Unlike most financial markets, the OTC (over-the-counter) foreign exchange market has no physical location or central exchange and trades 24-hours a day through a global network of businesses, banks and individuals. This means that currency prices are constantly fluctuating in value against each other, offering multiple trading opportunities.
The two main ways to trade in the foreign currency market is the simple buying and selling of currency pairs, where you go long one currency and short another. The second way is through the purchasing of derivatives that track the movements of a specific currency pair. Both of these techniques are highly similar to techniques in the equities market. The most common way is to simply buy and sell currency pairs, much in the same way most individuals buy and sell stocks. In this case, you are hoping the value of the pair itself changes in a favorable manner. If you go long a currency pair, you are hoping that the value of the pair increases. For example, let’s say that you took a long position in the USD/CAD pair – you will make money if the value of this pair goes up, and lose money if it falls. This pair rises when the U.S. dollar increases in value against the Canadian dollar, so it is a bet on the U.S. dollar.
The other option is to use derivative products, such as options and futures, to profit from changes in the value of currencies. If you buy an option on a currency pair, you are gaining the right to purchase a currency pair at a set rate before a set point in time. A futures contract, on the other hand, creates the obligation to buy the currency at a set point in time. Both of these trading techniques are usually only used by more advanced traders, but it is important to at least be familiar with them.
Types of Orders –
A trader looking to open a new position will likely use either a market order or a limit order. The incorporation of these order types remains the same as when they are used in the equity markets. A market order gives a forex trader the ability to obtain the currency at whatever exchange rate it is currently trading at in the market, while a limit order allows the trader to specify a certain entry price.
Forex traders who already hold an open position may want to consider using a take-profit order to lock in a profit. Say, for example, that a trader is confident that the EUR/USD rate will reach 1.1800, but is not as sure that the rate could climb any higher. A trader could use a take-profit order, which would automatically close his or her position when the rate reaches 1.1800, locking in their profits.
Another tool that can be used when traders hold open positions is the stop-loss order. This order allows traders to determine how much the rate can decline before the position is closed and further losses are accumulated. Therefore, if the EUR/USD rate begins to drop, an investor can place a stop-loss that will close the position (for example at 1.1770), in order to prevent any further losses.
As you can see, the type of orders that you can enter in your forex trading account are similar to those found in equity accounts. Having a good understanding of these orders is critical before placing your first trade.
At Powerup Capital you will learn the following topics –
- What makes a good candidate for each trading strategy? Based on our each proprietary trading strategies how to chose a currency pair that has a best possible outcome.
- What do I look for that would make one candidate better than another? How to chose the best currency pair using the strategies?
- How much should I be willing to pay for a particular trade? How much capital I should use for each trade so to stay in the game even if you have a bad trade?
- What are the proper entrance and exit criteria for each trade? How to find entry and exit using the proprietary trading strategies?
- How can I tell when to pass, or to go ahead with a trade? How to ignore bad trades?
- How do I establish my loss limits and profit goals?
- How much should I be willing to risk in order to make a reasonable return?
- How long should I hold a trade before I take it off for a loss or profit?