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Forex Trading
By: Richard Goldie
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 dollars you had), then, after pounds / dollar ratio goes up, you sell
pounds and buy dollars again. At the end of this operation you are going to have
more dollars, 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 dollars (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 EUR/USD is 1.3225/28 and you place a
market order to buy 1 lot of 100,000 Euros at 1.3228, expecting the euro to rise
against the dollar. 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 risk/reward 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 dollar 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.
About the Author:
Richard Goldie is a Forex trader and the author of this article and the owner of
the website: http://www.forex-tradingweb.com/ |
