Reading Currency Quotes : Each world currency is given a three-letter code. The most common currencies for traders are: European Euros (EUR), US Dollars (USD), United Kingdom Pounds (GBP), Australian Dollars (AUD), Japanese Yen (JPY), Swiss Francs (CHF) and Canadian Dollars (CAD).
Forex (FX) trading is a true 24-hour market that operates five days a week. For example, traders in Australia have access to the Forex market starting Monday morning when the market opens in Australia for the start of the trading week. Trading centres around the globe then come online until the US closes, by which time Australia has reopened for the next trading day, so traders can continue to trade around the clock until the New York close on Friday.
The Basics
Like everything else in this world, you need to know the basic terminology to get started.
When trading Forex, foreign exchange prices are indicated by quotes, called currency pairs (the simultaneous buying of one currency and selling of another). It is all automated in one trade, the same as CFDs for shares, gold or any other traded instrument.
In any currency pair, the first currency is called the 'base' and the second is called the 'quote' currency. The currency pair shows how much of the quote currency is needed to purchase one unit of the base currency. In the more active traded FX crosses like the Euro, British Pound, Aussie Dollar it is the norm for the USD to be the "quote" currency in the pair. e.g. AUD/USD = .8623. However, with the Japanese Yen, Swiss Franc, Canadian and Singapore Dollars, the USD is the "base" currency. e.g. USD/JPY = 91.23
As Forex (FX) trading essentially involves the buying of one currency and the selling of another, if you are buying the base currency you are also effectively selling the quote currency and vice versa.
Understanding Spreads : A spread is the difference between the ask price (the price you buy at) and the bid price (the price you sell at) quoted in pips. If the quote between EUR/USD at a given moment is 1.2220/2, then the spread is 2 pips. If the quote is 1.22235/50, then the spread is 1.5 pips. The spread arguably compensates the market maker for taking on risk from the time it executes a client trade to when the broker's net exposure is hedged (possibly at a different price).
Why Are Spreads So Important?
Spreads can affect the return on your trading strategy in a big way. Wider spreads can make it more difficult to realise a profit. The trader's sole interest when going 'long' is to buy low and sell high or when 'shorting', selling high and buying back low. Wider spreads means buying higher and having to sell lower for a long position and for the 'short' position, selling higher and buying back lower to get the same return as a small spread. In summary, the wider the spread, the less return compared to a narrow spread for the same percentage move.
Risk Management Strategies : The most common and important tool in currency trading is the stop-loss order. A stop-loss order ensures that a particular position is automatically liquidated at a predetermined price in order to limit potential losses, should the market move against a trader's position. This allows the trader to live to trade again.
Stop loss levels in trading are suggested for whatever reason, if the market starts going in the wrong direction traders tend to panic and say to themselves, it will turn around. Then comes the anxiety of when to exit. Not only could the trader lose more money than intended, but also the trader often loses morale, as it's now much harder to make up the losses. This is the reason a stop-loss level in trade is suggested strategies. Even if the market starts going in the right direction 5 minutes later, you have not eliminated the risk of it turning around.
Trading rules are there to follow, not to try to go around them. History shows that over the long term, not following a stop-loss strategy will only hurt the trader.
| product | symbol | contract unit | contract size | instrument type | initial margin | tick size | contract month |
|---|---|---|---|---|---|---|---|
| EURUSD | EURUSD | Currency | 100000 | Currency | 2000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| GBPUSD | GBPUSD | Currency | 100000 | Currency | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| AUDUSD | AUDUSD | Currency | 100000 | Exotic Currencies | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| NZDUSD | NZDUSD | Currency | 100000 | Exotic Currencies | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| USDCAD | USDCAD | Currency | 100000 | Currency | 1000 | 0.0001 | Spot - T+2 - Max. 360 Days |
| USDCHF | USDCHF | Currency | 100000 | Currency | 2000 | 0.0001 | Spot - T+2 - Max. 360 Days |
The destroyer of any trading strategy: One of the more common and often fatal mistakes a trader may commit in a losing trade is when they begin to think of excuses not to close the position - he or she thinks that perhaps the market will suddenly turn around and move in a favorable direction. The trader keeps thinking of this, and doesn't have the discipline to close the falling position. Don't let this happen and set exit points when you establish the trade - you can always change them once the trade goes in your favor.
Examples of Correct Stop and Limit Trading Orders
If you are buying foreign currency, it means you are investing in a long position. In this case, you will set a sell limit above the current currency price, so if the currency rises, you will collect the profit you've accumulated. You will also select sell stops in the long position; so if the currency drops you will cut your losses short.
In a short position, when you are selling currency, you will set buy limit trading orders below the currency price, so you can take profits if the currency keeps dropping. Buy stop trading orders will prevent you from taking more losses, also for the short position.