In order to execute your forex strategy, you will need to sign up with a broker to use their platform. Irrespective of which platform you decide to use, you need to understand and be able to do the following as a minimum within that platform.
Open both a BUY and SELL position within that platform, but what does BUY and SELL means in forex.
You need to understand and should be able to place the following orders as listed below:-
You should have and understanding of what is LEAVERAGE in forex.
You should be able to choose and set up indicators if your strategy requires it.
You should be able to calculate the spread for a currency pair that you want to trade as this is how much it will cost you each time you place and exit a trade.
As I mentioned before the Forex market is just like any other market in which you have buyer and sellers but what is being bought or sold in this market is not goods or services, it is currencies that are being bought or sold.
In a regular market if you buy goods in order to dispose of these goods you will have to sell.
You can either sell at a profit, i.e. you sell for a price higher than what you bought at or you can either sell at a loss, i.e. you sell at a price lower than what you bought.
The forex market is no different. If you predict that the market will be going up you will have to “BUY” in order to benefit from this move. In order to get out of this BUY POSITION you will have to SELL.
As mentioned above, in order to get out of your BUY POSITION you can SELL at a profit if the market goes in your direction, in forex you would place what is know as a LIMIT ORDER (TAKE PROFIT) at the price in which you want to get out of this BUY POSITION to make a profit.
On the other hand you can SELL at a LOSS if the market does not go in your predicted direction. In forex, you would place what is known as a STOP LOSS OR STOP ORDER at the price at which you want to get of of this BUY POSITION thus making a loss.
See diagram below that demonstates this.
YOU NEED TO PAY CAREFUL ATTENTON TO THIS
Not only can you make money when the market is going up in forex, you can also make money when the market is going down. CAN YOU BELIEVE THIS!!!!!! WOW! This is what can be confusing to new forex traders.
In order to benefit from the market when it is going down, instead of buying first you will have to SELL first.
In order to get out of this SELL POSITION you will have to BUY.
If the market goes down in your favor you will BUY to get out of this SELL POSITION thus making a profit. The price which you set to exit the market is called your LIMIT ORDER (TAKE PROFIT) in forex.
If the market goes against you, that is, it goes up you will still have to BUY to get out of your SELL POSITION. You will then make a loss. The price which you set to exit the market is called your STOP LOSS. It’s basically the opposite to what happens when you are in a BUY position.
See diagram below that demonstrates this
PLEASE NOTE! IF YOUR LIMIT ORDER IS REACHED YOUR POSITION WILL BE CLOSED AND AS A RESULT YOUR STOP ORDER THAT IS LINKED TO THAT SAME POSTION WILL AUTOMATICALLY BE CLOSED AS WELL.
ON THE OTHER HAND IF YOU STOP ORDER IS REACHED YOUR POSITION WILL BE CLOSED AND AS A RESULT YOUR LIMIT ORDER THAT IS LINKED TO THE SAME POSITION WILL AUTOMATICALLY BE CLOSED AS WELL.
An entry order is one that allows you to open a position in the forex market. You can either open a BUY POSITION if you think the market is going up or you can either open a SELL POSTION if you think the market is going down.
There are three types of entry orders, they are:
- Market orders
- Limit orders or Limit
- Stop orders or Stop loss or stop order loss
A MARKET ORDER is an order that allows you to get into the market at the current price at this point in time. Therefore you will either press your BUY or SELL button to open a position.
PLEASE NOTE! THE POSSIBILITY EXISTS THAT YOUR ORDER MAY NOT BE FILLED OR PARTIALLY FILLED BASED ON THE LIQUIDITY OF THE MARKET AT THAT POINT IN TIME.
PLEASE NOTE! BEFORE YOU PLACE YOUR MARKET ORDER OR ANY ORDER AT ALL YOU NEED TO FIRST CALCULATE YOUR RISK AND DETERMINE YOUR POSITION SIZE.
Unlike a market order a LIMIT ORDER is an order that allows you to enter the market at a price that you want. It is an order that you set to SELL above the current market price (SELL LIMIT ORDER) or an order for you to BUY below current market price (BUY LIMIT ORDER)
Unlike a market order a STOP ORDER is an order that allows you to enter the market at a price that you want. It is an order that you set to SELL below the current market price (SELL STOP ORDER) or an order that you set to BUY above the current market price (BUY STOP ORDER)
See summary in diagram below
STOP AND LIMIT ENTRY ORDERS
|BUY POSITION OR GO LONG||SELL POSITION OR GO SHORT|
|ABOVE CURRENT PRICE||BUY STOP ORDER||SELL LIMIT ORDER|
|BELOW CURRENT PRICE||BUY LIMIT ORDER||SELL STOP ORDER|
PLEASE NOTE! ONCE YOU HAVE A POSTION THAT IS OPENED WHICH CAN EITHER BE A BUY OR SELL POSITOIN, THE LIMIT AND STOP ORDERS THAT ARE LINKED TO THIS POSITION ARE USED AS EXIT ORDERS, THAT MEANS THESE ORDERS ALLOWS YOU TO GET OUT OF THAT POSITION.
THE ORDERS THAT ARE IN THE TABLE ABOVE IS WHAT YOU WILL USE TO ENTER THE MARKET AT YOUR PREDETERMINED PRICE AND NOT AT THE CURRENT MARKET PRICE.
Simply put, leverage is the use of borrowed funds.
In forex this borrowed fund is provided by the broker.
For example, you have a mini account, in order for you to trade one lot you will need to have US$10,000 in your account. If you should deposit all of this £10,000 to trade one lot then you would not be trading using leverage.
Instead of you depositing US$10,000, the broker provides this money for you to trade.
Before the broker gives you this money to control. They will require you to deposit money into your account. This deposit that will allow you to control US$10,000 is called the required margin.. It is usually represented as a percentage which can be 2%, 1%, .5%, .25%. etc.
Therefore if a broker requires a 2% margin before they give you control of US$10,000, you will need to deposit at least US$200 (US$10,000 x 2%) into your account.
If you only need to deposit US$200 to control US$10,000 then your leverage is 50:1 (10,000:200) got it?
You still want a mini account but the broker’s margin requirement is 1%. How much will you need to deposit and what would be your leverage?
You would need to deposit US$100 (US$10,000 x 1%)
Your leverage would be 100:1, that is (10,000:100)
You will observe from the examples above that a smaller margin requirement results in a higher leverage.
Now you are ready to calculate your deposit and leverage for the following margin requirements of .5% and .25%.
Your answer should be as follows:-
For the margin requirement of .5%, your deposit would be US$50 and leverage is 200:1.
For thje margin requirement of .25% your deposit would be US$25 and leverage is 400:1.
You have a mini account in which the margin requirement is 2% which works out to US$200. You deposit US$600 into your account and place one trade.
After you open the trade the broker will hold on to US$200 from your account as this is the margin requirement of the broker. This amount that the broker holds on to after you open a position is called margin used. You will get this back after you close your position.
For ease of calculation, let say you have US$400 left in your account as your deposit was US$600, The amount left in your account is called free margin or usable margin, meaning you are able to place more traders using this free margin or usable margin.
if you go ahead and place another trade, your margin used will increase to US$400 and your free margin or usable margin will reduce to US$200.