GBP USD forex chart

Forex Trader – Trading Principles To Get To Grips With

A forex trader trades the forex market. The forex market refers to the buying and selling of currencies of different denominations for the purposes of: repatriation of foreign funds; speculation; global business. Spot Forex trading refers to forex trading whereby settlement occurs very soon after the trade is agreed.

Who or What Trades Forex

The interbank market does the majority of the business of forex trading. Institutional traders and retail traders are the participants. Retail investors trade forex normally through a margin broker. Margin brokers act as middle-men between the interbank market and the retail trader.

Forex brokers and Leveraged Forex Trades?

A retail forex trader can obtain leverage from his or her margin broker. The broker may offer 50:1 leverage for example. This means that if the retail trader deposits $10000 US in their account, the broker will allow the trader to control a book amount of 50 x $5000 = $500,000 of currency. Many people struggle with understanding this concept. Their inclination is to fear that this automatically means they can lose far more money than they actually have deposited.

However, this is not the case for two reasons. Firstly, the price of forex pairs (e.g. the GBP/USD pair – British pound vs. US dollar) are quoted to the 1/1000 of a cent. So the quote my be: 1.5656/9 meaning that 1.5659 dollars can be sold in return for buying 1 pound or that 1.5656 dollars can be bought in exchange for selling 1 pound. The 0.0003 diference is known as the “bid ask spread.”

This is simpler than it sounds. Here is a forex quote:

GBP/USD   1.5656 (Bid) 1.5659 (Ask)

What this means is that the broker is willing to buy your 1 pound for 1.5656 at that time (you sell your pounds and buy dollars) or alternatively, you can buy pounds (and automatically sell dollars) at the price the broker is “asking” namely 1.5659.

In this case, we have a base currency (the Great British Pound) being quoted against the US dollar. The so-called “exchange rate” at that time is given by the current price. The spread between the bid and ask price is known as the “margin spread” and this is how the broker makes their commission (through the spread).

PIPS in Forex Trading & Why Leverage Is Required For Anyone To Make Any Money

What happens if the price goes up to 1.5656 to 1.5657? It means the value of one pound is now worth 1.5657 which is 0.0001 dollars more than a moment ago! This change in price is known as a change of 1 pip (price interest point). Going back to our original point about leverage and the $10,000 account then. If we have $10,000 being used in a trade and we make a profit of 20 pips, for example, by buying the pound (selling the dollar) at 1.5656 and then selling the pound (buying the dollar) – i.e. closing the trade – at 1.5676 – we have made a profit of 0.0001 x 20 = 0.0020 which is less than a single cent for the trade!

Nobody could get rich this way, not even the banks. What happens if we have 50:1 leverage given to us by the broker though? It means we can control 50 x our deposit as stated. This allows us to trade a bigger position size than we actually have in physical capital. How can we do this?

Because, our $10,000 collateral gives enough leeway for the market to swing a large number of pips in the opposite direction to which we want it to, without going below zero. Therefore, the transaction can take place in the broker’s books (or in the market) without you or the broker being overly concerned about it.

Why? Firstly, let’s say you use all of your $10,000 deposit PLUS the leverage the broker is offering you – 50:1 to control $500,000 of currency (known as one half of one standard lot – 1 lot = 100,000 units of currency). Controlling this amount, when the price moves from 1.5656 to 1.5657 this incremental change is worth $5 to you in the trade.

The market is going to have to move 10,000/5 = 2,000 pips (aka points) if your account is to be wiped out completely. The market does not move this amount of pips in several months sometimes and secondly, if your account were to get dangerously low, your broker will likely issue a “margin call” and liquidate your position rather than see you go into the red beyond your deposited means.

Putting It Together – A Brief Summary Of Forex Trading For Forex Trader

Let’s recap. The forex market is made up of institutional traders and retail traders who are trading in “currency pairs” (as opposed to stocks, soybeans, pork bellies, oil, palladium etc etc). Being the largest market in the world, the turnover daily is a staggering 2 trillion dollars approximately. The reason forex trading needs to occur is due to currency repatriation, global business transactions (including hedging) and speculative trading. Currency pairs can be denominated in a base currency other than the dollar (e.g. EUR/USD) or in dollars (e.g. USD/JPY). The vast majority of forex trades include the dollar in them. 1 pip is 0.0001 units in forex trading.

Brokers provide leverage to retail traders e.g. 25:1 or 200:1 leverage allowing trades to be able to make money which is worth trading for. SPOT FX deals are settled normally a couple of working days after the trade is agreed. Money can be made buying the base (left hand side) currency, when the price quoted goes up or selling the base currency, when the price quoted goes down. When you buy the base currency, you automatically sell the currency on the right hand side and vice versa when you sell the base currency. This is why it is said currencies are traded in pairs.

On this last point, actually, all financial instruments can be looked at as being traded in pairs. For example, let’s say you buy XYZ company’s stocks for $3. Effectively, you could say you “sold” your US dollars in exchange for buying XYZ company’s stock. So the pair is XYZ company’s stock (the asset) vs. the USD (cash).

Questions, queries, comments, corrections about forex trading or being a forex trader

If you have any questions or want clarification or to correct me on any of these points, please do feel free to do so using the comments box below.

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Forex Trading

The Forex Robot known as the Bulletproof EA

Forex Robot – Unmasking the hype

A lot of buzz has been going around about using a so-called forex robot to automate forex trades using Metatrader 4, for example. Metatrader 4 has the option to attach an “expert advisor” to a chart and the “forex expert advisor” will be programmed to carry out functions depending on the parameters of its code. For example, a simple EA (or expert advisor) might place a buy limit order when the price of the Euro/Dollar exceeds the previous days price by 12 pips. It places a sell stop order when the price breaks 12 pips below the low of the previous day.

Whenever the charting application is run and the expert advisor is attached and working, provided permissions have been set for the expert to carry out live trading on the account, the trades will be executed automatically. Add into the expert advisor described above a stop loss of 35 pips and a take profit of 70 pips and you have a forex robot which will open and close trades automatically.

Add a further parameter, like stop loss of 35 pips cannot exceed 5% of total account value at the time of trade and you have a forex robot which also includes money management. So, you now probably understand what automated trading means and how using a forex robot (or expert advisor in metatrader) works. On the detail, it will be worth you viewing the following forex robot reviews video which outlines this process in detail.

Run Your Own Forex Robot

You can try this out for yourself. A series of short tutorials will show you how to do this. However, if you wish to purchase a forex robot which has been pre-programmed ansd is being sold, there are plenty of forex robot reviews sites and expert advisors ready for premium purchase online. Here are two examples for three different trading strategies, swing/momentum trading and scalping.

Online Forex Robot Ideas For You To Buy & Try

1) Long term forex robot strategy – Click here (longer term performance)

2) Forex Robot FAP Turbo (scalping strategy)

Please note, that FastTrackForex.com does not endorse these forex robots. However, you may wish to experiment with automated trading solutions such as the above linked products. The advantage of the above products is that they both carry an 8 week guarantee, so you can trade them on a demo or practice account and if they’re rubbish, get your money back.

Using Metatrader 4 to setup and run a forex robot is fairly straightforward. Normally, the expert itself will be an “.ex4″ file which can be saved in the c:/program files/Metatrader/experts folder. Then it will appear in the “Navigator” of Metatrader 4. You can attach the expert to a chart from the navigator. If the expert is setup correctly, you will see a smiley face in the top right hand corner of your chart. If the expert is not configured correctly, you will see an unhappy face.

This forex robot video will help you in the process.

Forex “black boxes” have traded off simple and complex algorithms for years. Really it has been the development of the forex platform metatrader (MT4 / MT5) which has really seen an abundance of forex robots come into the marketplace. You should be careful about being sold on the “forex robot” dream. Remember, a lot of these sites may just be rehashes of freely available expert advisors such as those that can be found on the excellent Forex TSD, a site for forex robot developers, traders and indicator programmers.

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Forex Trading Basic Principles.

Discipline is a key requirement. Forex traders will utilise leverage if they are trading through a margin broker. Leverage gives the trader the opportunity to abuse their account. This is not forex trading. It is addiction, otherwise known as compulsive gambling. The fact of the matter is, that if you have $2000 in a leveraged account at 100:1, you can trade one standard lot – i.e. use $1000 of your deposit as required margin to your broker, who will let you place a $100,000 trade in the market.

Each incremental PIP increase or decrease in that currency pair, if the base currency is a major traded against the dollar – for example – EUR/USD or GBP/USD, will result in a net profit/loss shown in your live account balance of $10 US.

So let’s say you buy one standard lot of the GBP/USD, that is to say, you buy pounds and sell dollars, at the price quoted to you by your broker of 1.5000. Over the course of, for example, 1 hour, the price reaches 1.5050. You then close the trade, by selling back your pounds and buying US dollars again.

You have made a profit of $500 because each pip was worth $10 and you leveraged your $1,000 of your $2,000 into $100,000 through your broker allowing you to trade with leverage of 100:1.

Herein lies the potential problem with this trade. If the trade goes against you, and you end up closing your trade for a 50 pip loss, then your account has lost $500. That’s 25% of your overall account in a single trade and is disastrous.

Therefore, in managing money in forex, it is neccessary to protect your account balance by using risk management which is appropriate for your account size.

This will entail the use of a protective stop, also known as a stop-loss.

A small calculation will also be required for you to trade effectively.

Two forex risk management rules of thumb are: to never allow yourself to risk more than 2% of your account balance in any given trade and always to use a risk to reward ratio which is better than 1:1.

For example, with out $2000 starting account, leveraged at 100:1.

2% of the account is $40 US.

Therefore, in our first trade, we should not risk more than $40 in the trade. This is the maximum loss we are willing to take if the trade does not work out our way. Learning to lose in this way is actually learning to win.

Setting a risk to reward ratio of 1:1.5 would mean whilst our stop-loss is at $40, our take profit is set at $60. If we find a possibility of a 1:2 risk:reward trade, then our stop-loss is at $40 and our take profit is set at $80 profit.

For those pairs which are $10 per pip on a standard lot (such as GBP/USD or EUR/USD), we can calculate how many lots we need to trade on the 1:1.5 trade risking 2%.

2% of our account balance is $40.

We can therefore trade 0.2 lots or 2 mini-lots ($2 per pip) and set the stop loss 20 pips below our entry (if we are buying the base currency – N.B. the stop is set 20 pips above our entry if we are selling the base currency).

Another possibility is to trade 0.1 lots (1 mini-lot – $1 per pip profit/loss) and set our stop loss 40 pips below our entry.

For the take profit on the first trade (0.2 lots trade with 1:1.5 risk:reward) we set this at 30 pips above the entry if we have bought the base currency, in the determination that the GBP/USD exchange rate will go up. We set it 30 pips below the sell entry if we sold GBP against USD, for example, as we are trading on the basis that we think the exchange rate (and the strength of the pound against the dollar) is going to go down.

Note, this is simplified slightly because we have not taken into account the spread between the bid and ask price.

With this risk management in place, we can make two further comments or observations about the trade.

1) If the trade goes against us, we will be “stopped out” of the trade when the stop loss is hit, causing 2% damage to our account – or $40. In the 1:1.5 example, if the take profit is hit, we gain 3% on the account, or $30.

2) We believe this risk management for forex to be sound. If you use the 1:2 risk reward example, and keep the number of lots traded constant at 0.2 lots, look what happens over ten trades if you are only right about the direction 50% of the time.

The first trade is a loser, the second a winner, the third a winner, the forth a loser, the fifth a loser, the sixth a loser, the seventh a winner, the eighth a winner, the ninth a loser and the tenth a winner as follows.

The first trade is a loser, the second a winner, the third a winner, the forth a loser, the fifth a loser, the sixth a loser, the seventh a winner, the eighth a winner, the ninth a loser and the tenth a winner as follows.

TRADE NO. NET P/L

Trade 1    -40

Trade 2    +60

Trade 3    +60

Trade 4    -40

Trade 5    -40

Trade 6    -40

Trade 7    +60

Trade 8    +60

Trade 9    -40

Trade 10    +60

Total Profit:    +100

In this example, after ten trades, there is still a profit on the starting balance of the account of 0.5%, in spite of only placing trades which turned out to be winners 50% of the time.

The trader therefore needs to focus on getting their winning trade ratio as high as possible and maintaining a highly disciplined approach to forex trading & risk management within that context.

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