How To Trade Forex?
If you want to learn to trade forex, this is a guide to get you started and hopefully making some money while you're at it.
Forex Brokers
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Forex brokers are intermediaries in forex transactions. They help to connect
you, the individual trader, with the rest of the currency trading world. To open
a forex trading account, you need to find a broker that you can trust and get
started. There are plenty of forex brokers out there, each a bit different.
Take some time to do your research before just picking one.- Account Types
One thing that is cool about forex is that there are different account types. If you are a well capitalized trader, you can trade with a standard forex trading account. If you are a beginning trader, learning how to trade on a shoe string budget, you can open a mini account, or even a micro account. The type of accounts available to you depend on what broker you choose. For beginners, the smaller the better, you can always upgrade account types after you learn a little bit.
- Trading Styles
Trading styles is somewhat of a personal choice. Some traders prefer to trade on news and economic data while others prefer to trade visually. The truth is, it doesn't really matter what your preference is, as long as you honestly measure your own performance and work towards improving it. There are things about both trading styles that work, you just need to learn from your mistakes and not get overly attached to any particular trade that you make.
- Trading Psychology
This has to be one of the toughest parts of trading forex. With the availability of trading on margin, it's easy to get greedy or fearful, depending on how your trading is going. When you win, it can give you overconfidence, and when you lost money, particularly if you lose a lot of money, you can start to see things unclearly and make mistakes, or just give up on trading entirely. Forex trading can turn into a bit of a journey of learning how to deal with yourself. You must keep a clear head, accept your mistakes and learn from them. That is something that is difficult for anyone. In forex trading, you must be able to do it, or you will likely fail and walk away empty handed.
- Risk Management
Next to dealing with trading psychology, risk management is next most important factor. If you don't know how to control your risk, it doesn't matter how you feel about trading, you'll blow your account up. Risk management is all about knowing how much you can afford to risk on a trade, or a group of traders and sticking to it. There are other factors to it, but it really boils down to not risking too much at any one time. This can be achieved, through proper lot sizing, setting stops, or limiting your number of trades.
There will no doubt be times that you want to make trades, but the risk will be too great. Risk management is about not overdoing it and making sure that you never leave yourself with unlimited risk. At any time, you should be able to close all your trading charts and walk away without worrying about what the market will do because you've limited your risk. If that isn't the case for you, you need to re-examine what you are doing.
- Risk Reward Ratio
Forex trading is a wild ride, but it's not about guessing your way through. You have to follow some steps and have (or develop) some sense about what you're doing. Traders tend to come and go because they want to adopt a 'fly by the seat' approach to trading. It simply doesn't work that way, you may survive for a while, but one day you'll wake up with a blown account and no one to blame.
The Steps to Trade（Buy/Sell） Forex
One of the most liquid and widely traded markets in
the world, forex trading enables you to speculate on the future
direction of currencies through buying or selling the exchange rate of one
country’s currency against another, with the aim of making a profit.
To Buy or to Sell?
Buying a currency pair, for
example GBP/USD, simply means that you buy the first currency in the pair (GBP)
while simultaneously selling the second currency in the pair (USD) on
expectations that the cross rate price will rise in value and your profits will
rise in line with any increase in that price.
Conversely, selling a currency
pair simply means that you sell the first currency in the pair (GBP) while
simultaneously buying the second currency in the pair (USD) on expectations
that the price will fall and your profits rise.
Going Long on GBP/USD (Sterling/US dollar)
Please be aware that our fixed
spread on GBP/USD is 1.5 pips from 8am until 6.30pm GMT. For the purposes of
this example, we have used a 2 pip spread.
It is the first Friday of the
month and let’s assume that GBP/USD is currently trading at 1.5686/1.5688.
Traders are concerned about the
employment situation in the US.
They expect the level of actual non-farm payrolls to come in worse than
economist estimates.
You expect that the US dollar
will weaken and the British pound will strengthen against the US dollar, and
decide to buy (go long) £10,000 on GBP/USD at 1.5688.
The trade size is in units of
the first, or base, currency in the pair. For this trade, you choose a leverage
scale of 50:1.
This requires an initial deposit
of (£10,000*1.5688/50) $313.76. Find out more about Leverage.
As you anticipated, the pound
strengthens against the dollar, and when it reaches 1.5750 you decide to cash
in your profits. Our new price is 1.5750/1.5752 and you sell to close at
1.5750.
Result: You bought at
1.5688 and sold at 1.5750, a rise of 62 pips. This gives you a profit of:
(1.5750 – 1.5688) x 10,000 =
$62.
Profit/Loss is calculated (and
denominated) in the second, or counter currency of the pair.
Profit/Loss calculation: The difference between the closing price and opening price x size of
trade.
Alternative scenario:
If however, the actual non-farm payroll data had come in better-than-expected,
the US dollar would have strengthened against the pound.
If GBP/USD would have gone down,
say, to 1.5630 you would lose (1.5688 - 1.5630) x 10,000 = $58.
Profit/Loss Conversion: To help simplify the trading process, City Index automatically
converts trading P&L into the client’s denominated account currency at the
prevailing market rate at the time that the trade is closed.
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