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 Spread Betting and CFDs, or spot forex trading. They all enable you to go long and short on currency pairs, but they work in slightly different ways.
Spot FX is when you buy and sell currencies — for instance by buying US dollars and selling euros. You open your trade by deciding how much of the base currency you want to buy or sell.
Foreign Exchange (Forex)
Forex derivatives are markets that enable you to speculate on the price movements of forex pairs without buying or selling any currencies. When spread betting, you bet pounds per point of movement in the underlying currency. When trading CFDs, you choose how many contracts you want to buy or sell. 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:. 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 trading?
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.
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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.
Forex Trading
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.
The forex market can behave like a rollercoaster, and it takes a steel gut to cut your losses at the right time and not fall into the trap of holding trades too long. When traders become fearful because they have money in a trade and the market's not moving their way, the professional sticks to her trading method and closes out her trade to limit her losses. The novice, on the other hand, stays in the trade, hoping the market will come back. This emotional response can cause novice traders to lose all of their money very quickly.
The availability of leverage will tempt you to use it, and if it works against you, your emotions will weigh on your decision making, and you will probably lose money. Consider keeping a forex trading journal to keep track of your progress. The forex market works very much like any other market that trades assets such as stocks, bonds or commodities.
The way you choose to trade the forex market will determine whether or not you make a profit. You might feel when searching online that it seems other people can trade forex successfully and you can't.
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It's not true; it's just your self-perception that makes it seem that way. A lot of people trading foreign exchange are struggling, but their pride keeps them from admitting their problems, and you'll find them posting in online forums or on Facebook about how wonderful they are doing when they are struggling just like you. Understanding the forex market and winning at trading forex online is an achievable goal if you get educated and keep your head together while you're learning. Practice on a forex trading demo first, and start small when you start using real money.
Always allow yourself to be wrong and learn how to move on from it when it happens. People fail at forex trading every day because they lack the ability, to be honest with themselves. If you learn to do that, you've solved half of the equation for success in forex trading. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.
Foreign Exchange (Forex) Definition
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