Stages of Forex Trading

Basic stages of Forex trading

These are below the main Forex training article; This article covers the following:

How are currencies traded in the market?
How are currency value changes measured?
What is a spread and why is it important?
Cows and bears – what are they?
Market positioning

In this article, we will describe the most important steps that are an integral part of the world of Forex trading.

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What does the term currency pair mean?

When a beginner first encounters a currency trading platform, he or she will no doubt find that the currencies of any country in the world are traded in pairs. That is why they are known as currency pairs. Each of these pairs consists of a base currency and a currency (currency).

Take, for example, the GBP / USD currency pair, where the British pound (gbp) is the base currency, and the US dollar, also known as the “greenback”, is the currency.

In Forex trading, such as stock and commodity trading, you can see a single price announced for each currency pair. In the case of currency pair transactions, a trader buys or sells the base currency in relation to the mutual currency. In our example, we do not simply buy the British pound, but buy the pound for a certain amount of dollars.

If the GBP / USD pair is currently trading at 1,695, it means that 1,695 Units (US Dollars) are currently needed to secure 1 Base (GBP).

If the US dollar gains strength, it can be said that a smaller amount of the US dollar may buy a larger amount of the British pound. However, the GBP / USD tends to depreciate due to the appreciation of the US dollar and the fact that the pound is depreciated against the pound. If it used to trade at 1,695, due to the strengthening of our dollar, it is now trading at 1,680, or fewer of our dollars can now buy 1 pound.

Another important point when trading a currency pair is that a trader does not need to have dollars to buy a GBP / USD pair. He may start trading in euros and buy gbp / USD, as his euro becomes our dollar, which is then used to buy the British pound.

What is a pipe?

In Forex trading, changes in the price of a currency pair are measured with a “pip”. pip stands for “percentage on the spot”. This is the smallest price change that a given exchange rate can make. Most major currency pairs are priced at four decimal places, so in this case, the smallest change is for the last decimal place – for most pairs, this equals 1/100 of ٪ 1 or a base point.

If gbp / usd is currently trading at 1,670 – the last number is (0) pip. If the pair value increases from 1,670 to 1,6371, the pip has increased by 1 pp.

Forex traders usually measure their profit / loss by pip. If a trader buys GBP / USD at 1,670 and its value reaches 1,690, it means that the value of 20 pips has increased, which means that the trader will make a profit of 20 pips.

Some trading platforms reduce the value of the currency pair even further, including a fifth digit called the pipette. For example, this platform shows the value of gbp / usd as 1.63708 or five digits after the decimal point.

It is also useful to note that Japanese pairs are represented in different ways, while pip is the second number behind the decimal point and pipet is the third digit. If the usd / jpy pair value is 101,548, the number is 4 pips and the number is 8 pipettes.

Importance of spreads

In Forex trading, the spread shows the fee (commission) that each broker receives from you each time you enter the trade. Novice forex traders often underestimate the importance of spreads, but this is one of the most important factors in choosing your forex broker.

Example

Let’s take an example to say what spreads are. If GBP / USD is currently worth 1.6350 and you intend to buy this pair at this price, your broker will not sell it to you at 1.66350. The broker will send you a little higher than the bid price, for example 1,6352%. Buys the pair, gets it.

As you can see, there is a difference between the two (1,6348 and 1,6352). The difference of 4 pips indicates the spread. This is the difference between the price that the broker wants to buy from you and the price that he wants to sell to you. As the broker buys from you at a lower price and sells to you at a higher price, and makes a profit.

Many trading strategies and systems are heavily dependent on spreads, and in most cases a very large spread can make a trading system useless. If the trading system involves entering many positions in short periods, it is highly recommended to find a broker who has a small spread.

The amount of spreads is different for each currency. Unstable currency pairs usually have stronger spreads, while those with less liquidity usually have higher spreads. This is one of the main reasons why most traders prefer to trade pairs such as the Euro / US Dollar, because its spread is relatively low, especially for scalpers who enter many positions every day and with the lowest possible spreads. Need to fit. We will examine the behavior of scalpers later.

Ask and Bid

Here bid stands for the best possible price, in which a particular instrument that is currently being traded can be purchased by a trader. In Forex trading, the global bid price refers to the highest price a broker is willing to pay to buy a tool from a trader.

Ask also stands for the best possible price, where a tool is currently traded by a trader. In the Forex trading market, the ask price refers to the lowest price at which a broker is willing to sell a tool to a trader.

Trading tools (assets)

By trading tools or assets, we refer to the items that are currently being traded. If we are trading gold, gold is a trading tool. If we are currently trading a currency pair (for example, US Dollars / Dollars), then that currency pair is a trading tool.

Opening and closing position and entry and exit

If a trader has bought or sold a trading instrument, then his position in the market has opened or entered the market. If a trader is out of the market, it means he has closed his position.

If a trader has decided to open a position in the market by buying or selling trading tools, then he has entered it.

If a trader has decided to close his position in the market and record a profit or loss, it means that he has attempted to leave the market.

Optimal loss and profit margin

Loss limit is a term used to describe how to exit the market in the event that a trade is misguided. Let’s imagine a trader, who has opened his position to buy a tool in the market, but the trade develops in the wrong direction and he starts to lose. If the position remains open and the price continues in the opposite direction, the trader may lose more or all of the funds deposited in his trading account.

A loss order actually prevents heavy losses for the trader. Reaching the specified price, this order closes the position automatically. We will look at the basic types of orders that a trader can send later to start trading in the market.

Optimal profit is the price at which the trader tends to leave the market and lock in the profit he has recorded. This is usually determined before the trader decides to enter the market. In this case, if the trade proceeds as expected, the trader knows how much he will benefit from the trade before entering.

Bear market versus cattle market

One of the most important things to consider when investing in a particular market is whether prices are going up or down. Sometimes, however, the market may move in a certain direction, or as many people call it, “marginal trading.” It is very difficult to predict prices that fluctuate without a significant trend and their profitability is equally difficult, so beginners are advised to refrain from investing in such movements in the market.

If we have a distinct trend, the market can move in two possible directions – up or down, or as it is more commonly referred to – the bull or bear market.

A bull market is a financial market of any kind in which prices are rising or rising as expected. The word “cow” used to describe such a market is derived from the way cows do and throw their horns into the air from below, while bears pull their claws down.

Cattle markets are characterized by strong investor confidence, optimism and a desire to continue strong performance. “Stubborn” investors, given the market, buy assets in anticipation of the continuation of the same price trend, and they can later sell these assets at a higher price and take advantage of this difference.

Similarly, the term “bear market” describes a time when stock prices are generally falling. A bear market is affected by widespread pessimism that creates negative feelings about sustainability. As investors become more pessimistic about rising expectations, they continue to sell more and more.

A “descending” investor who wants to make a profit when prices fall has a short position and bets that prices will expand their losses. However, “short circuit” requires more management practice and is not suitable for inexperienced traders.

A variety of situations

There are two types of position trading in the market – long and short. Taking a long position means that you are buying a tool that you intend to sell later after acquiring it and earn money through the price difference. Other terms that are often used interchangeably include: long-term trading, long-term trading, market lengthening, and so on.

Taking a short position means betting that prices will go down and you will sell. Basically, when you go to a short position, for example, borrowing stock from a brokerage and selling it in the market, then you are obliged to repay what you have borrowed by buying from the open market, and you will make a profit if the price drops. The idea is to sell what you borrow now for a certain amount of money and then repay it to the broker by buying the same item at a low price.

Let us give an example. An investor gives a custom, which runs immediately, to sell 100 short xyz corp shares. Priced at $ 25.00 per share. The investor will receive $ 2,500 in cash from the transaction.

Now suppose that two weeks later, the price really drops and the investor can buy the stock (also known as short position coverage) for $ 20.00 per share. In the deal, he has to spend $ 2,000 to repurchase the stock. His business profit will be $ 500 ($ 2,500 initial cash inflow minus final cash outflow of $ 2,000). Another way to look at this is that he has earned $ 5 per trade, which gives him a $ 500 profit ($ 5 multiplied by 100 shares).

Short selling of currency is different from “short”
stocks Novice traders should be aware of the fact that short selling of a currency pair is different from short selling of stocks. In this pair, currencies are traded against each other. If we prefer to trade gbp / usd and enter a long position in this pair, we are actually buying the British pound and selling the US dollar. If we want to take a short position in this pair, we do the opposite – we buy the US dollar and sell the British pound. We are now selling the GBP / USD pair briefly.

Risk / reward ratio

The first step most new traders want to take is to dive into the market and get into the forex position immediately and at the earliest opportunity. By understanding most of the key terms and how to get into the position, a novice trader should also be aware of the risk management aspect of their business idea.

Proper risk management is essential for any business plan and allows the trader to know exactly where he wants to exit the market if the price is reversed. This is why you need to focus on better understanding the risk / reward ratio.

The risk / reward ratio is the amount of profit an investor expects to make in a situation relative to what he or she risks in the event of a loss. Knowing this ratio can help traders manage risk by setting expectations of pre-entry trading results. The key here is to find a positive ratio for your strategy. In this way, when he is right, he increases the profit margin in proportion to the amount he loses if he makes a mistake.

First class mistake

Understanding these ratios can actually help novices avoid the top-notch mistakes of business people. After reviewing more than 12 million trades, analysts were able to calculate that although most trades close with a profit, the losses are still greater than the profit because traders in lost positions are more than the amount of a win. They take risks. This statistic shows that most traders use a negative risk / reward ratio, which requires a much higher winning percentage to offset their losses.

An example to avoid this scenario is to use a minimum risk / reward ratio of 1: 2. This maximizes profit on win trades, while minimizing losses when a trade moves against you. For example, if a trader expects a trade to produce at least twice the amount at risk, this is known as a 1: 2 risk / reward ratio. Many people want this ratio to be at least 1: 3 before positioning in the business.