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FOREX Trading - an Easy Explanation

A frequently asked question about forex trading is:

Now how does this actually works?

The word Forex is an acronym for Foreign Exchange.

It refers to foreign money (the money of other countries) that needs to be exchanged for that of some other country.

Why do you need to exchange money?   Because if you were in possession of foreign money (for example USD = $), you can do almost nothing with it if you are not in the USA. In most countries it will be unusable.   You need to exchange it for the local money of that country (South African Rands = ZAR) before local people will accept it from you as payment for a product or a service.

What are the main reasons for the exchange of money?

• To pay for imports – the overseas people would prefer to receive payment in their own currency.

•  To do international investments.

•  To repay international loans.

•  To pay for services.

•  Tourism.

Each currency has got a certain value.

How do we measure the value of a currency? By measuring it against the value of another currency.

The value of one currency may not be the same as that of another currency.

It can be more or less.

The value of a currency as compared to other currencies will fluctuate and change the whole time.

The value of a currency is determined by the forces of supply and demand:

The more people that need to buy a certain currency (to pay for imports, investments, loans, tourism, services) the stronger that currency will become.

The change in value of a certain currency is affected by :

• Things happening in the world – war, acts of terrorism, natural disasters – we call these things fundamentals.

• Fundamental Announcements – announcements by governments regarding the financial and economic well being of their country.

• Banks doing large transactions.

• Speculation.

Forex trading is to speculate with the exchange rates of different currencies.

Before you can start to trade, you will have to apply for a forex trading account and deposit some money there, as you will be using your own money to trade with.

There are 3 types of accounts available (not all types are available at all brokers):

1. The normal or standard account which is also called a professional account at some brokers.

Deposit amount: $2,000.00 and up.

Smallest trade: $1,000.00 per transaction.

Pip value: It is 1% of the amount you trade with. If you are trading with $1,000.00 then the pipvalue will be $10.00 (which is 1% of $1,000.00).

(A Pip is 1/100 of a cent.)

2. A Mini Account.

Deposit amount: Any amount from $300.00 and up and less than $2,000.00.

Smallest trade: $100.00 per transaction.

Pip value: It is 1% of the amount you trade with. If you are trading with $100.00 then the pipvalue will be $1.00 (which is 1% of $100.00).

(A Pip is 1/100 of a cent.)

 

3. A Micro Account.

Deposit amount: Any amount from $100.00 and up and less than $2,000.00.

Smallest trade: $10.00 per transaction.

Pip value: It is 1% of the amount you trade with. If you are trading with $10.00 then the pipvalue will be $0.10 (which is 1% of $10.00).

(A Pip is 1/100 of a cent.)

 

As soon as you receive confirmation that the account has been opened and you can see your money in your account, you can start trading.

The process of trading:

We sit in front of a computer looking at graphs of the various currency combinations.   By keeping fundamental factors in mind (fundamental trading) and by looking at patterns in the candles as well as a combinations of indicators (technical trading) we aim to determine the direction of the market and will decide when is the best time to buy or sell.   Our main aim is to determine if the value of a certain currency as compared to another one is getting stronger or weaker.   Our aim is to invest in the currency that is getting stronger.

To Activate a trade:

If a currency is getting stronger, we will buy it.

If it is getting weaker, we will sell it.

You will right-click on the graph and select Trading / New Order in the popup menu

(or press the F9 key) to activate the Order window where you will click on the Buy or Sell button to activate a trade.

Symbol = the currency combination you are going to trade

Volume = the amount of money you are going to trade with

Volume 0.01 = $10.00

Volume 0.02 = $20.00

Volume 0.03 = $30.00

etc.

Volume 0.10 = $100.00

Volume 0.20 = $200.00

Volume 0.30 = $300.00

etc.

Volume 1.00 = $1,000.00

Volume 2.00 = $2,000.00

Volume 3.00 = $3,000.00

etc.

Stop Loss = a way of protecting yourself when in a trade by placing an order of where a trade should be closed if the market starts to move against you.

Take Profit = a place where you would like the trade to be closed in a profitable situation.

If a graph is moving higher, we will activate a Buy transaction. (Blue button)

If a graph is moving lower, we will activate a Sell transaction. (Red button)

When you activate a trade, a green dotted line will be visible on the graph to show where the entry is. If you enter a Stop Loss or a Take Profit, it will be visible as red dotted lines.

You can also see the active trade in the Terminal Window (Trade Tab) on the bottom of the screen.

To Close a trade:

Right-click in the Terminal Window (Trade Tab) on the active trade and select Close Trade. You can also double click on the active trade and the Order window will appear with a Yellow bar below the Sell and Buy buttons. Click on the Yellow bar to close the trade.

The nice thing about forex trading is that we buy from the brokerage and we sell back to the brokerage where our accounts are.

There is no need to run around looking for potential clients to convince to buy from us.

During and after every trade you will be able to see your saldo in the Account History Tab of the Terminal Window.

This is a very simplistic explanation of the procedure. We did not talk about Lots, Margins, Leverage and other important stuff in this article. More about those later on.

>>> Click here to learn more about the advantages of trading Forex

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Disclaimer

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.