Forex trading

So what is is Forex trading you may ask? Forex is the exchange you can buy and sell currencies. For example, you might buy British pounds (by exchanging them to the pounds you had), then, after pounds pound ratio goes up, you sell pounds and buy pounds again. At the end of this operation you are going to have more pounds, then you had at the beginning.

The Forex market has much higher liquidity, then the stock market, as much more money is being exchanged. Forex is spread between banks all over the planet and as a result it means 24 hour trading.

Unlike stocks, Forex trades are performed with high leverage, usually it is 100. It means that by investing 1000 you can control 100,000, and increase potential profits accordingly. Some brokers provide also so called mini-Forex, where the size of minimum deposit equals 100. It makes possible for individuals to enter this market easily.

The name convention. In Forex, the name of a “symbol” is composed of two parts – one for first currency, and another for the second currency. For example, the symbol usdjpy stands for US pounds (usd) to Japanese yen (jpy).

As with stocks, you can apply tools of the technical analysis to Forex charts. Trader’s indexes can be optimized for Forex “symbols”, allowing you to find winning strategy.

Example Forex transaction

Assume you have a trading account of 25,000 and you are trading with a 1% margin requirement. The current quote for EURUSD is 1.322528 and you place a market order to buy 1 lot of 100,000 Euros at 1.3228, expecting the euro to rise against the pound. At the same time you place a stop-loss order at 1.3178 representing a maximum loss of 2% of your account equity if the trade goes against you, 50 pips below your order price, and a limit order at 1.3378, 150 pips above your order price. For this trade, you are risking 50 pips to gain 150 pips, giving you a riskreward ratio of 1 part risk to 3 parts reward. This means that you only need to be right one third of the time to remain profitable.

The notional value of this trade is 132,280 (100,000 * 1.3228). Your required margin deposit is 1% of the total, which is equal to 1322.80 (132,280 * 0.01).

As you expected, the Euro strengthens against the pound and your limit order is reached at 1.3378. The position is closed. Your total profit for this trade is 1500, each pip being worth 10.