How to Trade in Forex
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- Trader Lose money on trades
- Forex trading is a skill, takes long period to learn.
- You need lots of PRACTICE and EXPERIENCE to master.
- Ninety percent of traders lose money, largely due to lack of planning, training, discipline, not having a trading edge and having poor money management rules.
In the forex market, you buy or sell currencies.
You purchase 10,000 euros at the EUR/USD exchange rate of 1.1900
2 weeks later, you have exchanged your 10000 euro back into US dollar @ the exchange rate 1.2600
You earn a profit of $700
*EUR 10,000 x 1.19 = US $11,900
** EUR 10,000 x 1.26 = US $12,600
Once your speculation gone against your prediction then you will lose $700
We are going to use fundamental analysis to help us decide whether to buy or sell a specific currency pair.
Each currency belongs to a country (or region). So forex fundamental analysis focuses on the overall state of the country’s economy, ie productivity, employment, manufacturing, international trade, and interest rates.
Here the pound is the base currency and thus the “basis” for the buy/sell.
If you think the British economy will continue to do better than the U.S. in terms of economic growth, you would execute a BUY GBP/USD order.
By doing so you have bought pounds in the expectation that they will rise versus the U.S. dollar.
If you believe the British economy is slowing while the American economy remains strong, you would execute a SELL GBP/USD order.
By doing so you have sold pounds in the expectation that they will depreciate against the U.S. dollar.
You’ve probably heard of the terms “pips,” “pipettes,” and “lots” thrown around, and now we’re going to explain what they are and show you how their values are calculated.
The unit of measurement to express the change in value between two currencies is called a “pip.”
A pip is usually the last decimal place of a price quote.
If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.
Most pairs go out to 4 decimal places, but there are some exceptions like Japanese yen pairs (they go out to two decimal places).
For example, for EUR/USD, it is 0.0001, and for USD/JPY, it is 0.01.
There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.
They are quoting FRACTIONAL PIPS, also called “pipettes.”
If the concept of a “pip” isn’t already confusing enough for the new forex trader, let’s try to make you even more confused and point out that a “pipette” or “fractional pip” is equal to a “tenth of a pip“.
For instance, if GBP/USD moves from 1.30542 to 1.30543, that .00001 USD move higher is ONE PIPETTE.
Spot forex was only traded in specific amounts called lots, or basically the number of currency units you will buy or sell.
The standard size for a lot is 100,000 units of currency, and now, there are also mini,micro, and nano lot sizes that are 10,000, 1,000, and 100 units.
Some brokers show quantity in “lots”, while other brokers show the actual currency units.
As you may already know, the change in a currency value relative to another is measured in “pips,” which is a very, very small percentage of a unit of currency’s value.
To take advantage of this minute change in value, you need to trade large amounts of a particular currency in order to see any significant profit or loss.
Let’s assume we will be using a 100,000 unit (standard) lot size. We will now recalculate some examples to see how it affects the pip value.
- USD/JPY at an exchange rate of 119.80: (.01 / 119.80) x 100,000 = $8.34 per pip
- USD/CHF at an exchange rate of 1.4555: (.0001 / 1.4555) x 100,000 = $6.87 per pip
In cases where the U.S. dollar is not quoted first, the formula is slightly different.
- EUR/USD at an exchange rate of 1.1930: (.0001 / 1.1930) X 100,000 = 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
- GBP/USD at an exchange rate of 1.8040: (.0001 / 1.8040) x 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.
Your broker may have a different convention for calculating pip values relative to lot size but whatever way they do it, they’ll be able to tell you what the pip value is for the currency you are trading at that particular time.
In other words, they do all the match calculations for you!
As the market moves, so will the pip value depending on what currency you are currently trading.
You Should DEMO TRADE until you develop a firm, profitable system before funding your real account.
You can open a demo account for FREE with most forex brokers. These “pretend” accounts have most of the capabilities of a “real” account.
It is free!!
It’s because the broker wants you to learn the ins and outs of their trading platform, and have a good time trading without risk, so you’ll feel confident with them and deposit real money.
The demo account allows you to learn about the mechanics of forex trading and test your trading skills and processes with no risk.
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Forex trading is not a get rich quick scheme. Before you start trading with real money, LEARN how to trade and practice first using a forex demo account.