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Learning CentreLearning Centre

FOREX Trading For Beginners


What is FOREX?

The Foreign Exchange market, also called FOREX or FX, is the global currency trading market. With a daily volume of more than $3 trillion, it is the biggest and most dynamic market in the world. FOREX is simple. Whether you sell EUR 100 to buy US dollars at the airport or a bank exchanges 100 million US dollars for Japanese yens with another bank, both of these are FOREX deals. The players on the FOREX market range from huge financial organizations, managing billions, to individuals trading a few hundred dollars.

The volume, the dynamics and the opportunities on the FOREX market are huge. Some say that it’s the closest thing to a Perfect Market: all of the traders – from individuals to big banks – trade at the same terms, have access to the same information and the market provides unlimited liquidity – you can always buy and sell, and there is no entry barrier.

Enter the Online FOREX Trading

Thanks to the Internet you can trade on the FOREX market in the same way as traders from the largest banks and investment funds.

All you need to get started is a computer with Internet access and a trading account with a FOREX broker.

How does the FOREX trading work

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On the FOREX market one currency is exchanged for another. The single most important thing on the FOREX market is the exchange rate between 2 currencies (currency pair). You’ve probably seen it on the news:

Currency pairExchange rate
EUR/USD1.4515
GBP/USD1.6430

The exchange rates change almost every second so there’s a lot of action going on 24 hours a day, 5 days a week. In general, the currency exchange rates reflect the health of countries' economies. If Europe’s economy is going better than the US economy, the euro will go up compared to the dollar (EUR/USD ↑) and vice-versa.

How do you make money on the FOREX market

Here's an example of a FOREX trade. You decide to buy 1 000 euros against US dollars. The EUR/USD exchange rate at which you can BUY at this moment is 1.4500 so you pay $1 450.

10 days later the EUR/USD exchange rate at which you can SELL euros for US dollars is 1.5500. You sell your €1 000 and get $1 550. Having started with $1 450, you now have $1 550 – you’ve made a profit of $100.

That’s how money is made on the FOREX market. In practice, this operation will take you only a few clicks.

Spread

If you look at the FOREX quotes on your trading platform you will see that there are 2 prices for each currency pair. One is the price at which you can buy, referred to as the "ask price", and the other is the price at which you can sell, referred to as the "bid price". The difference between those two prices is known as the spread. The ask price is always higher than the bid price. That's how the FOREX brokers make their money – from the spread for each trade.

The Advantage of the Leverage

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Or how to trade with 100 times more money than you have!

Here's one of the coolest things about FOREX trading: if your FOREX broker offers you a leverage of 1:100, you can trade with 100 times more money than your deposit. This means that if you want to buy 100 000 EUR/USD you only need to have EUR 1 000. You obtain the rest of the money as a loan from your broker for this trade. Thanks to the leverage you can control 100 times more money than you have, resulting in 100 times bigger profits. Of course the loss could be also 100 times bigger so you have to be careful. Simply said, the leverage multiplies the result of your trades by 100. The money that you put into your trading account is called the “Margin” and serves as a deposit to cover an eventual loss. While your potential profit in a leveraged trade is unlimited, your potential loss is limited to your margin so you will never get into a situation where your account has negative balance and you get into debt.

Make your first FOREX deal

To start please get a free Demo Account and log in. Then pick a currency pair (e.g. EUR/USD), choose a quantity and press the BUY button. Now you are in the game! A game played by millions of people all around the globe. You will earn money if the EUR/USD price goes up. Check out your current profit in the Open positions window. You can keep this position as long as you like. And if you think that you have earned enough, just close your trade by pressing the X button in the Open Positions window.

Long and Short trades

In the above example, we bet that the EUR will go up against the USD so we bought EUR/USD hoping to sell it later at a higher price. This is called long position. But what if we expect that the EUR will go down against the USD? Well, then you do the opposite - you sell the EUR/USD, expecting to buy it cheaper at later time. The short trading enables you to make money when the exchange rate is going down. Here's an example:

  1. You expect that the EUR/USD will go down in the next few days. Your position in EUR/USD at the moment is 0.
  2. You SELL 100 000 EUR/USD at 1.4300. Your position is short – 100 000 EUR/USD at 1.4300.
  3. A few days later you BUY 100 000 EUR/USD at 1.4200. Your position becomes 0 again and you have added USD 1 000 profit to your account. Please remember that profits and losses are always calculated in the second currency of the currency pair. In this example your profit is in US dollars.
ActionEUR/USD RateEURUSD
You expect that the EUR/USD will go down in the next few days.    
You SELL 100 000 EUR/USD 1.4300 -100 000 +143 000
A few days later you decide to close the position and take your profit by buying
100 000 EUR/USD
1.4200 +100 000 -142 000
Final Result (USD) 0   1 000

What are Pending Orders and how to use them

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The currency market /FOREX/ works 24 hours 5 days a week. We don’t expect that you will monitor the prices during all of that time in order to make a deal. You can make lots of deals without being in front of your computer. How? Using Pending Orders. Just tell us if you want to BUY or SELL and the price at which you want to do it and the platform will automatically make the deal for you when this price is hit.

You can close your open trades using Pending Orders. Try it yourself – click on the EUR/USD position that you first opened. It is in the Open Positions window. A Pending Order will appear. Just type your exit price and click on Confirm.

Pending Orders that will close your position on profit are called Limits. The ones that prevent you from losing more money and close your position on a certain loss are called Stops. If you want to place both a Stop and a Limit on an existing position then you should use an OCO Order /One cancels the other/.

Now you know how to BUY and SELL at Market prices and how to place Pending Orders. That’s all a beginner should know. If you like it so far you may continue by educating yourself on how to predict the future movements of the market. Read through everything in our section Learn To Trade.

What is Auto Close and how can we use it?

With the Auto Close feature you can make a market order, which will be automatically closed at a level you have pre-determined. You can set this level both as a market price, and as a money value – in other words, you can have the Auto Close fill your order when either at price X, or when you have earned $ X from the transaction (this value will be in your account currency).

Here is what else you need to know about the Auto Close feature:

  • It’s a feature of market orders and lets you set the market price, at which the system would close your position.
  • You can’t place a Pending Order and a Market Order with an Auto Close for the same trading instrument simultaneously.
  • With Auto Close, partial order fill is not possible.
  • The money value you have registered at the time of closing the position is displayed in your account currency.

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