Forex Fx Trading

Trading Guide

Why Trade On The Forex?

Forex Trading has become immensely popular due to the potentially high profits that can be realised with lower capital, and less risk than traditional stock market trading. A lot of traders are making a reasonable income with a low outlay, and not too much of a time investment.

For those entering the trading market for the first time Forex probably offers the best risk-reward ratio. The lot size system prevents traders from upping their stakes until they make a carefully considered move to a bigger lot size account.

This is a distinct advantage over spreadbetting, where it is very easy to up your stakes in the heat of the moment, and repent at your leisure when the deal goes sour.

You can open a trading account for less than $100, and open a trade for as little as $5. However, due to 'leverage' (see below),your trade has the volume of up to 400 times the amount of your original stake. Conversely, and luckily, the way that the system works mean that you do not risk 400 times your stake.

FX is also a relatively safe platform for developing your trading skills which can then be transferred to either another trading platform (spread, binary, or fixed odds financial betting) or another market (e.g. commodities). Learning to trade on the forex platform is not rocket science, and is perhaps not as important as learning to manage your money, and maintain trading discipline. Forex is the ideal place to develop these essential skills due to the safeguards that come with the trading platform.

How To Make A Forex Trade

Every trading platform is different, the Forex software may be different, and there may be more or less risk managment options available. However, the principals are generally the same.

In essence, you will be predicting the strength of one currency against another. This can be predicted within varying time scales decided by you - hourly, daily, weekly or longer.

Taking the example of the EUR/USD, you will decide whether or not the dollar will go up against the euro, or vice-versa.

In this currency pair example, if you thought the Euro was going up you would 'Buy' and if you thought it was going down you would 'Sell'.

Working Example

However, before you open your trade, you must decide how much of a risk are prepared to take on the trade. There are three factors that govern your 'risk management'.

Forex Risk Management Factors

Leverage and Margin

This varies between brokers, and account sizes. If for example you have a 10,000 lot mini account, you can decide whether you want to use leverage to reduce your stake size. In an account of this size you could make a trade with $50 (margin) at 200:1 leverage ($50 x 200 = 10,000), or $200 ($200 x 50 = 10,000). Most brokers offer leverage of between 100 x, and 200 x, and often it is fixed. If you want a broker that offers varying levels of leverage you should probably open an account with Etoro.com. For more details on use of leverage, have a look at 'Forex Leverage Guidance' in our Online Trading Guide.

Stop Loss

Stop loss is an option that will close your trade down before your margin limit is reached. For example you could set you stop loss at $100 on a $200 trade, so that you would never lose more than the $100. The deal would automatically be closed on the reaching the $100 mark. Setting a stop loss can either be done in dollar terms, or you have to set the actual currency price at which you would like your trade to be closed.

Take Profit

Take profit is the oposite of stop loss. Take profit is used to lock in your profits once a certain level has been reached. This prevents your profits depleting as a currency comes back down, and and again can be expressed either in dollar terms or currency price terms - dependent on your broker's software.

How Do I Know If A Currency Will Be Going Up Or Down Going Down?

Basically you don't! But, there are various ways of predicting a currency's performance, starting with following the trends that appear on the real-time graphs provided with all broker software. As this is technically a form of gambling the good news is that all profits are tax free at the time of writing, and this is unlikely to change in the forseeable future.

What Are Forex Points Or Pips?

A pip is the fourth decimal point, e.g. if an opening price is 1.4280, and a closing price is 1.4300, that is a move of 20 points. (Note: this does not apply to the Japanese Yen - JPY).

Which Type Of Forex Account Should I Use?

This depends on several factors. The most important factor for a beginner is the lot size of the account. In a mini account, every point a currency moves is equal to a dollar (lot size 10,000). In a standard account (lot size 100,000) one point is equal to 10 dollars. In a midi account (lot size 5,000) each point is equal to 50 cents (even smaller accounts are now available). Obviously it would be wise to start with a smaller account until you know what you are doing.

Which Forex Broker Should I Use?

This depends on the account sizes on offer, and perhaps how much of a minimum deposit is required to open an account. Some brokers have set up in recent years with small lot size accounts and low opening deposits simply to attract the growing army of people dipping their toes into Forex trading. Transfer of funds is another issue, as different brokers have different payment and withdrawal methods, and they do not all accept the same credit and debit cards. Some brokers offer bank wire transfer facilities, or online transfers such as Neteller.

Check to see what charges are applicable as all those percentages add up. Most brokers do not charge for UK debit card transfers. (Debit transfers are also a safer option for beginners as you can transfer what you have in your account, instead of racking up a large credit card debt and repenting at your leisure - again, never trade what you cannot afford to lose).

Which Forex Software Should I Use?

As a rule, the software comes with your broker, so if you don't like the software you need to change broker. The Forex software provided by most brokers is developed for them either in-house or by a software development firm.

Should I Use A Forex Demo?

Undoubtably, yes in the first instance. At the very least you need to know that you can get to grips with the trading interface. However there is some disagreement on the length of time a beginner should use a demo account - see 'Trading Demo Caveat' in our Online Trading Guide. CMC Markets are one operation who do not offer a demo, however, bearing in mind the plethora of awards they have recieved due to their software not having a demo should not put people off opening an account with them.

How Much Money Do I Need To Trade On The Forex Market?

Some brokers will such as Forex Webtrader let you open an account for as little as $25, and Forexyard will allow you to place a trade for as little as $5, but in this 1,000 lot size account each point is equal to 10 cents - so whilst it might be a good place to learn, don't expect to make much money.

How Does A Forex Broker Make Their Money?

When you trade on the FX, you are not trading against the broker, but 'with' or 'through' the broker. They make their money gradually by the small amounts of 'change' they make on the 'currency spread' each time you make a trade. It is in the broker's interest that you become a successful trader. If you lose, so do they in the long term. Most Forex brokers do not charge commission, although there are premiums for keeping a trading position open overnight.

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Disclaimer: Trading Forex can involve the risk of loss of all the money invested. Please read the full site disclaimer and risk warning. Forex is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.