This week we are going to focus on the basic mechanics of Forex! This week we will briefly talk about what you can trade, but most importantly, we will talk about how to execute trades!
What can you trade?
As we already know, Forex is about making money by trading money! Each trade consists of simultaneously buying one currency (base currency) and selling another (quote currency) to profit from the changes to their exchange rate. We will focus on currency pairs in more detail next week, so stay tuned if you want to know what a Loonie or a Kiwi are!
Depending on your broker, you can also trade:
· Indices, such as:
· US30 – representing the value of the 30 largest companies in the US
· NASDAQ100 – representing the value of the 100 largest non-financial companies in the US
· DAX30 – representing the value of the 30 largest companies listed on the Frankfurt Stock Exchange
· FTSE 100 – representing the value of the 100 largest companies listed on the London Stock Exchange
Stocks, Shares & Equities
Commodities, such as:
Gold, Silver, Platinum, etc.
Brent Oil, Natural Gas or Crude Oil
Coffee, Cocoa, Corn, Sugar, etc.
Cattle, Hogs, etc.
Cryptocurrency, such as
Bitcoin, Ethereum, Litecoin, Ripple, etc
As you can see, there are so many options for you to choose from when it comes to trading. We are going to take a look into how to trade now!
To participate in the market, you have to place an order. Placing an order is very straightforward and can be done with just a few clicks of the mouse or even on your mobile.
It’s what you do before placing an order that matters! This includes having a solid trading plan, following a trading strategy, sticking to risk management at all times, and more, but do not worry we will talk about all of these in our future lessons!
In Forex, we have 3 choices. We can buy, sell or stay flat.
When buying or going long, you have entered a position where you bought the base currency (and sold the quote currency at the same time) as you expect it to get stronger and rise in value so you can sell it at a higher price and make a profit in the future. You can add more buy positions at various price levels too. This is referred to as getting longer.
When selling or getting short, you have entered a position where you sold the base currency (and bought the quote currency simultaneously) as you expect it to lose value so you can buy it back at a lower price and make a profit in the future. You can add more sell positions at various price levels too. This is often referred to as getting shorter.
When you have no open positions, you are flat or square. This happens when you have closed off (squared up) all your open position or if you decided to stay out of the market and not to trade. You should never force a trade if there is no valid setup!
Remember, markets are open 24 hours a day, 5 days a week – there will be more opportunities to execute your strategy and place orders!
But what are orders?
Your instructions to enter or close positions are called orders. We will focus on some of the main order types you will use!
Market Order - you decide to buy or sell the instrument at the current price quoted by your broker. As you are entering (or exiting) a trade straight away, the price quoted is the best available one at the time of the execution of your trade. Remember that volatility of the market combined with the execution speed from your broker and the quality of your connection may affect the final price of your trade! You may see that you have lost/gained few pips from your original entry!
Limit Order – you decide to buy or sell the instrument at a specific price in the future. We already covered all 4 types of pending orders in Lesson 4! This type of order will enter a position at a more favourable price automatically. It means that you will not need to be in front of the trading platform to execute it yourself!
· Exiting position orders – as part of your trading strategy, you should have clear and defined risk management for all your activities, enabling you to benefit from the:
· Take Profit (TP) order – you use TP to automatically close the position when the price met your TP level
· Stop-Loss (SL) order – you use SL to automatically close out the position at a loss if the markets went against you. SLs should be used to limit your exposure and protect your capital
· Trailing Stop Loss (TSL)order – you use TSL to allow your winning positions to continue with the momentum and secure more profits before closing out. With the TSL you select a fixed amount of pips from your entry and once in profit, TSL will automatically adjust its value for you.
However, many other order types may be available with various brokers, these include
· If/then orders
· One Cancels the Other (OCO)
· One Triggers the Other (OTO)
· End of Day (EOD)
· Good Til’ Cancelled (GTC)
At the end of the day, it is all about Profit (and Loss)
Profit & Loss (P&L) are simple calculations that enable you to measure the success of your trading strategy. Luckily, these are all done by your broker! You will usually receive daily and monthly statements via email. Moreover, your trading platform will also automatically provide you with the P&L for your open positions at all times. It is important to understand how to calculate P&L manually. We will end this lesson with some fun and simple math exercise!
All you need to know is your lot size and the number of pips you want the price to move to calculate your total exposure and possible profits. The formula is: units traded * pips
In our example, we are looking for a buy order for GBPUSD. We are going to trade with 1 Standard Lot (100,000 units). We are looking at an SL of 20 pips with a TP of 60 pips. Our risk-reward ratio is 1:3 (we are risking $1 to gain $3 and yes, we will talk about risk management in one of our future lessons).
With an Entry Price at 1.2693 we’ve set our TP at 1.2753 (100,000 * 0.006 = $600.00 profit if hit) and SL at 1.2673 (100,000 * 0.002 = ($200.00) loss if hit).
We hope you have enjoyed our lesson and will join us next week, where we will look into currency pairs in greater detail!