Monday, March 9, 2009

ABC OF FOREX TRADING


There are essential things every trader should know at the back of their finger tips before embarking on the journey of digging on this farm land called FOREX. You need to know the FOREX terminologies as this will go a long way in helping you to understand Forex trading easier.


ORDERS

Under orders, we have ENTRY ORDERS AND EXIT ORDERS.

Entry orders can further be grouped into market orders and pending orders. Market orders are orders placed by a trader instructing his broker to buy or sell a security for him at a current market price. Pending orders are orders to buy or sell securities at a price higher or lower than the market price. Under pending orders we have buy stop, buy limit, sell stop and sell limit. Buy stop is a pending order given to a broker to buy a security at a price higher than the current market price (also called instant order) while a buy limit is a pending order to buy at a price lower than the current market price. A sell stop is a pending order to sell at a price lower than the current market price while a sell limit is a pending order to sell at a price higher than the current market price.

From this chart, we can see that the market price is 1.2837. Any order placed at this market price is a market order. An order place to buy or sell above this price is a buy stop and sell limit order respectively. While an order to buy or sell below the market price is a buy limit and sell stop order respectively.


EXIT ORDERS

These are orders placed by a trader instructing him to close his open position at a particular price to book his profit or to cut his losses. They are TAKE PROFIT ORDER AND STOP LOSS ORDER. Take profit order is an exit order to exit a trade when a targeted profit is realized. A stop loss order is an exit order to close your trade at a stated price if the market goes against you. This is mostly used to mange your investment risks.


ASK PRICE

A price given to you by the market which to buy a security. Simply put the buying price


BID PRICE

This is the price you can sell your security that the market is willing to purchase it from you. It is usually lower than the Ask price. It is the selling price



SPREAD

This is calculated as difference between the ask price and the bid price. It is the commission you pay to your broker for his services. From the diagram above, Ask - Bid = Spread (2 pips).


CURRENCY

Currency Is any form of money issued by central bank of any country. Currency pairs consist of two currencies making a pair. In Forex, currency as an instrument is traded in pairs like EURUSD, USDJPY, GBPCHF, etc


CURRENCY QUOTE

USD/JPY

This currency pair consist of two currencies: US dollar and Japanese yen. USD being the first in the quote is the base currency (base currency is always equal to 1 in that particular quote)while Japanese yen being the last in the quote is the counter currency (counter currency is equal to their exchange rate at that point in time).


RATE

This is the price of one currency in terms of another. If the exchange rate of EUR/USD is equal to 1.234, this means that 1 unit of EUR can be exchanged to 1.234 units of USD. The rate at which one currency is changed for another changes over time and this is what Forex traders take advantage of. They open a buy position when their analysis signals to them that the rate (or price) will be going up and close their position by selling back to the market in order to lock their profit. He will do the opposite when he see that the exchange rate will be falling.


PIPS

Pips is an acronym for percentage in points. It is the movement of exchange from one point to another. If EUR/USD exchange rate moves from 1.234 to 1.236, this means 2 pips gained.


LEVERAGE

This is an extra trading power provided by the market to a trader. It is in form of ratio like 100:1, 200:1, etc. When a leverage of 100:1 is given to a trader it means that for every I unit of a trader's capital the market has provided an extra 100 units to enable him trade more quantities. The provided money is a borrowed money.


MARGIN

Before you start trading, the amount you are required to deposit in your trading account is your margin.

When you receive a margin call it means you are called by your broker to deposit more money to enable you trade.


SHORT

To short a trade means to sell a security(currency). Bear also means sell.


LONG

To go long on a position means to buy. Also bull means buy.


ACCOUNT

This is where record of all your transactions are kept. This is the portfolio of your investment. In Forex we have live account and Demo-account. Demo-account is a practice account which a trader opens with a virtual money enabling him to practice Forex trading before investing his real money in a live account. You don't have to rush into Forex market but learn it as a serious business by first having a practice account as this will allow you to see all the market performance and reactions. The only difference between live account and Demo-account is that the money involved in practice account is not your real money but virtual.




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