loss however, for which a small premium is charged upon trigger, guarantees to close your trade at the stop loss level you have determined, regardless of any market gapping.
A limit order or take profit is an instruction to close out a trade at a price that is better than the current market level and is used to help lock in price targets. Standard stop losses and limit orders are free to place and can be implemented in the dealing ticket when you first place your trade, and you can also attach orders to existing open positions.
Learn more about risk management here. When you are ready to close your trade, you do the opposite to the opening trade. By closing the trade, your net open profit and loss will be realised and immediately reflected in your account cash balance. To read more about this please visit our help and support section.
One important aspect of trading currencies is learning what affects their prices. Remember, forex pair prices will move based on the relative strengths of both currencies — so keep an eye out for any developments that might move either the base or the quote when trading. Economic data Traders will often flock to currencies backed by strong economies, increasing demand.
Inflation, unemployment numbers, payrolls or other key economic data can often have a major impact on forex prices.
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Central banks Central banks buy and sell large amounts of their own currency, attempting to keep it within a certain level. Both individuals and investors alike trade forex markets. Individuals who trade the forex market tend to constitute a low percentage of volume during daily trades. This is because effective currency trading tends to require a mass of capital to profit.
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Institutions alternatively will trade a market with millions, and possibly billions in capital, depending on the set strategies of such investors. Individual traders can range from an average trader who bases their income off trading, to a rich investor with years in currency trading as a veteran. Institutions who join the FX market are also a variety. Those include banks and central banks, which comprise the majority of volume in FX trading. Those may also include trading companies such as corporations, or investment and hedge fund managers.
Forex Pairs
In addition to trader activity, the economic and political conditions of a Country shape the global forex market. The exceptions to this are the JPY pairs which are quoted to just 2 decimal places. Pip stands for Percentage in Points. Most currency pairs are quoted to 5 decimal places with the change from the 4th decimal place 0.
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