Basics of Forex Trading
Forex has many attractive features.*
- 24-Hour Trading – Sunday evening through Friday afternoon
- Low capital investment compared to the capital required to trade stocks.
- Extraordinary liquidity in the world’s largest financial market.
- Focus your trading on a few currency pairs instead of thousands of stocks.
- Trade long and short positions with no restrictions.
- Quick execution of trades within seconds.
When trading currencies, the trade is always executed as a currency pair. One currency is bought and the other sold relative to the supply and demand of both currencies. For example, you buy Euros with U.S. Dollars anticipating an increase in the value of the Euro relative to the U.S. Dollar. If the Euro rises against the U.S. Dollar, you can close the trade with a potential gain. Yet, suppose the Euro falls relative to the U.S. Dollar, you will experience a loss. Self-traders should consider focusing their attention and become very familiar with one or two of the major currency pairs (EUR/USD, GBP/USD, USD/JPY, and USD/CHF).
A Forex trade is comprised of the following basics:
- Currency Pair
- Number of Lots traded
- Trade direction – Long (buying) or Short (selling)
- Order type – Market or Entry order
- Money Management – Stop Loss order and Limit order
Forex trading is a speculative endeavor that requires proper training, education, discipline, confidence, risk management and money management skills. Developing a trading system matched to your trading style requires more than technical indicators, trends, and market analysis; it also requires mental and emotional discipline. Often, a trader’s emotions of greed and fear negatively influence trading results. Therefore, we suggest the following rules of trading:
- Have a trading plan focused on proper money and risk management techniques.
- Set a small profit target and become efficient at reaching your target.
- Use Stop Loss orders to protect your investment and minimize losses.**
- Open a demo account and paper trade before using real money.
- Keep a log of all your trades – good and bad. Analyze each trade and learn from it.
Become a student of the Forex market and the economic events that affect it. Those who have mastered a trading method and established the principles required to be a confident trader will enjoy the benefits of their discipline. At CompassFX, we want to assist each trader by providing an efficient trading platform, valuable market information, and effective strategies.
* The Forex market is an “off-exchange” market which may affect your trading outcome.
** With consideration of slippage, actual transaction costs may differ from attempted execution.