Forex Trading Basics
The foreign exchange market is the highest volume trading market in the world and daily turnover dwarfs all other stock and bond markets worldwide. Some reasons why foreign exchange trading is so popular are due to 24 hour trading and high leverage available.
Forex is normally traded on margin, meaning only a small deposit is normally required which controls a significantly larger actual trade value. A normal deposit would be 1% which means if you traded $100,000 a deposit of $1000 would be required. This represents leverage of 100:1 and means a shift in the underlying value of a trade of 3% would result in a 300% profit or loss on your deposit.
Due to this, forex trading requires a professional approach where discipline is always present and emotion is as far removed as possible from all trades.
Currency Pairs: Base Currency versus Variable Currency
Every trade on the foreign exchange market is carried out by trading currency pairs. For example, you will buy GBP and sell USD or buy Euro and sell USD or any combination of your choosing. Each trade involves a long (bought) and short (sold) side to a trade and represents your speculation on one of the currencies gaining strength against the other.
The base currency should always be the first currency quoted in a trade pair. For example, USD/CAD, the US dollar would be the base currency while the Canadian dollar would represent the variable currency. The price of CAD at any time would represent how much of the variable currency is required to get 1 unit of the base currency.
Stop-Loss and Slippage
Slippage is not uncommon within foreign exchange trading as the market is fast-moving which can lead to currency being traded at a price below the requested minimum trade price in the stop-loss order.
A stop-loss is a vital means of limiting potential losses or preventing winning trades turning into losing trades when market conditions go against your desired results. These prices can be adjusted throughout the day and can make trades profitable even when market conditions are volatile. For example, if you have charted out your desired stop-loss position and set a price to take-profit, if the daily trend remains highly favourable, you can adjust the take-profit and stop-loss figures upwards. This means if you don't achieve the new higher figure and the market takes a downward turn, your adjusted stop-loss figure can still turn out profitable.
