How forex trading works
How forex trading works
The Forex market is the biggest in the world and operates 24 hours a day. However, there are some nuances- such as trading in ‘pairs’ like EUR/USD (the euro against the dollar) and the use of leverage. Here are the steps of how forex trading works.
How to start with trading forex
1. Choose a currency pair
What is a currency pair?
Governments, banks, companies and individuals need foreign currency every day. This might be businesses buying stock from an overseas supplier, a bank hedging, its exchange rate risk or an individual going on holiday and needing some spending money. Whether directly or through intermediaries like brokers, these parties all come together to buy and sell currencies – this creates the market and the price you see on your trading screen.
To avoid having to tie up all their capital when opening one position, most forex traders use leverage. With leverage, you only have to put up a fraction of your position’s full value to open a trade. The amount you are required to put up is known as your margin or initial capital.
2. Decide how you want to trade forex
Types of forex market
In addition to choosing how to trade forex, you can pick a different market for each currency pair. The two main types of forex markets are spot and futures.
- The spot market gives the live price of a forex pair
- In the forward market, you agree to settle your trade on a set date in the future
3. Decide to buy or sell your currency
WITH A BUY POSITION, you believe that the value of the base currency will rise compared to the quote currency. If you’re buying the EUR/USD, you believe the price of the euro will strengthen against the dollar. In other words, you believe the euro is bullish (and that the US dollar is bearish).
WITH A SELL POSITION, you believe that the value of the base currency will fall compared to the quote currency. If you’re selling the EUR/USD, you believe the price of the euro will weaken against the dollar. In other words, you believe the euro is bearish (and that the US dollar is bullish).
These are the main points of how forex trading works.
4. Manage your risk
What is a stop-loss order?
A stop-loss order is an instruction to close out a trade at a price worse than the current market level and, as the name suggests, is used to help minimise losses. There are three types of stop-loss orders: standard, trailing and guaranteed.
A standard stop-loss order closes the trade at the best available price. There is a risk therefore that the closing price could be different from the order level if market prices gap.
A guaranteed stop-loss closes your trade at the stop loss level you have determined, regardless of any market gapping.