How and the rules of forex trading
For those of you who are still ordinary, of course, wondering about how the forex trading is? Many people imagine easy ways, buy currencies at low prices, then sell at high prices. In fact, to be able to do it well and achieve profits, an understanding of the rules and methods of forex trading is summarized in the following 10 points.
Forex Trading Can Be Done Anytime And Anywhere
The time of opening the forex market is divided into session market from Sydney, Tokyo, London session, and New York.
This fact has a big effect after the birth of the online forex trading method because it means that forex traders throughout the world can trade 24 hours a day for 5 days a week. You can trade forex before battling to the office, before going to bed at night, or even during work breaks.
How To Trade Forex Online Requires Internet Access
Before entering into the discussion on how to trade forex, it is necessary to know what the supporting infrastructure is. To be able to trade forex online, a computer, laptop, or smartphone is needed; and internet connection. In addition, forex trading platform software is also needed which can be downloaded and used for free.
Where can I get software for forex trading? Companies called forex brokers will connect you as a trader to gain access to the market. So, the first step in the procedure for how to trade forex is to register with a particular broker, then download the trading software provided.
If you want to experiment with how to trading forex and don’t want real trading, you can also register a forex demo account first. Demo forex accounts can be obtained for free from any broker, and you can use them to trade with virtual funds
Currency Traded in Pair
Forex trading is done in pairs. In forex trading, we will sell or buy currencies, and that is certainly done between two different currencies. Therefore, the mention is always in pairs, where a stronger currency will be in front. For example, the US Dollar with the British Pound abbreviated GBP / USD. Or American Dollars with Japanese Yen to USD / JPY.
Basically, there are eight of the most commonly traded currencies in the forex market. These eight currencies are called major currencies consisting of:
- US Dollar (USD) is also called “Greenback” or “Buck”.
- Euro (EUR) is also called “Single Currency” or “single currency 18 countries”
- Japanese Yen (JPY)
- The British Pound (GBP) is nicknamed “Sterling” or “Cable”
- Australian Dollar (AUD) nicknamed “Aussie”
- New Zealand Dollar (NZD) nicknamed “Kiwi”
- Canadian Dollar (CAD) nicknamed “Loonie”
- The Swiss Franc (CHF) is nicknamed “Swissy”
These currencies are usually paired and traded with each other (cross) and are among the most widely traded currency pairs in the world. There are also exotic pairs (eg American Dollars with Singapore Dollars (USD / SGD). However, exotic currency trading is rare in the forex market, because volatility and trading costs are usually very high, so the risk of loss is greater. rather than potential profit.
Because currencies are traded in pairs, then in forex trading, when we buy (Buy) one currency, we automatically sell (sell) the currency that is the companion.
Forex Traders Profit When Prices Up And Down
Basically, trading forex is done by looking at market conditions, then predicting whether the value of a currency pair (price) will rise or fall. The prediction is then executed by opening a trading position (entry or open position). In the way forex trading is only known there are two types of positions, namely:
- Buy (Buy / Long Position): Buy position is opened if the currency price of a predicted will rise.Buy position means we want to benefit from a price that arises So if you want to do a Buy, we have to make sure the value of the base currency will arise. After buying at a low price level, we will close the position (closed position) at a higher price.
- Sell (Sell / Short Position): Sell position is opened if the currency price predicted will DOWN.Sell position means that we want to benefit from a decline in price. So, if you want to sell, we have to make sure that the base currency value will down. We buy at a high price level, then close that position after the value of the base currency is lower than the opening value.
Because in the way of forex trading there are two types of positions, forex traders have the opportunity to make a profit, both when the exchange rate of a currency strengthens or weakens.
In Forex Trading There Are Two Types of Prices
Have you ever entered a Money Changer to exchange foreign exchange? There are two types of exchange there, namely the selling rate and the buying rate. Similarly, in forex trading, all price quotes are written in two prices: bid and ask. Bid prices are usually lower than the asking price.
- The bid price is the price at which the broker is willing to buy the base currency and sell the quote currency. This is the price we use if we are going to sell a currency pair.
- The ask price, or sometimes also called an offer, is the price at which the broker is willing to sell the base currency and buy the quote currency. That is, the ask price is the price we use if we are going to buy a currency pair.
The difference between the bid and ask prices is called spread, and this is one part of the consideration given trader at broker as remuneration for providing the trading software and connect to the market.
Price Movement Counts Based on Pip
In forex trading, price movements are calculated starting from a number of decimal places. This price movement unit is called “pip”. Or in other words, pip is a unit of measurement that shows a change in value between two currencies. For example, the USD / JPY pair moves from 91.23 to 91.24. Well, this 0.01 increase is called ONE PIP.
The pip is usually the last decimal in one quoted currency. Generally, forex pairs appear with 4 decimal digits, but some pairs (such as Japanese Yen cross pairs) have 2 decimal digits.
Along with the development of financial technology, more and more brokers provide trading facilities that can monitor price movements to even smaller fractions. Therefore, not all brokers use 4 and 2 digit quotations; there are also brokers who use 5 and 3 digit quotes. Well, the brokers basically use “fractional pips” or also called “pipettes”. For example, if USD / JPY moves from 91,234 to 91,237, then there is a change in 0.003, or equal to 3 pipettes.
How to calculate profit from a pip?
Don’t Need Large Capital Because There Are Leverage And Margin
In financial markets, in addition to ordinary trading, the term “Margin Trading” is also known. Margin Trading allows us to trade forex with far less capital than what is really needed to access the forex market. In fact, millions of dollars are needed to participate in forex trading like the big traders. However, Margin Trading makes us able to take part in this highly profitable market.
This term is a trading activity of financial assets using funds borrowed from a broker after we give a number of funds as a “guarantee” to the broker. However, even though “borrowing funds”, we don’t have to pay interest to brokers. Why so? because forex trading is trading on a non-physical basis, meaning that brokers do not need to hand over a real amount of 10,000 euros to us. We as traders also have enough to pay trading fees in the form of spreads and commissions only on brokers.
Margin Like a Double-Edged Sword
- Margin Requirement / Margin Required: the same as the definition of “margin” above, this means the amount of money that we need to submit to the broker in order to be able to trade forex.
- Margin Account: the total money we have in our “account” or our account at the broker.
- Used Margin: the part of the money in our account that is “locked” by the broker to maintain the current trading position. We cannot tamper with this Used Margin until our trading position is closed (Close Position), or hit by a Margin Call.
- Usable Margin: part of the money in our account that is free to use buying and selling, aka open a new trading position.
- Margin Call: if the amount of money in our account cannot patch the possibility of loss (loss), or when the amount of capital we have is lower than Used Margin, then the current trading positions will be automatically closed by the broker.
Online Trading Doesn’t Always Need Online
Technology has made online forex trading in such a way as to make it easier for us as traders. For example, after opening a trading position, we don’t need to glare at the computer only while waiting for the position to reach the profit target. We simply place the instruction on the platform, at what price the profit target is considered to be reached and the trading position must be closed. Later, even though we are relaxing watching movies in the cinema or busy working in the office, the trading position will be closed automatically and profits will go directly into the account.
Through a similar method, we can also prevent fatal losses due to Margin Calls. You do this by placing a Stop Loss to close the losing trading position, before reaching the margin availability limit. Therefore, even if we do not observe the market continuously, we can still prevent unwanted losses. Very practical, this is the ease of the way of forex trading today.