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:

  1. US Dollar (USD) is also called “Greenback” or “Buck”.
  2. Euro (EUR) is also called “Single Currency” or “single currency 18 countries”
  3. Japanese Yen (JPY)
  4. The British Pound (GBP) is nicknamed “Sterling” or “Cable”
  5. Australian Dollar (AUD) nicknamed “Aussie”
  6. New Zealand Dollar (NZD) nicknamed “Kiwi”
  7. Canadian Dollar (CAD) nicknamed “Loonie”
  8. 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?

Because each currency has its own exchange rate, the way to calculate the pip value for each pair keeps changing along with the fluctuation of the exchange rate. Consider the following example:
 Sarah has an account at the AngelFX broker that provides four-digit quotes. There, he will trade USD / CAD. At that time, the USD / CAD exchange rate was 1.0200. That rate can be read as 1 USD / 1,0200 CAD. Here, changing one pip means a change of 0.0001 CAD. So the value of per-pip dollars per unit traded:
 = (0,0001 CAD) x (1 USD / 1,0200 CAD)
 = (0,0001 CAD / 1,0200 CAD) x 1 USD = 0.00009804 USD per unit
 With that example, if Sarah trades 1 mini lot in a USD / CAD pair, where 1 mini lot = 10,000 USD, then the per-pip dollar value is approximately 0.98 USD.
Confused? Don’t worry, at the time of trading we don’t need to worry about calculating pip or pipette. The trading platform can do all calculations for us automatically.

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.

Margin Trading

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.

To clarify, note the example of trading without margin (Margin 1: 1) below:
 It is known today that the EUR / USD exchange rate is 1.5712 which means 1 Euro is equal to USD 1.5712. And the next day the currency pair has experienced a movement of points to 1.6712. For example, we buy 100 Euros, then the profit we will get is calculated as follows (1.6712 – 1.5712) x 100 Euro = 0.01 x 100 = 1 Euro.
 Why the profit is only 1 Euro, then what’s interesting is forex trading? The capital is small, only 100 Euros. Imagine if we deposit more capital, 10,000 Euros for example. So if you count again, with a deposit of that size, the profit can be 100 Euros!.

Leverage

Leverage. In terms, it can more or less be interpreted as the ‘leverage’ offered by brokers so that we can trade big even though our capital is small. This is becaus,  in order to truly be able to reap profits, the truth is that you will need big capital.
With leverage, we don’t need to actually prepare 10,000 euros of capital for trading. In essence, you only have to give a small amount of collateral to get the 10,000 Euro capital
For example, with 1: 100 leverage, we only need to give 100 euros to the broker to get “capital” of 10,000 euros. If the capital of 10,000 Euros is used to trade and get profit as in the example above, then the profit is 100 Euros! In essence, we can be lucky 100 per cent trading!
100 Euros as a “guarantee” in the example is called “margin” that you need to submit in order to take advantage of this facility. Or in other words, the margin is the amount of money that we need to submit to the broker as a guarantee that we can trade forex freely.
In practice, margins are usually shown in the form of a percentage of guarantees that we must surrender versus the number of funds that we can use to open trading positions. Based on the broker’s specified margin, we can calculate how much our maximum leverage is.
How and the rules of forex trading

Margin Like a Double-Edged Sword

From the previous description, it can be concluded that the existence of leverage and margin benefits traders. However, this is actually a double-edged sword that must be used wisely.
The problem is, the margin disguises how much our capital really is, so that even when big losses can be felt. For example in the example above. Thanks to a 1% margin, enough with a capital of 100 euros, we can get a profit of 100 euros. But, suppose the EUR / USD doesn’t go up from 1.5712 to 1.6712 but instead drops to 1.4712, then we will lose 100 Euros too.
Therefore, it is advisable to use moderate leverage and margin, around 1: 100-1: 200 if it is still common on how to trade forex. In addition, we must pay attention to the following important terms when trading forex.
  • 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.

Open Trading Position Doesn’t Have To Be At Current Prices

In the forex trading platform provided by brokers, there are various types of instructions available. In addition to instructions to close trading positions automatically, there are also various types of orders, such as: sell if the price is above the current price (Sell Limit), open buy if the price is below the current price (Buy Limit), and so on.
With the available pending order facilities, we can order at a price that according to the analysis is the best price and does not have to always monitor the development of the market

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