In this post I will be talking about forex. So at the end of this you will know what is forex, how forex works and how to get involved in it.
The word forex basically means “foreign exchange market”. It determines foreign exchange rates for every currency. It includes all aspects of buying, selling and exchanging currencies at current or determined prices.
So without complicating the whole thing, forex is a market where you can trade currencies attempting to make a profit.
For instance, you buy 100 units of GBPUSD currency pair at a price of 1.3803. The total cost would be $130.8 (not taking into account broker and trading fees)
Now You held your 100 pairs for couple of hours and the price rose to 1.3900. Now your intial investment of $130.8 is now worth $131.
But wait a minute, 20 cent does not make any sense. Well that is right.. and therefore you will use something called as leverage while trading forex.
Leverage is just like a loan that will return automatically when closing a trade.
For example a leverage ratio of 1:100 means that for every $1 invested your profit and loss will be calculated from $100 instead of the actual $1 you originally invested. Or in other words your profits are 100 times bigger and losses are 100 times bigger.
The same applies on all levergae ratios (for example 1:500, 1:200, 1:50, 1:20, 1:5…)
Lets say your levergae ratio was 1:500 when you bought 100 units of GBPUSD. It will means that instead of your $0.20 profit you could have made without leverage, you made this time $100 (500 times $0.2).
While trading using leverage even small move in the price would have a large impact. If the price goes against you, you may end up losing a lot of money or even blow up your whole account in a matter of days. But you could easily prevent that from happening if you have a strict risk managment plan. If you don’t have a risk managment plan i can gurantee you will not succeed. In trading you should risk not more than 3% of capital per trade (some even suggest 1%).
In a $1000 account that means you can lose only $30 on a single trade. You can use the stop loss to exit the trade automatically at a certain loss. You can also use take profit to exit the trade at a certain profit.
Here is an example of a good risk managment plan:
- Max risk per trade: 3%
- Stop loss: $30
- Take profit: $50
So on each trade i will either lose $30, or make $50. If you have a win-rate of 50% and i do 10 trades i will:
- Lose 5 trades: -$150
- Win 5 trades: +$250
Net profit: $100
I hope this post helped you to get started with trading