Tutorial Forex

The best way for new traders to get a handle on what currency trading is all about is to open a practice account. Almost every forex broker offers a free practice account to new clients. All you need to do is to sign up with any good forex broker.

Practice accounts give you the great chance to experience the forex market. You can see how the price changes at different times of the day. Practice accounts are funded with virtual money. So you are able to make trades with no real money at stake and gain experience in how margin trading works.

How various currency pairs may differ from each other? How the forex market reacts to new information when major news and economic data is released. You can trade your practice account with real market conditions without any fear of losing money.

You will also learn using different market orders on your practice account. Imagine using your real money trying to figure out how different market orders work. You will learn on your practice account how to manage an open position? This will improve your understanding of how margin trading and leverage works. You can also start analyzing charts and following technical indicators on your practice account. Without any fear of losing your money, you can experiment with different trading strategies and see how they work out in the real market conditions.

You can test drive almost all the features and functionality of a brokers platform on your practice account. However, one thing you will never be able to simulate on your practice account is the emotions involved in trading. Controlling emotions is important in order to become a successful trader. Emotions will only come into play once you put your real money on the line. Practice accounts are a great way to experience real forex markets first hand.

You can use market orders like the limit orders or the one cancels the other orders. However, you can also trade the current price of the market using the click and deal feature of your brokers platform. There are many ways to pull the trigger in the forex market. Pulling the trigger means how to enter or exit a position.

Many traders dont want to leave an order that may or may not get executed. Most like the idea of opening a position by trading at the market. Most prefer the certainty of knowing that they are in the market.

You just need to specify the amount that you want to trade. Then click on the buy or sell button to execute the trade. The forex trading platform will respond back within a second or two with a pop-up message either confirming or not confirming that the position was opened. Most forex brokers provide live streaming prices. You can deal with these live price feeds with a simple click of your computer mouse.

Attempts to trade at the market can sometimes fail in very fast moving markets when prices are adjusting quickly like after a data release or break of a key technical level or price point.

Gold has always been considered as the ultimate global currency. Before 1973, US Dollar used to be pegged to gold. But with the collapse of the Bretton Woods System that year, US Dollar was unpegged from gold and become a freely floating currency. Free floating means the value of the currency is determined by the economic fundamentals of supply and demand.

Now US Dollar is only backed by the full faith and credit of the US Government. In times of financial crisis like the present when the global economy is in recession, many investors try to take refuge in gold as the ultimate safe haven.

The Australian Dollar is known for its strong correlation with gold prices. Most of this is due to the amount of gold that Australia produces and exports. US Dollar has an inverse relationship with gold prices. When gold prices rise, US Dollar falls in value. This causes the currency pair AUD/USD to rise in value.

The opposite is also true. As the US Dollar gains value, gold usually loses value. So when gold prices are rising, we can execute long trades on AUD/USD. Likewise, when gold falls in value, we can sell short AUD/USD. This relationship provides us with a method to take advantage of the fundamental factors in forex markets. It may be due to the fact that gold is considered to be the ultimate safe haven by investors in times of financial crisis.

We now know that AUD/USD pair reacts strongly to gold prices. How do you follow gold in currency trading? We will trade AUD/USD following gold. You should use RSI (Relative Strength Index) as the technical indicator to trigger the trade. If you have read the previous article on how to follow oil in currency trading, I had talked about using the CCI (Commodity Channel Index) to trade USD/CAD pair.

When both gold and oil are commodities, why is that we are now using RSI instead of CCI? It all depends on how quickly the two indicators react to volatility. CCI gives a quicker signal. This is good for relatively less volatile pairs. Whereas RSI gives slower signals, this is ideal for more volatile pairs like AUD/USD.

You should use a moving average to confirm if gold is in an uptrend or a downtrend. You will use the seven periods RSI on AUD/USD chart. Watch the RSI chart when it enters one of its reversal zones, then move back out of the reversal zone in the same direction as the gold is trending.

You should enter a long trade on AUD/USD if the gold prices are rising and the RSI is crossing back above the 30 line. On the other hand, you should enter a short trade on AUD/USD pair if the gold prices are declining and the RSI is crossing below the 70 line.

Set a limit order of 200 pips and a stop loss order of 50 pips. This gives a risk to reward ratio of 50/200=1/4. 200 pips mean $2000 profit if the trade goes as you had anticipated. 50 pips stop loss means a $500 loss if the trade does not go in your favor. It is not uncommon to have a trade go against you only to find yourself right back in trade that goes your way.

Rollovers represent the intersection of interest rate markets and forex markets. When an open position from one value date or settlement date is rolled over to the next value date or settlement date, this is known as Rollover in currency trading. Rollovers are unique to the currency markets.

Rollover rates depend on the difference between the interest rates of the two currencies in the pair that you are trading. Only remember that what you are trading is in fact the good old cash. Dont forget currency is money after all.

It is like having a deposit in a bank account when you are long on a currency. Its like take a loan from the bank if you are short. You should expect an interest gain or an interest expense on holding a currency position over time just as you would expect to earn interest on a bank deposit and pay interest on a loan.

The difference between the interest rates between the two currencies is called the interest rate differential. Think of the open currency position as one currency with the positive balance (the currency you are long) and one with negative balance (the currency you are short).

You should look for the base or benchmark lending rates in each country. The interest rates of two different countries apply because your accounts are in two different currencies. You can find the benchmark lending interest rates of different countries from any good financial website like the Wall Street Journal, the Financial Times, CNBC etc.

The larger the impact from rollovers, the larger the interest rate differential! The smaller the impact of the rollovers, the narrower the interest rate differential! If you hold an open position past the settlement date or value date, rollovers are usually carried out by your forex broker.

Rollovers are applied to your open currency position by two offsetting trades that result in the same open position. Some online forex brokers apply the rollover rates by adjusting the average rate of your open position. Other forex brokers apply the rollover rates by applying the rollover credit or debit directly to your margin balance.

Rollovers are not applied if you dont carry a position over the change in the value date. Rollovers do not apply for day traders who usually close their positions at the end of each trading day. Rollovers are applied to open position after 5.00 PM EST change in value date. Rollovers only apply to your over night open position carried over to the next day.

Rollovers can earn you interest income if you are long the currency with the higher interest rate and short the currency with the lower interest rate. Rollovers will cost you money if you are short the currency with the higher interest rate and long the currency with the low interest rates.

Trading can be challenging. Trading is not investing. It is speculating. Speculating is defined as assuming business risk in the hope of making a profit from market fluctuations. Successful speculating requires analyzing different market situations, predicting outcomes, and putting your money on the side of the trade on which you think the market is going to go up or down.

If you are a trader, you should appreciate the fact that if you apply the correct techniques for analyzing trades, manage your money and protect your trading account, you can be wrong 70 percent of the time and still be a successful trader. How is that possible? It is only possible by entering a trade where the risk/reward ratio is les than1/3.

Over time, opportunity keeps on shifting from one market to another. For example, right now forex and gold markets are really hot while stocks are down. Gold prices are going up. Those who entered the trend by investing at the right time and are going to ride the trend till it lasts will make a lot of money in the gold markets. At the moment almost everyone is running and buying gold as a hedge against turmoil in the global markets. Everyone includes countries, institutional investors, hedge funds and retail investors.

Many hedge funds had made a lot of money by investing in crude oil futures in the year 2008. Right now oil prices are down due to the reduced demand in the global markets, this situation may continue for some months or some years but suddenly you will find that crude oil futures have become a great investment opportunity again.

Oil prices will again go up in a few years time as the global economy recovers and demand for oil increases. In trading it is the timing that is of essence. Timing for entering the market and the timing for exiting the market!

Investors and traders make the mistake of focusing only on one market. Many end up spending time on only one market. In reality all the markets are interlinked. Futures, options, forex, stocks, commodities, all markets are effected and in return effect other markets. If something happens in one market, you will find the repercussions in the other markets. Successful trading requires mastering a strategy that enables you to trade multiple markets and multiple time frames.

They do testing, development, put on a million indicators, go and trade live. They do everything they can while spending all kinds of time trying to figure out one market and one timeframe. But then what almost happens is that market starts to go sideways or the opportunity shifts to another market.

You really have to have the ability to be able to adopt the market conditions and not waste your time to really master one market which is critical. There were so many stocks just a few years ago that were incredible to trade that either dont exist anymore or would not trade successfully today.

This is counterintuitive. A lot of people will teach you that you really need to learn the ins and outs of one market. But the problem with that philosophy is that its very difficult to stay with one market and one timeframe.

In forex trading, stop loss execution policy is somewhat different than in equity trading. If the broker bid price reaches your stop loss order rate, stop loss orders to sell are triggered. Suppose, your stop loss order to sell is 1.2540! The brokers lowest price quote is 1.2540/1.2543. Your stop loss order will be executed. Almost the same goes for buy orders.

Most of the forex brokers will never guarantee stop losses around the release of economic reports. The benefit of this practice is that some brokers will guarantee against slippage on your stop loss order under normal trading conditions. The downside of this is that your stop loss order will be executed earlier. So you will have to add in extra cushion when placing them on your forex trading platform.

One-Cancels-the-Other Orders: A one cancels the other order is a stop loss order paired with a take profit order. A one cancels the other order is usually abbreviated as OCO order. Your position stays open until one of the order levels is reached by the market and closes your position. When one order level is reached and triggered, the other order is automatically cancelled. An OCO order is the ultimate insurance policy for any open position!

One cancels the other (OCO) orders are highly recommended for every open position. Lets use an example to make it clear. Suppose you are short USD/JPY at 120.00. You think that its going to keep going higher if it goes up beyond 120.00. Thats where you decide to put your stop loss buying order.

At the same time, you believe that USD/JPY has downside potential to 118.50. So you set your take profit buying order at 118.50. You now have two orders bracketing the market. Your risk is clearly defined. As long as the market trades between 120.00 and 118.50, your position remains open. If 118.50 is reached first, your take profit order is triggered and you buy back at a profit. However, if 120.00 is hit first, your position is stopped out at a loss.

Contingent Orders: Contingent orders are also referred to as if/then orders. They are sometimes also called If done/then orders. If/then orders require the If order to be done first. Only then the second part of the order becomes active. A contingent order is an order where you combine several types of market orders to create a complete forex trading strategy.

If the trading platform offer rate reaches your buy rate that means your limit order is only executed. Similarly, a limit order is only executed if the trading platform bid price reaches your sell rate. Your order is only filled based on the price spread of the trading platform. This is the key feature of most forex broker order policies.

Lets make it clear with an example. Suppose you have a buy order to sell EUR/USD at 1.2855. Your forex broker spread on EUR/USD pair is 3 pips. Your buy order will only be filled if the trading platform price is 1.2852/1.2855. If the lowest price is 1.2853/1.2856, the limit order will not be filled as the brokers lowest rate of 1.2856 does not match your buy rate of 1.2855. The same thing happens with limit orders to sell.

Developing trading discipline in yourself is what you should do if you want to become a successful trader in the long run. Suppose in a trading session, you come to a point in your market analysis when you have no confidence on the accurate direction of the market forecast. Things are not clear. Never forget, a lost opportunity is better than lost capital. Choose not to trade.

Wait for the market conditions to become clearer. Increase the probability of success by trading when the trade setups are strong. This is far more important in forex trading than in stock trading. The forex markets move a lot.

You should understand that high leverage gives you the opportunity to make a lot more money much faster. But in case you go wrong, you can get your account wiped out. When you dont see an opportunity clearly, try to sit on the sidelines. Wait for the market conditions to become clearer. Learn to be a patient trader. Let the market come to you.

Leverage is a wonderful money making tool. It is the key to making money in the forex markets. No other market allows high leverage that this market allows. 100:1 leverage means that for a $1000 deposit, you can trade $100,000. This huge leverage allows you the opportunity to make the kind of returns that you want.

But using high leverage can be dangerous. It has the potential of making you lose some or all of your capital if you trade foolishly. Take the example of credit cards; the bank lets you borrow huge sums of money using your credit card on the promise that you will pay it back. You should use your credit card responsibly.

But in case you abuse your credit card. It can lead you into heavy debt and even bankruptcy. Like you manage your credit card, you should manage leverage in forex trading. Just because you have $10,000, it does not mean that you should trade 10 lots and use all your capital. Using all your capital in one trading session would be foolish.

A very effective trading method yet very conservative would be to never use leverage of more than 20% on your capital in the account. You should only trade two lots with a $10,000 capital in your account. Use good money management rules. Trade with discipline! You can grow your account realistically in a short period of time.

The compounding factor of money is very powerful. Many people want to get rich quick. They try to take unnecessary risk. Dont focus on proper trading principles. Develop the discipline in yourself to follow simple money management rules.

Suppose you open a mini account. Start by trading one position of a tenth of a lot. You will not make much money in the beginning. The position size is only one tenth of a normal lot. Be patient! The percentage of returns will compound over time. You will trade a much larger sum of money with the passage of time.

As a forex trader, you should make realistic goals. Goals that can be achieved over time! You should not use your life savings. You should never borrow money to trade. You should not use money that you would use to pay monthly utility bills. You should always trade with the money that you can afford to lose! Never ever trade with money that you cannot afford to lose! It is foolish. You should not think like a gambler. Trading is business. It is not gambling.

Stop Loss Orders: If you dont use stop loss orders, you are leaving yourself at the mercy of the markets. A dangerous proposition with unlimited downside risk! Stop loss orders are critical to your trading survival. If the market moves against your position, stop loss orders are used to limit losses. The traditional stop loss order does just that. It stops losses by closing out an open position that is losing money.

Stop loss orders are on the other side of the take profit orders but in the same direction. If you are long, your stop loss order would be to sell but at a lower price than the current market price. If you are short, your stop loss order would be to buy but at a higher price than the current market price.

Trailing Stop Loss Orders: A trailing stop loss order is a stop loss order that you set at a fixed number of pips from your entry rate. As the market price moves, the trailing stop order adjusts the order rate but only in the direction of your trade.

Suppose you are long on EUR/CHF at 1.2654. You set the trailing stop loss order at 30 pips. The stop will initially become active at (1.2654-30=) 1.2624. The trailing stop loss order continues to adjust itself higher as the market moves higher. The stop adjusts itself and will become active at 1.244 if the EUR/USD rate goes up to 1.2674.

When the market puts in the top, your trailing stop will be 30 pips below the top. If the market ever goes down by 30 pips, the trailing stop loss order will be triggered and your open position closed. So in our example, you are long at 1.2654. You set the trailing stop loss at 30 pips and it became active at 1.2624.

If the market never ticks up instead goes straight down, you will be stopped out at 1.2624. If the market first rises to 1.2664 and then declines 40 pips, your trailing stop loss order would have first risen to 1.2664-30=1.2634. Thats where you would be stopped out.

You must have heard the saying: Cut your losses and let your winners run. A trailing stop loss order allows you to do just that. The idea is that when you have a winning trade on, you wait for the market to stage for a reversal and take you out of your trade by using the trailing stop loss order instead of picking the right level to exit on your own.

So the key to successful trading is to cut losing positions quickly and let winning positions run. This function is nicely performed by the trailing stop loss order. Use of stop loss orders is critical in money and risk management. Never ever, trade without the stop loss orders!

Forex markets are open 24 hours a day, five days a week except on weekends. You cannot sit in front of your computer screen all the day watching the markets move. Currency traders use market orders to catch market movements when they are not in front of their screens. A market move is just likely to happen while you are asleep or in the shower as while you are sitting in front of your computer screen.

Trading can be very difficult without these market orders. Market orders are very critical to your trading success in the currency markets. Think of them as trades waiting to happen. If you enter an order and the subsequent price action triggers its execution, you are in the market so be as careful as possible while playing with the market orders.

Professional currency traders routinely use market orders to capture sharp short term price fluctuations, limit risk in volatile or uncertain markets, implement a trade strategy from entry to exit and preserve trading capital from unwanted loss. Market orders are essential for maintaining trading discipline.

Currency markets can be notoriously volatile and difficult to predict. There can be sudden price swings. Using market orders can help you capitalize on short term price movements while limiting the impact of any adverse price movements.

If you dont use market orders, you probably dont have a well thought out trading plan. While there is no guarantee that the use of market orders will limit your losses and protect your profits in all market conditions, a disciplined use of market orders will help you quantify the risk that you are taking. It will also give you the peace of mind in trading.

Multiple types of market orders are available in forex markets to forex traders. However, you should know that not all market orders are available at all online forex brokers. So when you open an account with a forex broker, you should add the market orders to the list of questions you need to ask the broker.

Take Profit Orders: When you have an open position in the market, use the take profit order to lock in profits. There is an old market saying, You cant go broke taking profits. Suppose you are short GBP/USD at 1.2354. Your take profit order will be to buy back the position and be place somewhere below 1.2334. Making you a profit of 20 pips! If you are long EUR/USD at 1.2845, your take profit order will be to sell the position somewhere higher close to 1.2875.

Limit Orders: Dont forget the saying, Buy low and sell high. A limit order is any market order that triggers a trade at more favorable levels than the current market price. If the limit order is to sell then it must be placed somewhere above the current market price. If the limit order is to buy, it must be entered somewhere below the current market price.

Cross currency pairs are as important as the major currency pairs that involve USD on either side of the transaction. The most active traded crosses focus on the three non USD currencies namely EUR, GBP and JPY. These crosses are known as the euro crosses, sterling crosses and the yen crosses. The most actively traded cross currency pairs are: EUR/GBP, EUR/JPY, GBP/JPY, AUD/JPY, EUR/CHF, and NZD/JPY. Sometimes you will find more action in the cross currency pairs. Crosses enable currency traders to directly target trades to specific individual currencies to take advantage of news or events.

For a new traded there are some surprises in currency trading. You may notice that the currencies are combined in a seemingly strange way when you look up at the currency pairs. For example, if euro-yen (EUR/JPY) is a euro-yen cross, why it is not being also referred to as yen-euro (JPY/EUR)? The answer is these conventions have been designed to reflect traditionally strong currencies versus traditionally weak currencies with the strong currency coming first. Those quoting conventions were evolved over the years.

The first currency in the pair is known as the base currency. It is the base currency that you are buying or selling when you buy or sell a currency pair. The second currency in the pair is known as the counter currency. So if you buy 100,000 EUR/JPY. You have just bought 100,000 Euros and sold the equivalent amount in Japanese Yen.

Therefore you can say currency trading involves simultaneously buying and selling. Going long in currency trading means having bought a currency pair! When you are long, you are looking for the prices to go higher. You want to sell at a higher price from that where you bought. It will make you a profit. If you are long and the price goes down, you will make a capital loss.

Going short in currency trading means selling a currency pair! It means that you have sold the currency pair, meaning you have sold the base currency and bought the counter currency. When you anticipate the price of a currency pair going down, you go short in anticipation of the price going further down. This will make you a capital gain later when you exit your position. In currency trading going short is as common as going long. Unlike stock trading where you had to observe the up tick rule before you could go short. In currency trading there is no such rule.

Its called squaring up if you have an open position and you want to close it. You need to buy or go long to square up if you are short. You need to sell or short to go flat if you are long. Having no position in the market is known as being square or flat. Selling high and buying low is the standard currency trading strategy just like in any other trading.

Profit and Loss is how traders measure success and failure. A clear understanding of how P&L works is especially critical to online margin trading. When you open an online currency trading account, you will need to pony up cash as collateral to support the margin requirements established by your broker.

Profit and Loss calculations are pretty straight forward. They are based on position size and the number of pips you make or lose. A pip is the smallest increment of price fluctuation in currency pairs. Most of the currency pairs are quoted up to four decimal places except those involving JPY; they are only quoted up to 2 decimal places. Suppose GBP/USD quote is 1.2963. If the price moves from 1.2963 to 1.2983, it has gone up by 20 pips (1.2983-1.2963). Pip is the increase or decrease in the fourth decimal digit. Pips are also referred to as points.

For trading success, good money management is the key. Many traders ignore this aspect of trading at their own peril and get their account blown in a few weeks of trading. Trading discipline means using a trading system based on money management rules that limit your risk and avoid making trading decisions based on emotions.

You need to have sufficient capital in your account if you want to make meaningful profits. One of the worst blunders that currency traders can make is to trade without sufficient capital. Low capital increases your chances of getting blown out too soon. This does not mean that you should have a lot of money before you start trading. It only means that you need to have enough capital in your account in order take advantage of the movements in the currency markets.

The minimum amount required to open a standard account with many forex brokers is $2000. You can start with $2000. However, it is recommended by most of the professional traders that you should start with at least $5000 to get good results. A trader with limited capital is always a worried traders always looking to minimize losses beyond the point of realistic trading. Never ever trade live without practicing on the demo account for a few months.

A regular account or a standard account often also called 100k account lets you trade a $100,000 standard lot with a $1000 deposit. This $1000 is kept as the margin by the broker. This is a 1% margin.

You can change the margin account to whatever you feel comfortable with. When you open an account with the broker, you must determine what the default margin is. If you start at 2% margin, then it will cost you $2000 to trade one standard lot.

Many brokers offer huge leverage to the new trades. This is done to entice them to trade more. You can get a leverage of up to 400% by some brokers. Using 400% leverage means trading $400,000 with a $1000 deposit. With a small deposit you are controlling a huge amount. Be careful! You will get wiped out in a moment. Dont use more than 4% leverage while trading in the start. Too much leverage is dangerous for you.

I am not saying that leverage is bad. You need to know it is a double edged sword that can cut both ways. It can increase your ROI but at the same time it can wipe you out in case of a slight market move going against you. Its just that you need to understand and learn how to use leverage. You can only do so with practice and with practice and more experience; you can increase the level of leverage in your trading.

Mini accounts are great for beginners. You can open a mini account with most of the brokers with a deposit of only $300. The mini account was developed to accommodate investors who were looking for bringing more diversification to their stocks portfolios. This small dollar requirement allows many small investors to participate in the forex markets. Many were previously unable to do so. Some brokers offer micro accounts as well.

On a mini account, you have different lot sizes as compared to the standard account. One lot on a mini account means $10,000. You only need $50 to control a mini lot of $10,000. A pip size on the mini account is equal to $1 instead of $10 as on a standard lot.

If you lose 100 pips on a mini account, it means losing only $100. Losing 100 pips equal $1000 on a standard lot. A mini account reduces your risk by 10%. But it also reduces the profit that you can make by 10%. Start with at least $500 on a mini account. A mini account is a great way for new traders to practice forex trading. First develop the feel of how the forex markets work. Once you become an expert, trade on a standard account. Standard lot gives you the opportunity to make good ROI.