The Forex or foreign exchange market is a group of traders conducting tens of trillions of dollars worth of trades 24 hours a day, six days a week. When the Forex or FX market is in session, individuals, governments and major banks all over the world trade currency pairs with one another constantly. Mere seconds can mean the difference between making and losing money, and those same seconds can equal the difference between small and large changes in one’s wealth.
Currency pairs are when two types of money are traded for one another. One can trade nearly any kind of currency against nearly any other kind, provided someone in the Forex market has it available. For example, one can trade US dollars versus Japanese yen, or Euros versus Great British pounds. Since there is no unilateral standard for what a particular currency is worth, the market is in constant flux as currencies move upward and downward against one another.
In most cases, there are seven major currencies being traded. These currencies include the ones mentioned above, as well as Australian and Canadian dollars and Mexican pesos. However, since there are over a dozen different currencies available in the Forex market, there are dozens of different currency pairs one can trade.
The spread is the difference between the bid or buying price for a currency and the ask or selling price for it. An individual trading currencies has to use a broker, and every broker attaches a spread to the currency they trade, which is where they make their profit.
When you trade currencies, you watch the numbers in your currency pair. If the currency you hold has a higher number than that of the currency you are about to trade for, you will make a profit. If the reverse is the case, you will take a loss. Naturally, making a profit is in your best interests.
A pip is the smallest unit on the Forex market. In some cases, two currencies have four digits to the right of the decimal point–the furthest right is the pip. In others, most notably those involving Japanese yen, the pip is the second number from the decimal point. One pip of difference between two currencies may represent only a tiny amount of money going into your retirement fund, but there is an ace in the hole: leverage.
Unless you are watching Mr. Wizard, leverage refers to the use of credit or margins to trade currencies on the Forex market. With leverage, an individual can make one dollar have as much power as fifty dollars. This leverage must be used carefully because it can lead to heavy losses, which we will discuss in the next section.
Margins are more than just the edges of a piece of paper. Margins are also the credit many brokers will extend to traders, which allow them to trade large amounts of money without investing nearly as much. One can use $10,000 to wield half a million dollars, simply through the use of margins. However, there is a risk which comes with this power.
Sometimes, the Forex market becomes as scared a place as any other market. Rather like during the Panic of 2008 in the stock market, trading comes to a near standstill and many large players lose confidence. This tends to initiate a margin call, which is when everyone who is trading on margins has to return all of the money they borrowed. This can be problematic if one owns currencies which have changed value against them.
During a margin call, a trader is responsible for all of the money they have borrowed, which can subject them to losses far beyond the money they originally invested. Thus, it is extremely important to initiate a stop loss.
A stop loss is your best friend. Provided you set a stop loss properly, or set a trailing stop loss, you will only stand to lose a small amount of your investment, regardless of where the Forex market goes. A regular stop loss will stay at a particular valuation between currencies permanently, while a trailing stop loss will continue with your position no matter how high it may go. Once you have a decent profit, a trailing stop loss will protect your profit.
Long Versus Short
Holding a long position in a currency means keeping it for an extended period, often for at least a week. In the Forex world, a week can be a very long time. Occasionally traders will even keep positions for several months, and ride a long-duration trend in that position. However, shorting or short selling a currency is a bet against it going downward. When a trader shorts a currency, they buy a currency trading against it.
Closing it Up
The Forex market is a place where having a good command of a few basic terms is crucial to having any kind of success. Opinions vary widely on what constitutes a successful trading strategy, but without the above terms, the only terms you will get to know well are loss and tax deductions.
Content Resources: Investopedia.com
Pending Orders in Forex Trading
The concept of the pending orders can seem somewhat complicated to the new Forex traders. The way they are used or why they are used at all isn’t that obvious compared to the standard trading orders. Pending orders help traders to automate the process of trading and remain in the market, while being not in front of their Forex terminals. There are 4 basic types of pending orders and 2 derived types (which are quite popular):
Buy Limit is used if you want to buy a currency pair (open a long position) at a level, which is below the current price. For example, EUR/USD is currently trading at 1.2378, you think that it can reach as low as 1.2300 and then it will rise. If you want to have an automatically triggered buy order at 1.2300 in this case you should use a Buy Limit pending order.
Sell Limit should be used when you want to sell a currency pair (open a short position) at a level, which is above the current price. For example, GBP/USD is currently trading at 1.4531 and you think that if the currency pair reaches 1.4700 it will surely go down after that. If you want your broker to enter a short position at 1.4700 in this case you should use a Sell Limit pending order.
Buy Stop is a pending order to buy a currency pair (open a long position) at a level, which is above the current price. For example, USD/JPY is currently trading at 92.46; you think that if the currency pair goes up to 92.55 it will trigger an upward trend (e.g. a major resistance level will be broken). If you want to have a long position at 92.55 automatically in this case you should use a Buy Stop pending order.
Sell Stop is a kind of a pending order used to sell a currency pair (open a short position) at a level, which is below the current price. For example, EUR/JPY is currently trading at 114.28 and you believe that if the pair declines to 113.40 it will trigger a strong bearish movement (e.g. a major support level will be broken). If you want to have a short position open automatically at 113.40 in this case you should use a Sell Stop pending order.
Stop-Loss is used to prevent an excess loss on a position. It’s automatically triggered whenever the price reaches a designated level. It can only be set to the level above the open price for the short positions and to the level below the open price for the long positions. It’s a combination of Buy Stop and Sell Stop pending orders. Almost all Forex brokers feature trading platforms that provide an opportunity to set stop-loss as a simple parameter of a position.
Take-Profit is used to close a position with a satisfactory amount of profit. Like stop-loss, it’s triggered automatically at a certain level. It can only be set to the level below the open price for the short positions and to the level above the open price for the long positions. It’s a combination of Buy Limit and Sell Limit pending orders. Almost all Forex trading platforms allow setting a take-profit as a simple parameter of a position.
Now you should be able to use pending orders without too much trouble. It’s always recommended to use stop-loss and take-profit orders and it’s sometimes more prudent to use stop/limit orders to enter positions, especially when you expect a market to retrace to a certain level before continuing its trend. If you have any questions or comments about pending orders and their use in Forex trading, please, use the form below to post them.