How to learn Forex trading?
If you want to learn forex trading, you have to acquire a lot of knowledge in the first step. Trading is a craft like any other that wants to be learned first. Even if trade seems very simple at first glance, it is a complex area that has its pitfalls.
Start with the basics, deal with the technical terms and practice implementing what you have learned on a first demo account.
What does trading with long or short positions mean?
A long position is a position where the trader benefits from an increase in the value of the financial product. If you enter a long position in EUR/USD, bet on strengthening the euro OR weakening the dollar. Ideally, a combination of both factors works for you. Holders of a short position, on the other hand, speculate on the exact opposite.
How is the Forex pip calculated and what does it say?
A forex pip describes the price change of a currency pair to the fourth decimal place if they have only one decimal place. So one pip usually corresponds to a price change of 0.0001. Nowadays, Forex is usually quoted to five decimal places, these smallest changes are called pips. In the case of the Japanese yen, however, one pip corresponds to a price change of 0.01.
What do the lots stand for in Forex trading?
When you trade currencies, you always trade with special Forex contracts. These are called lots. A standard lot is 100,000 units of the base currency, a mini lot is 10,000 units. In addition, micro-lots are also usus (1,000 units), which are mainly found at brokers who target forex beginners.
1 lot EUR/USD Long means that I buy 100,000 units of Euro, at an exchange rate of 1.1024 I sell 110,240 units of dollars at the same time. If the exchange rate changes by 10 pips in my favor to 1.1034, the euro position will make a profit of 100 dollars from a US dollar perspective.
We’ll show you how to calculate the position size
What is absolutely necessary when learning Forex trading is the calculation of positions sizes. In Forex-trading, the size of the positions is of great importance. In the first step to determining the lot size, you need to know your maximum planned loss. This is the distance between the entry price and the exit price, usually the stop price. If I know the risk per position, I can determine my position size based on the risk per trade in relation to my total capital.
Let us take, for example, an invoice for EUR 500. I am prepared to risk 2% of my capital per trade, i.e. 10 euros. I am planning a long entry into EUR/USD at 1,1024 and would limit or realize my loss at the latest at 1,1000. So I have a risk of 24 pips. My planned risk of 10 euros, which I still have to convert into dollars, makes 11,024 dollars. Divided by 0.0024, this results in 4,593 units. If you trade in foreign exchange spots, you would have to limit yourself to 4 micro lots and then risk slightly less than planned. However, if you are trading fx CFDs, you can choose exactly 4,593 units.
What is levering and how does it work?
The trade takes place with borrowed capital, which is provided by the broker. For example, a 1:30 lever would mean that you would shift 30 times your amount of moneys on the market. This is where the margin principle comes into play, which means that as a trader you only have to have a small part of the actual positional strength as capital in order to invest. A classic feature of Forex trading is therefore the low initial capital. The Forex trading can already be operated effectively with little money.
The leverage in Forex trading is at least 1:20 or 1:30 but can also be much higher. In the case of a bet of 1 euro (with a leverage of 1:30) the broker will bet 30 euros on the bet – this is to be understood as a loan. Those who invest more act accordingly quickly with large amounts. With a leverage of 1:100, a total of 10,000 euros will be moved with an investment of 100 euros. This often leads beginners to large position sizes because there is little capital tied to the account. Position sizes should never be determined by capital requirements, but always by the pre-planned maximum loss, as shown above.
What does Margin Call mean and what is a Stop Out?
The experience of learning Forex trading shows that understanding the importance of margin calls and stop outs is incredibly important. Let us take this example: you have invested 100 euros of capital and are moving 10,000 euros of a EUR/USD position, a so-called mini-lot. Now it is important that you are not overly indebted. If you had only deposited 200 Euros, only 100 Euros are now freely available in your account to compensate for price developments at your disadvantage.
If this position now only develops 50 pips to your disadvantage, only 50 Euros are left in the account. The trading system should now set in motion a mechanism to prevent the account from slipping into the red numbers.
There is a warning to either close the position or deposit new capital. This is a margin call. If you do not respond to this or the position continues to develop unfavorably too quickly, Stop Out is activated when a certain level of freely available capital is reached. The broker automatically closes positions that have a loss, starting with the position with the largest loss.
This is to avoid a margin obligation. Typically, customers who have received inappropriate item sizes or do not use stops are protected.
What is the obligation to make a supplementary payment?
Should an account slip into the red in extreme cases, the customer is in principle obliged to make up for the shortfall. After all, the broker loan has been (mis)speculated. This obligation to make a supplementary shot initially deters many newcomers. In day-to-day practice, this must be prevented with sensible risk and position size management. However, GBE brokers do not require a margin.
In which area can Forex-trading incur costs?
Trading with Forex products can incur costs in various areas. Primarily through the spread, i.e. the difference between the purchase price and the selling price. This spread varies between 1 and 1.6 pips for most brokers, but there are no additional direct trading costs. This is in contrast to those brokers who forward client orders directly to the affiliated banks and receive only one commission. In return, the spread is much tighter, and the EUR/USD can be traded from a spread of 0.1 pip. In general, the holding costs for holding positions overnight until the next trading day are also called financing costs or swaps.
We hope you were able to learn about Forex trading with our help and feel ready to start.