How Do You Actually Trade Forex?

 How Do You Trade Forex? 

     To trade forex, many things should be put into consideration. I will try to explain it in steps.

 It may seem a little confusing at first but really, it is quite simple.

Forex is a leveraged financial instrument, as are Options, Futures, CFDs, Warrants

etc. So this is nothing new.

You trade Forex in 'lots'. That is the industry standard, but there are

brokers out there that do things slightly differently. For example, Oanda trades in

'units', but they can be easily converted to a lot size equivalent.

Lots are known by different names, depending on how much currency they

represent. There is a standard lot, a mini lot, and a micro lot:

One standard lot

100,000 units of the base currency and is normally expressed as a 1.0 lot

One mini lot

10,000 units of the base currency and is normally expressed as a 0.1 lot

One micro lot

1,000 units of the base currency and is normally expressed as a 0.01 lot

How many lots you can buy or sell depends on a few things:

▪ your account balance

▪ your nominated trading leverage, and

▪ how much you are willing to risk on the trade

This is when I mention the words 'margin', 'leverage', and 'risk'. All words that are

important, but there is no need to get stressed about them as they can all be

controlled and I'll show you an easy way to stay out of trouble.

Margin refers to the money you have in your account that is available to trade with.

As stated earlier, Forex is a leveraged instrument, so if your broker offers you 

  Important Information for US-based Traders

1. Most US Traders are restricted by their government's regulations whereby they

do not allow US-based brokers to offer more than 50:1 leverage on their

trading accounts. It is “Big Brother’s” way of telling you what’s best for you.

There are ways around this if you are a US-based trader. It will take a little

research on your part. 

2. Another US-only regulation is not allowing traders to hedge, which means that

you cannot have a buy and a sell trade open at the same time on the same pair.

A lot of traders hedge trades that are going against them so it gives them time

to reassess their overall position. Some actual trading systems call for trades

to be taken in both directions at the same time also. There are ways around this

also.

3. Another US-based rule is called FIFO, which means ‘first in, first out.

If you are trading multiple trades on one pair, these would be all

in the same direction, as you are not allowed to hedge, you have to exit the

trades in the same order that you entered. It also depends on the position size

of each trade. Refer to your Broker for exact information on this. This is

probably one of the most frustrating rules for US traders as sometimes you

don’t necessarily want to exit in that particular order. I’ve heard more

complaints about this rule than the others.

Most other countries do not have these restrictions.

Lot Size and Equivalent Pip Value

Just to refresh your memory, if the EUR/USD moved from 1.3924 to 1.3928, it has

moved a total of 4 pips, and if the USD/JPY moved from 95.23 to 95.19, it also

moved 4 pips. Straightforward, so far.

If I was trading 1 standard lot ($100,000), then each pip is worth US$10. So in the

above EUR/USD example of the 4 pip move and you were trading 1 standard lot, 4

pips are equal to US$40. The same US$10 per pip also applies to the GBP/USD,

AUD/USD and NZD/USD.

That is the easy part. Now all the other forex pairs aren't quite as simple due to the

the fact that the USD is not the quote or counter currency. So what you have to consider

here, is the currency conversion between the two pairs and the math can be a little

100:1 leverage, then for every 1 unit you have in your trading account, you can

control 100 units in a trade. Some brokers offer up to 1000:1 leverage. If you are

over-leveraged and trade goes against you, and you decide not to take any action,

your broker will close the trade on your behalf to protect their interests, even

though you may have blown your account out. The higher the leverage, the more

currencies you can control (buy or sell more). It is not something that concerns me

as my risk is controlled on all trades. Risk refers to what you are willing to risk on 

confusing. Me, I keep it simple and consider all pairs to have a 1 pip value of

US$10. Just about all of the forex pairs, except the EUR/GBP have a pip value of

less than US$10, and most of these are just under that level, but they do fluctuate

with currency variations.

If you do need to know the exact pip value, there are plenty

of free websites with a built-in calculator to do the math for you.

The majority of traders either trade standard lots or mini lots. As stated earlier,

Oanda is slightly different here as they trade in units, which can be very useful for

precise money management.

So, if 1 pip is equal to US$10 on a standard lot (1.0 lot / $100,000), then 1 pip on a

mini lot (0.1 lot / $10,000) must be equal to US$1, and 1 pip on a micro lot (0.01 lot

/ $1,000) is worth $0.10. Simple! And to keep it very easy and simplified, just

consider every Forex pair the same. I know a USD/JPY pip on a standard lot isn't

US$10, but it is close enough for me not to worry about its exact value. If your style

of trading is affected by the exact price of pips on the Forex pair you are trading,

then you will have to use something like a dedicated forex calculator to work out the.