Table of Contents
- 1 How to Make Money Trading Forex
- 2 Know When to Buy or Sell a Currency Pair
- 3 What is a Pip in Forex?
- 4 What is a Lot in Forex?
- 5 Impress Your Date with Forex Lingo
- 6 Types of Forex Orders
- 7 Demo Trade Your Way to Success
- 8 Forex Trading is NOT a Get-Rich-Quick Scheme
Now, it’s time to learn HOW to rake in the moolah!
In the forex market, you buy or sell currencies.
Placing a trade in the foreign exchange market is simple. The mechanics of a trade are very similar to those found in other financial markets (like the stock market), so if you have any experience in trading, you should be able to pick it up pretty quickly.
And if you don’t, you’ll still be able to pick it up….as long as you finish our School of Pipsology!
The objective of forex trading is to exchange one currency for another in the expectation that the price will change.
More specifically, that the currency you bought will increase in value compared to the one you sold.
|You purchase 10,000 euros at the EUR/USD exchange rate of 1.1800||+10,000||-11,800*|
|Two weeks later, you exchange your 10,000 euros back into U.S. dollar at the exchange rate of 1.2500||-10,000||+12,500**|
|You earn a profit of $700||+700|
*EUR 10,000 x 1.18 = US $11,800
** EUR 10,000 x 1.25 = US $12,500
An exchange rate is simply the ratio of one currency valued against another currency.
For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
How to Read a Forex Quote
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is because, in every foreign exchange transaction, you are simultaneously buying one currency and selling another.
Here is an example of a foreign exchange rate for the British pound versus the U.S. dollar:
The first listed currency to the left of the slash (“/”) is known as the base currency (in this example, the British pound), while the second one on the right is called the counter or quote currency (in this example, the U.S. dollar).
When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy one unit of the base currency. In the example above, you have to pay 1.51258 U.S. dollars to buy 1 British pound.
When selling, the exchange rate tells you how many units of the quote currency you get for selling one unit of the base currency.
In the example above, you will receive 1.51258 U.S. dollars when you sell 1 British pound.
The base currency is the “basis” for the buy or the sell. If you buy EUR/USD this simply means that you are buying the base currency and simultaneously selling the quote currency. In caveman talk, “buy EUR, sell USD.”
- You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency.
- You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.
First, you should determine whether you want to buy or sell.
If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price.
In trader’s talk, this is called “going long” or taking a “long position.” Just remember: long = buy.
If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price.
This is called “going short” or taking a “short position”. Just remember: short = sell.
“I’m long AND short.”
The Bid, Ask and Spread
All forex quotes are quoted with two prices: the bid and ask. For the most part, the bid is lower than the ask price.
The bid is the price at which your broker is willing to buy the base currency in exchange for the quote currency.
This means the bid is the best available price at which you (the trader) will sell to the market.
The ask is the price at which your broker will sell the base currency in exchange for the quote currency.
This means the ask price is the best available price at which you will buy from the market.
Another word for ask is the offer price.
The difference between the bid and the ask price is known as the SPREAD.
On the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. Look at how this broker makes it so easy for you to trade away your money.
- If you want to sell EUR, you click “Sell” and you will sell euros at 1.34568.
- If you want to buy EUR, you click “Buy” and you will buy euros at 1.34588.
Here’s an illustration that puts together everything we’ve covered in this lesson:
Now let’s take a look at some examples.
Know When to Buy or Sell a Currency Pair
In the following examples, 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, such as productivity, employment, manufacturing, international trade, and interest ratezzzzzzzz.
If you always fell asleep during your economics class or just flat out skipped economics class, don’t worry!
We will cover fundamental analysis in a later lesson.
But right now, try to pretend you know what’s going on…
In this example, the euro is the base currency and thus the “basis” for the buy/sell. If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, you would execute a BUY EUR/USD order.
By doing so, you have bought euros in the expectation that they will rise versus the U.S. dollar.
If you believe that the U.S. economy is strong and the euro will weaken against the U.S. dollar, you would execute a SELL EUR/USD order.
By doing so, you have sold euros in the expectation that they will fall versus the US dollar.
In this example, the U.S. dollar is the base currency and thus the “basis” for the buy/sell.
If you think that the Japanese government is going to weaken the yen in order to help its export industry, you would execute a BUY USD/JPY order.
By doing so you have bought U.S dollars in the expectation that they will rise versus the Japanese yen.
If you believe that Japanese investors are pulling money out of U.S. financial markets and converting all their U.S. dollars back to yen, and this will hurt the U.S. dollar, you would execute a SELL USD/JPY order.
By doing so you have sold U.S dollars in the expectation that they will depreciate against the Japanese yen.
In this example, 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’s economy is slowing while the United States’ economy remains strong like Chuck Norris, 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.
In this example, the U.S. dollar is the base currency and thus the “basis” for the buy/sell.
If you think the Swiss franc is overvalued, you would execute a BUY USD/CHF order.
By doing so you have bought U.S. dollars in the expectation that they will appreciate versus the Swiss Franc.
If you believe that the U.S. housing market weakness will hurt future economic growth, which will weaken the dollar, you would execute a SELL USD/CHF order.
By doing so you have sold U.S. dollars in the expectation that they will depreciate against the Swiss franc.
When you go to the grocery store and want to buy an egg, you can’t just buy a single egg; they come in dozens or “lots” of 12.
In forex, it would be just as foolish to buy or sell 1 euro, so they usually come in “lots” of 1,000 units of currency (micro), 10,000 units (mini), or 100,000 units (standard) depending on your broker and the type of account you have (more on “lots” later).
“But I don’t have enough money to buy 10,000 euros! Can I still trade?”
You can! With margin trading!
Margin trading is simply the term used for trading with borrowed capital.
This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000.
You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.
Let us explain.
Listen carefully because this is very important!
- You believe that signals in the market are indicating that the British pound will go up against the U.S. dollar.
- You open one standard lot (100,000 units GBP/USD), buying with the British pound at 2% margin and wait for the exchange rate to climb. When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000). If the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade (US$150,000 * 2%). You now control 100,000 pounds with just US$3,000. We will be discussing margin in more detail later, but hopefully, you’re able to get the basic idea of how it works.
- Your predictions come true and you decide to sell. You close the position at 1.50500. You earn about $500.
|You buy 100,000 pounds at the exchange rate of 1.5000||+100,000||-150,000|
|You blink for two seconds and the GBP/USD exchange rates rises to 1.5050 and you sell.||-100,000||+150,500|
|You have earned a profit of $500.||+500|
When you decide to close a position, the deposit that you originally made is returned to you and a calculation of your profits or losses is done.
This profit or loss is then credited to your account.
What’s even better is that, with the development of retail forex trading, there are some brokers who allow traders to have custom lots.
This means that you don’t need to trade in micro, mini or standard lots! If 1,542 is your favorite number and that’s how many units you want to trade, then you can!
For positions open at your broker’s “cut-off time” (usually 5:00 pm EST), there is a daily rollover interest rate that a trader either pays or earns, depending on your established margin and position in the market.
If you do not want to earn or pay interest on your positions, simply make sure they are all closed before 5:00 pm EST, the established end of the market day.
Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading.
Interest is PAID on the currency that is borrowed.
Interest is EARNED on the one that is bought.
If you are buying a currency with a higher interest rate than the one you are borrowing, then the net interest rate differential will be positive (i.e. USD/JPY) and you will earn interest as a result.
Conversely, if the interest rate differential is negative then you will have to pay.
Note that many retail brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates).
Please check with your broker for more information on rollover rates and crediting/debiting procedures.
Here is a chart to help you figure out the interest rate differentials of the major currencies. Accurate as of January 2019.
Benchmark Interest Rates
Later on, we’ll teach you all about how you can use interest rate differentials to your advantage.
What is a Pip in Forex?
Here is where we’re going to do a little math. Just a little bit.
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.
What the heck is a Pip?
The unit of measurement to express the change in value between two currencies is called a “pip.”
If EUR/USD moves from 1.1050 to 1.1051, that .0001 USD rise in value is ONE PIP.
A pip is usually the last decimal place of a price quote.
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.
What is a Pipette?
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.
Here’s how fractional pips look like on a trading platform:
On trading platforms, the digit representing a tenth of a pip usually appears to the right of the two larger digits.
How to Calculate the Value of a Pip
As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair.
In the following example, we will use a quote with 4 decimal places.
For the purpose of better explaining the calculations, exchange rates will be expressed as a ratio (i.e., EUR/USD at 1.2500 will be written as “1 EUR / 1.2500 USD”)
Example #1: USD/CAD = 1.0200
To be read as 1 USD to 1.0200 CAD (or 1 USD/1.0200 CAD)
(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)
[.0001 CAD] x [1 USD/1.0200 CAD]
Or simply as:
CAD) / (1.0200 CAD)] x 1 USD = 0.00009804 USD per unit traded
Using this example, if we traded 10,000 units of USD/CAD, then a
one pip change to the exchange rate would be approximately a 0.98 USD
change in the position value (10,000 units x 0.0000984 USD/unit).
We say “approximately” because as the exchange rate changes, so does the value of each pip move.
Example #2: GBP/JPY = 123.00
Here’s another example using a currency pair with the Japanese Yen as the counter currency.
Notice that this currency pair only goes to two decimal places to measure a 1 pip change in value (most of the other currencies have four decimal places). In this case, a one pip move would be .01 JPY.
(The value change in counter currency) times the exchange rate ratio = pip value (in terms of the base currency)
[.01 JPY] x [1 GBP/123.00 JPY]
Or simply as:
JPY) / (123.00 JPY)] x 1 GBP = 0.0000813 GBP
So, when trading 10,000 units of GBP/JPY, each pip change in value is worth approximately 0.813 GBP.
Finding the Pip Value in your Account Denomination
The final question to ask when figuring out the pip value of your position is, “What is the pip value in terms of my account currency?”
After all, it is a global market and not everyone has their account denominated in the same currency.
This means that the pip value will have to be translated to whatever currency our account may be traded in.
This calculation is probably the easiest of all; simply multiply/divide the “found pip value” by the exchange rate of your account currency and the currency in question.
If the “found pip value” currency is the same currency as the base currency in the exchange rate quote:
Using the GBP/JPY example above, let’s convert the found pip value of .813 GBP to the pip value in USD by using GBP/USD at 1.5590 as our exchange rate ratio.
If the currency you are converting to is the counter currency of the exchange rate, all you have to do is divide the “found pip value” by the corresponding exchange rate ratio:
.813 GBP per pip / (1 GBP/1.5590 USD)
GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move
So, for every .01 pip move in GBP/JPY, the value of a 10,000 unit position changes by approximately 1.27 USD.
If the currency you are converting to is the base currency of the conversion exchange rate ratio, then multiply the “found pip value” by the conversion exchange rate ratio.
Using our USD/CAD example above, we want to find the pip value of .98 USD in New Zealand Dollars. We’ll use .7900 as our conversion exchange rate ratio:
0.98 USD per pip X (1 NZD/.7900 USD)
USD) / (.7900 USD)] x (1 NZD) = 1.2405 NZD per pip move
For every .0001 pip move in USD/CAD from the example above, your 10,000 unit position changes in value by approximately 1.24 NZD.
Even though you’re now a math genius–at least with pip values–you’re probably rolling your eyes back and thinking, “Do I really need to work all this out?”
Well, the answer is a big fat NO. Nearly all forex brokers will work all this out for you automatically, but it’s always good for you to know how they work it out.
What is a Lot in Forex?
In the past, spot forex was only traded in specific amounts called lots, orbasically 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.
|Lot||Number of 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.
Here are examples of pip values for EUR/USD and USD/JPY, depending on lot size.
|Pair||Close Price||Pip value per:|
|Unit||Standard lot||Mini lot||Micro lot||Nano lot|
|USD/JPY||1 USD = 80 JPY||$0.000125||$12.5||$1.25||$0.125||$0.0125|
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.
What the heck is leverage?
You are probably wondering how a small investor like yourself can trade such large amounts of money.
Think of your broker as a bank who basically fronts you $100,000 to buy currencies.
All the bank asks from you is that you give it $1,000 as a good faith deposit, which it will hold for you but not necessarily keep.
Sounds too good to be true? This is how forex trading using leverage works.
The amount of leverage you use will depend on your broker and what you feel comfortable with.
Typically the broker will require a deposit, also known as “margin“.
Once you have deposited your money, you will then be able to trade. The broker will also specify how much margin is required per position (lot) traded.
For example, if the allowed leverage is 100:1 (or 1% of position required), and you wanted to trade a position worth $100,000, but you only have $5,000 in your account.
No problem as your broker would set aside $1,000 as a deposit and let you “borrow” the rest.
Of course, any losses or gains will be deducted or added to the remaining cash balance in your account.
The minimum security (margin) for each lot will vary from broker to broker.
In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.
Let’s say you want to buy 1 standard lot (100,000) of USD/JPY. If your account is allowed 100:1 leverage, you will have to put up $1,000 as margin.
The $1,000 is NOT a fee, it’s a deposit.
You get it back when you close your trade.
The reason the broker requires the deposit is that while the trade is open, there’s the risk that you could lose money on the position!
Assuming that this USD/JPY trade is the only position you have open in your account, you would have to maintain your account’s equity (absolute value of your trading account) of at least $1,000 at all times in order to be allowed to keep the trade open.
If USD/JPY plummets and your trading losses cause your account equity to fall below $1,000, the broker’s system would automatically close out your trade to prevent further losses.
This is a safety mechanism to prevent your account balance from going negative.
How the heck do I calculate profit and loss?
So now that you know how to calculate pip value and leverage, let’s look at how you calculate your profit or loss.
Let’s buy U.S. dollars and sell Swiss francs.
- The rate you are quoted is 1.4525 / 1.4530. Because you are buying U.S. dollars you will be working on the “ASK” price of 1.4530, the rate at which traders are prepared to sell.
- So you buy 1 standard lot (100,000 units) at 1.4530.
- A few hours later, the price moves to 1.4550 and you decide to close your trade.
- The new quote for USD/CHF is 1.4550 / 1.4555. Since you initially bought to open the trade, to close the trade, you now must sell in order to close the trade so you must take the “BID” price of 1.4550. The price which traders are prepared to buy at.
- The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
- Using our formula from before, we now have (.0001/1.4550) x 100,000 = $6.87 per pip x 20 pips = $137.40
Remember, when you enter or exit a trade, you are subject to the spread in the bid/ask quote.
When you buy a currency, you will use the offer or ASK price.
When you sell, you will use the BID price.
Impress Your Date with Forex Lingo
As in any new skill that you learn, you need to learn the lingo… especially if you wish to win your love’s heart.
You, the newbie, must know certain terms like the back of your hand before making your first trade. Some of these terms you’ve already learned, but it never hurts to do a little review.
Major and Minor Currencies
The eight most frequently traded currencies (USD, EUR, JPY, GBP, CHF, CAD, NZD, and AUD) are called the major currencies or the “majors.” These are the most liquid and the most sexy.
All other currencies are referred to as minor currencies.
The base currency is the first currency in any currency pair. The currency quote shows how much the base currency is worth as measured against the second currency.
For example, if the USD/CHF rate equals 1.6350, then one USD is worth CHF 1.6350. In the forex market, the U.S. dollar is normally considered the “base” currency for quotes, meaning that quotes are expressed as a unit of 1 USD per the other currency quoted in the pair.
The primary exceptions to this rule are the British pound, the euro, and the Australian and New Zealand dollar.
The quote currency is the second currency in any currency pair. This is frequently called the pip currency and any unrealized profit or loss is expressed in this currency.
A pip is the smallest unit of price for any currency.
Nearly all currency pairs consist of five significant digits and most pairs have the decimal point immediately after the first digit, that is, EUR/USD equals 1.2538.
In this instance, a single pip equals the smallest change in the fourth decimal place – that is, 0.0001. Therefore, if the quote currency in any pair is USD, then one pip always equal 1/100 of a cent.
Notable exceptions are pairs that include the Japanese yen where a pip equals 0.01.
One-tenth of a pip. Some brokers quote fractional pips, or pipettes, for added precision in quoting rates.
For example, if EUR/USD moved from 1.32156 to 1.32158, it moved 2 pipettes.
The bid is the price at which the market is prepared to buy a specific currency pair in the forex market. At this price, the trader can sell the base currency. It is shown on the left side of the quotation.
For example, in the quote GBP/USD 1.8812/15, the bid price is 1.8812. This means you sell one British pound for 1.8812 U.S. dollars.
The ask/offer is the price at which the market is prepared to sell a specific currency pair in the forex market. At this price, you can buy the base currency. It is shown on the right side of the quotation.
For example, in the quote EUR/USD 1.2812/15, the ask price is 1.2815. This means you can buy one euro for 1.2815 U.S. dollars. The ask price is also known as the offer price.
The spread is the difference between the bid and ask price.
The “big figure quote” is the dealer expression referring to the first few digits of an exchange rate. These digits are often omitted in dealer quotes.
For example, the USD/JPY rate might be 118.30/118.34, but would be quoted verbally without the first three digits as “30/34.”
In this example, USD/JPY has a 4-pip spread.
Exchange rates in the forex market are expressed using the following format:
Base currency / Quote currency = Bid / Ask
The critical characteristic of the bid/ask spread is that it is also the transaction cost for a round-turn trade.
Round-turn means a buy (or sell) trade and an offsetting sell (or buy) trade of the same size in the same currency pair.
For example, in the case of the EUR/USD rate of 1.2812/15, the transaction cost is three pips.
The formula for calculating the transaction cost is:
Transaction cost (spread) = Ask Price – Bid Price
A cross currency is any pair in which neither currency is the U.S. dollar. These pairs exhibit erratic price behavior since the trader has, in effect, initiated two USD trades.
For example, initiating a long (buy) EUR/GBP is equivalent to buying a EUR/USD currency pair and selling GBP/USD. Cross currency pairs frequently carry a higher transaction cost.
When you open a new margin account with a forex broker, you must deposit a minimum amount with that broker.
This minimum varies from broker to broker and can be as low as $100 to as high as $100,000.
Each time you execute a new trade, a certain percentage of the account balance in the margin account will be set aside as the initial margin requirement for the new trade.
The amount is based upon the underlying currency pair, its current price, and the number of units (or lots) traded. The lot size always refers to the base currency.
For example, let’s say you open a mini account which provides a 200:1 leverage or 0.5% margin. Mini accounts trade mini lots. Let’s say one mini lot equals $10,000.
If you were to open one mini-lot, instead of having to provide the full $10,000, you would only need $50 ($10,000 x 0.5% = $50).
Leverage is the ratio of the amount capital used in a transaction to the required security deposit (margin).
It is the ability to control large dollar amounts of a security with a relatively small amount of capital.
Leveraging varies dramatically with different brokers, ranging from 2:1 to 500:1.
Types of Forex Orders
“Would you like pips with that?”
Okay, not that type of order.
The term “order” refers to how you will enter or exit a trade.
Here we discuss the different types of forex orders that can be placed in the forex market.
Be sure that you know which types of orders your broker accepts.
Different brokers accept different types of forex orders.
There are some basic order types that all brokers provide and some others that sound weird.
A market order is an order to buy or sell at the best available price. For example, the bid price for EUR/USD is currently at 1.2140 and the ask price is at 1.2142.
If you wanted to buy EUR/USD at market, then it would be sold to you at the price of 1.2142.
You would click buy and your trading platform would instantly execute a buy order at that exact price.
If you ever shop on Amazon.com, it’s kinda like using their 1-Click ordering. You like the current price, you click once and it’s yours!
The only difference is you are buying or selling one currency against another currency instead of buying a Justin Bieber CD.
Please keep in mind that depending on market conditions, there may be a difference between the price you selected and the final price that is executed on your trading platform.
Limit Entry Order
A limit entry is an order placed to either buy below the market or sell above the market at a certain price.
For example, EUR/USD is currently trading at 1.2050. You want to go short if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a sell market order).
Or you can set a sell limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class).
If the price goes up to 1.2070, your trading platform will automatically execute a sell order at the best available price.
You use this type of entry order when you believe price will reverse upon hitting the price you specified!
A limit order to BUY at a price below the current market price will be executed at a price equal to or less than the specified price.
A limit order to SELL at a price above the current market price will be executed at a price equal to or more than the specific price.
Stop Entry Order
A stop entry order is an order placed to buy above the market or sell below the market at a certain price.
For example, GBP/USD is currently trading at 1.5050 and is heading upward. You believe that price will continue in this direction if it hits 1.5060.
You can do one of the following to play this belief:
- Sit in front of your computer and buy at market when it hits 1.5060 OR
- Set a stop entry order at 1.5060.
Stop Loss Order
A stop loss order is a type of order linked to a trade for the purpose of preventing additional losses if the price goes against you.
If you are in a long position, it is a sell STOP order.
If you are in a short position, it is a buy STOP order.
REMEMBER THIS TYPE OF ORDER.
A stop loss order remains in effect until the position is liquidated or you cancel the stop loss order.
For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200.
This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss (eww!).
Stop losses are extremely useful if you don’t want to sit in front of your monitor all day worried that you will lose all your money.
You can simply set a stop loss order on any open positions so you won’t miss your basket weaving class or elephant polo game.
A trailing stop is a type of stop loss order attached to a trade that moves as the price fluctuates.
Let’s say that you’ve decided to short USD/JPY at 90.80, with a trailing stop of 20 pips.
This means that originally, your stop loss is at 91.00. If the price goes down and hits 90.60, your trailing stop would move down to 90.80 (or breakeven).
Just remember though, that your stop will STAY at this new price level. It will not widen if market goes higher against you.
Going back to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.40, then your stop would move to 90.60 (or lock in 20 pips profit).
Your trade will remain open as long as the price does not move against you by 20 pips.
Once the market price hits your trailing stop price, a market order to close your position at the best available price will be sent and your position will be closed.
Weird Forex Orders
“Can I order a grande extra hot soy with extra foam, extra hot split quad shot with a half squirt of sugar-free white chocolate and a half squirt of sugar-free cinnamon, a half packet of Splenda and put that in a Venti cup and fill up the “room” with extra whipped cream with caramel and chocolate sauce drizzled on top?”
Oops, wrong weird order.
Good ‘Till Cancelled (GTC)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore, it is your responsibility to remember that you have the order scheduled.
Good for the Day (GFD)
A GFD order remains active in the market until the end of the trading day.
Because foreign exchange is a 24-hour market, this usually means 5:00 pm EST since that’s the time U.S. markets close, but we’d recommend you double check with your broker.
An OCO order is a combination of two entry and/or stop loss orders.
Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled.
Let’s say the price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985.
The understanding is that if 1.2095 is reached, your buy order will be triggered and the 1.1985 sell order will be automatically canceled.
An OTO is the opposite of the OCO, as it only puts on orders when the parent order is triggered.
You set an OTO order when you want to set profit taking and stop loss levels ahead of time, even before you get in a trade.
For example, USD/CHF is currently trading at 1.2000. You believe that once it hits 1.2100, it will reverse and head downwards but only up to 1.1900.
The problem is that you will be gone for an entire week because you have to join a basket weaving competition at the top of Mt. Fuji where there is no internet.
In order to catch the move while you are away, you set a sell limit at 1.2000 and at the same time, place a related buy limit at 1.1900, and just in case, place a stop-loss at 1.2100.
As an OTO, both the buy limit and the stop-loss orders will only be placed if your initial sell order at 1.2000 gets triggered.
The basic forex order types (market, limit entry, stop-entry, stop loss, and trailing stop) are usually all that most traders ever need.
Here’s a cheat sheet (current price is the blue dot):
Unless you are a veteran trader (don’t worry, with practice and time you will be), don’t get fancy and design a system of trading requiring a large number of forex orders sandwiched in the market at all times.
Stick with the basic stuff first.
Make sure you fully understand and are comfortable with your broker’s order entry system before executing a trade.
Also, always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day.
Keeping your ordering rules simple is the best strategy.
DO NOT trade with real money until you have an extremely high comfort level with the trading platform you are using and its order entry system. Erroneous trades are more common than you think!
Demo Trade Your Way to Success
You can open a demo account for FREE with most forex brokers. These “pretend” accounts have most of the capabilities of a “real” account.
But why is it 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 fall in love 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 ZERO risk.
Yes, that’s right, ZERO!
YOU SHOULD DEMO TRADE UNTIL YOU DEVELOP A SOLID, PROFITABLE SYSTEM BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.
YOU SHOULD DEMO TRADE UNTIL YOU DEVELOP A SOLID, PROFITABLE SYSTEM BEFORE YOU EVEN THINK ABOUT PUTTING REAL MONEY ON THE LINE.
“Don’t Lose Your Money” Declaration
Now, place your hand on your heart and say…
“I will demo trade until I develop a solid, profitable system before I trade with real money.”
Now touch your head with your index finger and say…
“I am a smart and patient forex trader!”
Do NOT open a live trading account until you are CONSISTENTLY trading PROFITABLY on a demo account. If you can’t wait until you’re profitable on a demo account, then there’s no chance you’ll be profitable live when real money and emotions are factored in.
At least demo trade for THREE to TWELVE months.
You can hold off losing all your money for a year riiight? If you can’t, just donate that money to your favorite charity or give it to your mama…show her you still care.
Concentrate on ONE major currency pair.
It gets far too complicated to keep tabs on more than one currency pair when you first start demo trading.
Stick with ONE of the majors because they are the most liquid which usually means tighter spreads and less chance of slippage.
Plus, in the beginning, you need time to focus on improving your trading processes and creating good habits.
You’ll also need to experience different market environments and learn how to adjust your methods and strategies as market behavior changes.
You can be a winner at currency trading, but as with all other aspects of life, it will take hard work, dedication, a little luck, and a whole lot of patience and good judgment.
Forex Trading is NOT a Get-Rich-Quick Scheme
Before we go any further we are going to be 100% honest with you and tell you the following before you consider trading currencies:
1. All forex traders, and we do mean ALL traders, LOSE money on some trades.
Ninety percent of traders lose money, largely due to lack of planning, training, discipline, and having poor money management rules. If you hate to lose or are a super perfectionist, you’ll also probably have a hard time adjusting to trading because all traders lose a trade at some point or another.
2. Trading forex is not for the unemployed, those on low incomes, are knee-deep in credit card debt or who can’t afford to pay their electricity bill or afford to eat.
You should have at least $10,000 of trading capital (in a mini account) that you can afford to lose.
Don’t expect to start an account with a few hundred dollars and expect to become a gazillionaire. The forex market is one of the most popular markets for speculation, due to its enormous size, liquidity, and the tendency for currencies to move in strong trends.
You would think traders all over the world would make a killing, but success has been limited to a very small percentage of traders.
The problem is that many traders come with the misguided hope of making a gazillion bucks, but in reality, they lack the discipline required for really learning the art of trading.
Most people usually lack the discipline to stick to a diet or to go to the gym three times a week.
If you can’t even do that, how do you think you’re going to succeed one of the most difficult, but financially rewarding, endeavors known to man?
Short term trading IS NOT for amateurs, and it is rarely the path to “get rich quick”. You can’t make gigantic profits without taking gigantic risks.
A trading strategy that involves taking a massive degree of risk means suffering inconsistent trading performance and large losses.
A trader who does this probably doesn’t even have a trading strategy – unless you call gambling a trading strategy!
Forex Trading is NOT a Get-Rich-Quick Scheme
Forex trading is a SKILL that takes TIME to learn.
Skilled traders can and do make money in this field. However, like any other occupation or career, success doesn’t just happen overnight.
Forex trading isn’t a piece of cake (as some people would like you to believe).
Think about it, if it was, everyone trading would already be millionaires.
The truth is that even expert traders with years of experience still encounter periodic losses.
Drill this in your head: there are NO shortcuts to forex trading.
It takes lots and lots of PRACTICE and EXPERIENCE to master.
There is no substitute for hard work, deliberate practice, and diligence.
Practice trading on a DEMO ACCOUNT until you find a method that you know inside and out, and can comfortably execute objectively. Basically, find the way that works for you!!!
“If you don't find a way to make money while you sleep, you will work until you die.”
- Warren Buffett
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