How to trade Forex

How to trade Forex 2018-04-10T09:23:01+00:00

The foreign exchange market, known as the Forex market or FX market is one of the biggest financial markets in the world. If this the first time you are hearing about the Forex market you may be surprised to know that the average daily volume in the FX markets exceeds 5 trillion dollars, a substantial increase from several years ago.

Banks, hedge fund managers, insurance companies, financial brokers and private investors are just some of the names you will find in the foreign exchange market. Approximately 90% of the forex traders are the speculators, private investors that trade from home or an office in attempt to capitalize over the slightest price change known as pips. Forex trading is choosing a currency pair that you expect to change in value and place a trade accordingly.

Unlike with other market,s forex trading is available 24 hours a day. Whether you are from Europe or Asia, trading will always be available for you 24 hours a day from Monday to Friday. Once you begin trading, profits can be booked in anytime, 10 seconds into the trade or after 20 years.

There is no minimum or limit to the amount of time you hold onto a trade in the market as long your invested capital can support the open positions. LTD Accipiter offers a variety of currencies in its trading platform. Euro, US Dollar, Australian Dollar, Canadian Dollar, Japanese Yen, Swiss Franc, South African Rand and Norwegian Krone are just some of the currencies you will find in the Forex market.

Advantages of Forex Trading

  • The FX markets are open 24 hours a day.
  • Exceptional liquidity, over $5 trillion are traded on a daily basis.

Trading forex means buying and selling global currencies, or in other words exchanging one currency for another. Traders buy a certain currency if they believe it will strengthen and sell a currency of their choice if they forecast a weakness in its value. In forex terms, traders who bought a currency are said to go long while traders who sold a currency are said to go short. The actual trading takes place through LTD Accipiter ‘s electronic trading platform, which connects you to the largest banks in the world for deeper liquidity. Each trader will have access to numerous pairs that can be traded 24 hours a day.

Let’s take the most traded pair in the market as an example, Euro-Dollar or EUR/USD: The current rate for EUR/USD is 1.3145. This means 1 Euro is worth 1.3145 US Dollars

When would you buy or sell?

Traders would look to buy EUR/USD if they believe the rate will rise. This may happen as a result of the Euro strengthening against the US Dollar. Likewise, traders would sell EUR/USD if they believe the rate will drop, which means they expect the Euro to devalue against the US Dollar. The profits are calculated in accordance to the amount of pips EUR/USD gained or shed.

Understanding the Pips

Your earnings are determined by the accumulated pips you make on your trades. You will be looking to profit over the smallest unit in the price that constantly fluctuates throughout the trading day. A pip is an abbreviation for ‘Percentage in Point.

One PIP is displayed in the following numerical figure: 0.0001

Let’s take GBP/USD as an example:

Great British Pound (GBP) against the US Dollar (USD)

GBP/USD rose from 1.5462 to 1.5467. The price difference between the currencies is 0.0005 or 5 pips for long. In other words, if GBP/USD rose from 1.5462 to 1.5467 we say the pair gained +5 pips.

GBP/USD dropped from 1.5468 to 1.5464. The price difference is 0.004, or 4 pips for short. To simplify, we say GBP/USD dropped by -4 pips.

GBP/USD rose from 1.5462 to 1.5488. The price difference is 0.0026, or 26 pips for long. We therefore say GBP/USD gained +26 pips.

GBP/USD dropped from 1.5475 to 1.5244. The price difference is 0.0231, or 231 pips for short. That means GBP/USD dropped +231 pips.

GBP/USD rose from 1.5430 to 1.5530. The price difference is 0.100, or +100 pips for long. In other words, GBP/USD gained +-100 pips.

The more pips you accumulate, the greater your earnings will be from the market. There is no limit to the amount of pips you can accumulate, nor is there a minimum amount, it is decided only by the trader. After you buy or sell, remember the rates are constantly moving. At one moment you could be at a loss of 15 pips and ten minutes later you can have a profit of 30 pips if not more.

A trade that is in the market is referred to as an ‘open’ trade or ‘open’ position. When the trader wishes to exit the trade, both manually or using a stop loss and/or take profit order, it is referred to as ‘closing’ the trade or ‘closing’ the position. The market is often driven by economic events that are released almost every day.”

How many pips should I expect to earn?

There are times when you and another trader have both bought or sold the same financial asset, accumulated the same amount of pips but you profited less money. How is that?

The more capital you allocate for the trade, the higher the value of each pip increases. The minimum pip value in LTD Accipiter is just 10 cents. This means that if you have invested the minimal amount in the trade and you are currently profiting 100 pips, the profit in real money would be $10. However, a trader that has invested more capital where each pip is worth $50, accumulating 100 pips means the trade is in a profit of $5,000 ($50 x 100 pips).There are no limits to the amount you can invest in the market. If you allocate all of your invested capital into a single trade the pip’s value can be high but so is the market exposure.

For example: if a trader invests $10,000 and uses the entire investment in a single trade, each pip could be worth more than $140. In other words, if the market moves against the trade by just under 100 pips the invested capital will be soaked in the market. Gaining 100 pips will double the investment of course but the trader must be aware of the risk he is undertaking allocating all of his free capital into one trade.

  • The pip’s value increases in accordance to the amount you invest in the market.
  • You decide how many pips you are expecting to earn.
  • If you over-leverage your trade the profit can be extremely high but so would your market exposure.

What is Take Profit?

Take Profit is an automated order you set so that your particular currency position if it reaches a certain level of profit will be automatically closed. This way you ensure yourself a profit. The downside to the Take Profit is that sometimes you get in on the ground floor of an especially profitable trend that continues long after you’ve exited and you accidentally deprive yourself of an even more profitable trade.

Take Profit orders mean that you are able to take advantage of any profits before the rate falls again and your profit reduces, without constantly monitoring your trades.

Take Profit and Stop Loss Orders are crucial tools in enabling you to professionally manage your trades. Where you set these orders depends on your level of risk, but it is good practice to use them with every trade you make.

Management of positions and your investment is key to successful Forex trading.

What is Stop Loss?

Whether you are trading Forex, Commodities, Indices or Stocks you can always pre-define your market exposure. Say you are trading USD/JPY. In the case of USD/JPY, you can set an automated instruction that will pull you out of the market if the market moves against you.

NOTE: Under abnormal market conditions, CFDs may fluctuate rapidly to reflect unforeseeable events that cannot be controlled either by the Firm or you. As a result your stop loss instructions might not be executed at the declared price(negative slippage might apply) hence a “stop loss” order cannot guarantee to limit losses during abnormal market conditions.

Even if after you bought USD/JPY it suddenly drops +800 pips you can set a stop loss of just 25 pips. Unlike what you may have thought before, trading the market using a stop loss can be a great technique of protecting your investment. Likewise, there is also an automated feature called ‘Take Profit.’ This automated order allows you to set a target for your trade. If you bought USD/JPY at 94.50 for example you can set 95.40 as your ‘Take Profit.’

When the price reaches your take profit, the trade will close automatically and the profit will be booked and added to your balance. These orders will remain active even if you are offline. You can place your trades, set a stop loss and take profit and continue with your day.

  • A stop loss allows the trader to predetermine the risk to the market
  • Take profit will ensue the trade will automatically close when your targeted price is obtained

 

Carry Trading, Long-Term Investments

In the Forex market, experienced traders take advantage of the interest rate differentials in order to profit over the long-term. Forex traders make note of the current interest rate of the base currency and ensure it is significantly higher than the secondary currency. Let’s break it down and understand how carry trading works in the Forex market. We will take AUD/JPY as an example.

The interest rate in Australia is significantly higher than the current interest rate in Japan. If a trader buys AUD/JPY, he will pay interest for selling JPY but benefit from a high interest by holding AUD. Because the interest rate in Australia is higher the trader will enjoy high interest on the trade, which he will be paid for on a daily basis during the rollover.

Such a trade can be held onto for an unlimited period of time, as long as there is enough capital to sustain the open trade. AUD is seen as one of the favorite currencies to carry trade due to its relatively tight spreads and volatility. If you are considering to carry trade, calculate how much interest you are expected to receive and monitor the rates of both Australia and Japan.

Traders may also focus on key economic figures from Australia and Japan such as unemployment rates to ensure they are entering the carry trade at the right time.

  • Carry trading is used for long-term investments
  • Carry traders will look to profit over the interest rate differentials
  • Carry trading can be exercised for an unlimited period of time
  • AUD is the favorite currency for carry trading.

Leverage and Gearing

Leverage enables you to gain a large exposure to a financial market while only tying up a relatively small amount of your capital.

CFDs are leveraged, which means you only have to put down a small deposit for much larger exposure. Leverage can make your investment capital go further, but if the market moves against you there’s a risk you can lose more than your deposit.

Margin

When trading, you must maintain a certain level of funds in your account (the necessary margin), also known as a good faith deposit. Calculating and understanding your necessary margin requirements beforehand allows you to apply good risk management and avoid any unnecessary margin calls resulting in the closing of a position due to not enough margin in your account.  Additional info regarding margin and margin calls can be found below.

Disclaimer: The Leverage / Margin requirements may be subject to change as a result of applicable regulations in your country of residence. For residents of Poland, the maximum leverage is 1:100.

Is Leveraged Trading Risky?

Even though you only put up a relatively small amount of capital to open a position (initial margin), your profit or loss is based on the full value of the position. So the amount you gain or lose might seem very high in relation to the sum you’ve invested. However, it should always be kept in mind that leverage not only magnifies your potential profits but also your potential losses. It is possible to lose much more than your initial margin if the market turns sharply against you.

It is also vital to remember that you could be called upon to put down more margin and cover your losses if the market goes in the wrong direction for you.

Margin Account & Requirements

You need to ensure that you have sufficient margin on your trading account, at all times, in order to maintain an open position. In addition, you need to continuously monitor any open positions in order to avoid positions being closed due to the unavailability of funds: it should be noted that LTD Accipiter is not responsible for notifying you for any such instances.

LOTs

Below is table showing the pip’s value per different trade sizes. ‘Lots’ are referred to the trade sizes in the MT4 platform:

1,000 = 0.01 lots = 10 cents

10,000 = 0.10 lots = $1.00

100,000 = 1 lot =$10

1,000,000 = 10 lots = $100

10,000,000 = 100 lots = $1,000 and so on.

The bigger the trade size, the bigger the pip’s value. If a trader invests $10,000 to his trading account and opened a buy (long) trade of 3,000,000 (30 lots) in EUR/USD, each pip would be worth $300.

If EUR/USD gained 50 pips, the profit would be $15,000. If EUR/USD drops by just below 30 pips the entire invested capital is in risk. Caution should be taken when using the leverage in the markets.

Margin

Margin is calculated based on the leverage used and is the amount of equity needed to open and maintain a position.

Formula: Margin = (Quantity*Lot) / Leverage.

Assuming that your account has 1:100 leverage and you want to buy 1 Lot (fixed at 100,000) EUR/USD, then you have to pay 1/100 of the invested amount (this will be the margin used for this single position).

1 Lot EUR/USD = 100,000 EUR against USD

If the EUR/USD rate was 1.12 the Trade value will be (100,000 * 1.12) or 120,000 USD

Therefore, your margin for this position is (120,000/100) 1,200 USD.

Free Margin

The free margin is shown at the bottom of your platform and is the difference of your account equity and the open positions margin.

Free margin = Equity – Margin

Margin Level

A percentage value based on the amount of available usable margin. If the margin level is less than 100% LTD Accipiter may freeze opening new orders. If the margin level is lower than the margin call level you are advised to deposit more funds, LTD Accipiter may automatically close your open orders and prevent further trading if the margin level falls below the stop out level

Formula: Margin Level = (Equity/Margin) * 100

Margin call refers to the margin level where the broker will ask you to deposit more funds because you are utilizing a very high percentage of your equity.

It should be noted that the Firm is not responsible for notifying you for any such instance but your advised to maintain a margin level above 25%.

Stop Out level is 10%, and this refers to the margin level where the system will start closing your positions automatically in order to increase the margin level above 10%. It should be noted that the Firm is not responsible for notifying you for any such instance.

Example 1

Client deposits 10,000 USD and sets the maximum leverage to 1:100. So the trader could open positions of up to (10,000 * 100) 1,000,000 USD which is equal to 10 Lots.

Then opens a BUY position of 5 LOT EUR/USD at 1.12.

Volume of the particular position will be (500,000 EUR * 1.12) 560,000 USD.

Margin will be ( 560,000/100) 5600 USD.

Free Margin will be (10,000 – 5,600) 4,400 USD

Margin Level will be [(10,000/5600)*100]  178.57%

Profit-making Scenario:

If the EUR/USD rate rise to 1.135, the trader will make a gain of [( 500,000 EUR * 1.135) -560,000 USD] 7,500 USD.

Free Margin will rise to (17,500 – 5,600) 11,900 assuming the position was not closed yet.

Margin level will rise to [(17,500/5600)*100] or 312.5%

Loss Making Scenario:

If the EUR/USD rate falls to 1.105, the trader will make a loss of [560,000 USD – (500,000 EUR * 1.105)] 7,500 USD.

Free Margin will fall to (2,500 – 5,600) -3100 assuming the position was not closed yet.

Margin level will fall to [(2500/5600)*100] or 44.6%

Since the margin level is below 100%, trader could not open new positions

If the EUR/USD continues to fall and reach 1.101, the trader will have a loss of [560,000 USD – (500,000 EUR * 1.101)] 9500 USD.

Margin Level will fall to [500/5600 * 100] 8.9%, this is below the stop out level of 10% so the trade will automatically be closed by the system,

Example 2

Client deposits 10,000 USD and sets the maximum leverage to 1:300. So the trader could open positions of up to (10,000 * 300) 3,000,000 USD which is equal to 30 Lots.

Then opens a BUY position of 20 LOT EUR/USD at 1.12.

Volume of the particular position will be (2,000,000 EUR * 1.12) 2,240,000 USD.

Margin will be ( 2,240,000/300) 7,467 USD.

Free Margin will be (10,000 – 7,467) 2,533 USD

Margin Level will be [(10,000/7,467)*100]  133.92%

Profit-making Scenario:

If the EUR/USD rate rise to 1.135, the trader will make a gain of [( 2,000,000 EUR * 1.135) -2,240,000 USD] 30,000 USD.

Free Margin will rise to (40,000 – 7,467) 32,533 assuming the position was not closed yet.

Margin level will rise to [(40,000/7,467)*100]  536.69%

Loss Making Scenario:

If the EUR/USD rate falls to 1.11625, the trader will make a loss of [2,240,000 USD – (2,000,000 EUR * 1.11625)] 7,500 USD.

Free Margin will fall to (2,500 – 5,600) -3100 assuming the position was not closed yet.

Margin level will fall to [(2500/7,467)*100] or 33.48%

Since the margin level is below 100%, trader could not open new positions

If the EUR/USD continues to fall and reach 1.1155, the trader will have a loss of [2,240,000 USD – (2,000,000 EUR * 1.11525)] 9500 USD.

Margin Level will fall to [500/7,467 * 100] 6.69%, this is below the stop out level of 10% so the trade will automatically be closed by the system.

Conclusion

The above examples illustrate the importance and impact of margin and leverage to your account.

Higher margin and leverage (as used in example 2) increase the potential profits of a EUR/USD move at 1.135 but at the same time increases potential losses.