In this section of tradingonlineguide.com, you’ll learn how to trade fx and also discover what the main points to consider are. All the questions about financial leverage, pips and long position or short position will be explained.
You will also learn how to set a pending order in your trades and how they really work.
Let’s begin with the first steps to start trading in Forex (foreign exchange trading) and CFDs that you must read if you are a beginner.
- 1 How to trade forex (fx) and CFDs
- 2 What is the leverage in Forex?
- 3 What is the margin in Forex?
- 4 What is a pip in forex?
- 5 What is a lot in forex?
- 6 Long Position and Short Position
- 7 Pending Orders
How to trade forex (fx) and CFDs
After explaining what forex and CFDs is (here: https://tradingonlineguide.com/what-is-forex-trading/), let’s understand how to trade forex known also as currency trading.
To trade Forex you need to follow 4 important steps, mainly if you are a beginner:
- Have the right mindset
- Trade with the best and most legit trading platform
- Follow a good trading strategy
- Open your trades
1- The right mindset
By the right mindset we mean to trade with the goal to make as many profits as possible, with the least possible losses. To achieve it there are two very important concepts in trading: diversification and risk management.
Why are they so important?
When you open an account with a certain amount of money, a good thing to do is to just use a small part of your currency to trade – normally the 5% to 10%. This is called risk management.
Following this strategy, you won’t risk everything, but you will manage the money you use in a more steady and safe way.
At the same time, managing your risk allows you to be satisfied with your profits too.
To make good profits you don’t need to risk a lot of money, but just to invest in the right market at the right time.
2- Choose the best trading platform
This is probably the most important step to start your trading career.
When you need to create your fx account, there are many things to take into consideration.
The regulation is probably the most important point. To be sure you are not depositing your money with an illegal broker, always check if that broker is licensed by one or more trading authorities.
Another thing to take in consideration is the minimum deposit. This is normally $100 or even just $10 with some brokers.
The last important factors to consider are the spreads and commissions.
Some brokers offer accounts with a small spread and zero commission to your trades, others have the opposite scenario. It’s always up to the trader to decide the best settings for themselves.
All the trading platforms listed below are of trustable and regulated brokers to create a free account with.
|Trading Platform||Rating||Minimum Deposit||Demo Account||Start Trading|
|$100|| TRADE NOW *CFD Service. 80.6% lose money |
|$200|| TRADE NOW *Your capital is at risk |
|$10|| TRADE NOW *Your capital is at risk |
IQ Option review
‘CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.’
3- Good trading strategy
Investing in the right market at the right time brings us to the third important concept: have a good trading strategy.
There are many valid strategies a trader can follow in the foreign exchange trading, but the main ones are:
- News Trading
- Fundamental Analysis
- Technical Analysis
News trading is the most common one for beginners and it consists of reading the economic news in the economic calendar and making trades based on that. (here an example of an economic calendar)
For example, if today at 14:00 hours there is important news about the American interest rates, it could be a good opportunity to trade in dollar-related markets such as EUR/USD or USD/JPY because in these markets there will be a high volatility to take advantage of.
The fundamental analysis is the study of the macroeconomic situation of a certain market in order to predict how it will move in the future.
This kind of analysis takes into consideration different macroeconomic factors such as the national GDP, or the national industrial production that have a daily impact on the foreign exchange market.
Thanks to this analysis it’s possible to understand how these factors could change the market in the future.
(To learn more about what macroeconomic means see the page worldatlas.com)
Finally, the technical analysis consists of pure chart analysis.
If a chart is analyzed in different time frames, it’s possible to see whether the graphic might have repetitive trends.
For instance, if a graphic has tried to go higher than a certain level price for several times to then be bounced, that level price is called resistance.
On the other side, a graphic could have tried to go below a certain price many times – which has then bounced up. That level is called support and it’s possible that the price will try to reach that level again.
For a more detailed explanation of all the trading strategies go to the trading strategies page.
4- Open your trades
Now that everything is set you are ready to go and open your trades.
How do I open a trade?
The first thing you need to do is to select the market (asset) you want to trade. This can be a currency such as EUR/USD, or a commodity such as Gold. As we said in the foreign exchange trading everything is available.
Then you must decide if you want to buy or sell.
In this phase, professional traders usually trade with the support of the take profit and stop loss.
These represent the price level your investment will automatically close with- either in profit (take profit) or with what price the trade will be stopped (stop loss).
Finally, the last step consists of keeping under control the opened trades.
This is important because it’s possible to close them manually if they do not reach any take profit or stop loss prices. Usually, there is an “X” symbol to click on at the end of every opened position, clicking on this will close the trade.
What is the leverage in Forex?
A lot of you might have heard of the financial leverage in Fx.
But what is the leverage in forex exactly?
The financial leverage is a tool which multiplies the value of money invested in a position. It allows traders to move big capitals with a very small investment.
Let’s make an example to understand it better in this tutorial:
Imagine a trading account with a selected leverage of 1:200.
Investing just $100 with the above set up allows you to move in the market a total amount of $20.000.
Why? Because we multiply 200 times the $100 invested.
This example shows why fx trading is so popular. It’s possible to have potentially big profits from a very small amount of money thanks to the leverage.
At the same time, it’s important to mention that a high leverage can bring very high profits but at the same time high risks.
Remember the multiplier effect must be adopted for losses too.
You can choose your leverage when you have opened the account. However, with a few brokers, the leverage can be set differently for each position a trader opens.
To see the different leverage offers go to the best forex trading platform page.
To prevent the risk of losing everything due to a lack of experience or strategy, it’s always possible to train using a forex demo account.
What is the margin in Forex?
The margin is the amount of money required by the broker to open a position and to cover the potential losses.
This scenario is applicable in case of leverage. If you are moving a total of $1000 with one position, there must be at least $1000 in the account.
If there is not enough money in the account, the broker won’t allow you to open the position.
This is to prevent the account from going under zero. Actually in forex trading is impossible to go under zero.
It’s possible to trade only if there is enough money in the account.
What is a pip in forex?
When talking about how to trade forex there are 2 terms used by everybody. We are talking about Pips and Lots.
What is a pip in forex?
A pip (percentage of a point) measures the smallest change in an asset price and it’s the Forex unit of measure.
Usually in Forex the prices are represented by 4 units after the unity. These units are called pips.
For example if the price of EUR/USD changes from 1,2201 to 1,2209, it has moved 8 pips.
The bigger the movement is, the more pips are involved.
What is a lot in forex?
Now that the unit of measure is clear let us see what a lot is.
What is a lot in forex?
A lot represents a Forex transaction unit of measure. Thanks to this it’s possible to know how much money a trader needs to use for a single trade.
The smallest fraction of a lot is called microlot and it’s worth 0,01 lot. There is then the minilot which is 0,1. However, there is no limit to the highest amount – even if some brokers allow to trade a maximum of 20 lots for every single position.
A standard lot (1 lot) represents 100.000 units, but this doesn’t mean that a trader should have $ 100.000 in their account.
In fact, if the chosen leverage is 1:200, it’s just necessary to have $500 to open a position of 1 lot.
The concept can sound a bit complicated we know! To simplify when trading just remember what the starting leverage is.
Tutorial: once you have the starting leverage, you just need to divide 1 lot (so 100.000) for the leverage (200 in this case), and the result represents the amount of money you’re going to invest for that position if you decide to open 1 lot. So this would be $500 in our example.
If $500 is too much for a single investment, it’s possible to select a lower amount of lots, for example 0,1 lot and invest just $50.
Every broker has different leverage offers. Just select the one with the most appropriate offer for you listed.
Long Position and Short Position
When learning how to trade forex there are some important terms that every trader should know.
The most common ones are short position and long position.
We have already mentioned that in trading there are just 2 different possible things to do: buy or sell.
Because of this, a buy position is called a long position.
Whereas a sell position takes the name of a short position.
For example if a position has been opened in a sell position, it’s because of a drop expectation in that asset’s price.
They are both two potentially profitable trades if the prediction will match with the trading strategy and the expectation also aligns.
When trading a common question a lot of traders ask themselves is:
Do I need to spend a whole day in front of my computer to open a position at that certain price?
The answer is: NO!
In every forex platform, there is the opportunity to use the so-called pending orders.
A pending order is a particular option which allows you to set up a trade which will be automatically opened once it reaches the set price.
Let’s make an example:
The price of oil is $60.00 at the moment, and we want to sell only when it reaches $61,00.
In this case we need to set up a pending order called sell limit. This will automatically sell oil just when the price meets $61,00.
If the price doesn’t reach $61,00 the order will never enter in the market so you won’t risk anything.
There are 4 different pending orders:
- Buy limit: in this case it’s necessary to set up a lower price than the actual price. The expectation is that the price will drop down to the selected level to suddenly grow again.
- Sell limit: in this case the goal is to sell at a higher price than the actual one to suddenly see the price drop down again.
- Buy stop: the price keeps on growing after it passes a certain level higher than the actual one. It’s necessary to select a price higher than the actual one in the setup.
- Sell stop: here the concept is to see the price keep falling once it’s gone lower than a certain level. In this last case it’s necessary to select a lower price than the actual one.