Forex is the abbreviation for Foreign Exchange and means freely translated “foreign exchange trading” or “the trade with foreign exchange”. The most famous examples are the USD (U.S. Dollar), GBP (British Pound), JPY (Japanese Yen, EUR (Euro), AUD (Australian Dollar).
!!! Daily trading volume about 4 trillion USD !!!
The Forex or foreign exchange market enables private and institutional investors to trade with domestic and foreign currencies. When trading, one speculates on a falling or rising exchange rate of two opposing currencies.
A detailed explanation with a suitable example can be found on our main-page
Translated with www.DeepL.com/Translator (free version)
If you trade with a regulated forex broker and you haven’t come across a fraud, then forex trading is pretty much the safest financial instrument available at the moment. Because the trading is “decentralized”, the chance of manipulation is very small to non-existent.
A lot describes the position size of a trade. A standard lot in Forex trading corresponds to 100,000 units of a base currency. Some brokers also offer mini lots (10,000 units of a base currency) and micro lots (1000 units of a base currency) for trading.
For example, in EUR/USD, we open a Buy position of 1 lot on the EUR/USD currency pair. In this case EUR is our base currency and USD is our quote currency. So we have opened a position of 100,000 units (=100,000 EUR). If we open a mini lot (0.1 lot), our position size is 10,000 units (=10,000 EUR), and if we open a micro lot (0.01 lot), our position size is 1000 units (1000 EUR).
The position size therefore influences the profit and/or loss of a trade. The higher the position the higher the profit / loss.
Tips for risk management and position size can be found below.
Pip or pips refers to the movement of a price of the currency pair or pairs. A pip refers to the fourth decimal place of a price, except for JPY (Japanese Yen) pairs, which are traded with only two decimal places. The profit or loss of a trade is given or calculated in pips.
The following examples:
EUR – USD : We buy at 1.1322, the price goes up and we close the order at 1.1342 … The price has moved up 20 pips, these 20 pips are now our profit. At a price of 1.1302 and closing the order we would have realized a loss of 20 pips.
EUR – JPY : We buy at 124.20, the price goes up and we close the order at 124.63 … The price has moved up 43 pips, these 43 pips are now our profit. For example, if we close the order at 123.71, we would have realized a loss of 49 pips.
1 Standard Lot is usually 10 USD per pip, in the case of 1 EUR – USD we would have realized a profit or loss on 20 pips of 200 USD.
Freely translated, Take Profit means “Take the profit” or “Take the profit”. It means nothing else than that we set a Take Profit (TP) when we create an order or when an order is already running to automatically take our profit target and close the trade automatically when we reach our price target.
For example: EUR – USD : We place a Buy Order at a price of 1.1320. We have analyzed and assume that the price will move up 60 pips. To be on the safe side, we want to take the profit after 40 pips. To do this, we set a Take Profit (TP) on the order at 1.1360. When the price reaches 1.1360, the buy order will automatically close at that price and we will have taken the profit even if we did not follow the trade live.
Stop Loss (SL) is the counterpart to Take Profit (TP). It protects our positions from uncontrolled losses or even the loss of our entire trading account. The Stop Loss (SL) is best set directly when an order is created.
Example: EUR – USD : We create a Buy order at a price of 1.1320 with Take Profit (TP) of 40 pips. Based on our analysis, we assume that the price may fall. We still want to take the trade but minimize our loss in case of fall. Now we set a Stop Loss of e.g. 20 pips down on our order. This means that if the price moves downwards, i.e. falls, and reaches our Stop Loss (SL) at 20 pips, i.e. 1.1300, the order will automatically close with a loss of 20 pips to avoid greater damage to our account. The SL is used as a tool for good risk management and to limit your losses.
The Metatrader or also called MT4 / MT5 is an online trading software for CFDs and Forex / Forex. He is used predominantly by private people and is absolutely broker independent. Developer of the Metatrader is the company Metaquotes. Almost every broker has his own branded version of the Metatrader. The Metatrader is available for Desktop – PCs, Laptops, Tablets and Smartphones. So you can trade with Metatrader from every internet capable device via your broker at the Forex market.
A buy limit order is used when you want to enter a trade with an entry price below the current price. Such an order is useful when you cannot or do not want to constantly monitor the price. If a Buy Limit order is set, the trade is automatically set when the desired price is reached.
An example: Current price EUR -USD 1.1350 . We have analyzed the currency pair and its movements and assume that the price will fall before it will rise again. We want to catch the perfect time and execute a buy order at 1.1320. Since we are not able to monitor the price movements all the time, we set a Buy Limit Order at 1.1320. If the price falls to 1.1320 or below, the position is triggered and our trade is active.
A sell limit order is the counterpart of a buy limit order. This order is only triggered when the price exceeds our entry.
Here is an example: We want to shorten / sell EUR-USD but assume that the price is still moving upwards. Current price is 1.1350 and we think it will rise to 1.1380. We now place a sell limit order at 1.1380 or below to get the best possible entry into the trade. If the price now exceeds our target price, the sell limit order is triggered and the trade is active.
A Buy Stop is a trade where the entry price is above the current price. This order is very rarely used for trading.
Here is an example: current EUR/USD 1.13. You want to wait for a price breakout and go long at 1.1320. Now we create a Buy Stop Order at 1.1320 and the trade will be automatically placed when the price is reached.
Same principle as a Buy Stop Order only in the opposite direction. With a Sell Stop the entry price is below the current price. This order is also chosen very rarely.
For example, the current EUR/USD rate is 1.13 . We want to wait for a falling price movement and go short at 1.1280. We now set a Sell Stop Order at 1.1280 and the trade will be triggered automatically when the price is reached.
The Forex market has a wide variety of players. The most important ones are listed below:
-international foreign exchange banks
-Private or Retailtrader
On the Forex market, you can normally trade 24/5, which means the market opens on Sunday evenings at 22.00 CET and closes on Fridays at 23.00 CET. Due to the different worldwide time zones and opening hours of the various stock exchanges, there are times of day when trading is particularly intense and times when it is quieter.
Trading begins on Sunday evenings at 22.00 CET in Australia (Sydney) and ends on Friday evenings at 23.00 CET in the USA (New York).
In Forex trading, Trade refers to a transaction.
As an example: We have a buy position on EUR/USD with 1 lot and we call it Trade. So we have set a Trade.
Margin in Forex trading refers to the security deposit or the stake for a trade. Margin is calculated according to the leverage of the trading account and the size of the trade. With a leverage of e.g. 100:1 we would have to “deposit” 1% of the trade as security / stake for a position of 1 lot or it will be blocked in our broker account from our account for other transactions or withdrawals until the trade is closed.
In Forex trading, equity is our total equity, i.e. our capital including current open trades.
Our account balance with our broker is 1000 EUR. We open a trade which is 100 EUR in the plus after 5 minutes. Now our account balance is still 1000 EUR our equity, but the account balance if we would close the trade or trades directly now is 1100 EUR. Equity is the total equity available at the moment.
If our trade is now 100 EUR in minus and not in plus then our account balance is still 1000 EUR but our equity is currently 900 EUR.
If a trader’s open positions slip so far into the red that the margin (see above) is exhausted, the broker can call a so-called margin call. The trader then has the opportunity to add money to his account. If he does not do this and the positions go deeper into the minus, the trades are automatically closed by the broker to prevent further losses of the trader and the broker. This option is advantageous for brokers and traders because they can’t lose more than the amount of money they actually have in their trading account. If the broker would not call a margin call, it could lead to the fact that one has debts with the broker by further minus positions and an obligation to pay in additional capital would come to carrying.
To put it roughly : all the players in the Forex market (see : “Who trades everything in the Forex market”). Supply and demand also apply to the Forex market. If none of the players were to take positions to buy or sell, the prices would probably not change. Of course, several factors play a role why a player enters into a position, here is a small list of some factors that can lead to opening a position:
-the need for means of payment
-Monetary policy decisions and key interest rates
-Change in the prices of goods
Long : When you set a trade long, you are assuming that the price will rise, so you set a buy order.
Short: If you set a trade short, the price is expected to fall, so you set a sell order
The so-called spread is the difference between the ask and bid price of a currency in Forex trading. It is always calculated in pips and is the broker’s fee or commission for executing a trade. The spread can be fixed or variable, depending on the broker and the type of account used.
For example: Ask price EUR/USD 1.12343 and Bid price 1.12310 . The difference between the two prices here is 3.3 pips. So this is the fee that the broker retains. The Ask price is for buyers of the pair and the Bid price is for sellers of the pair.
In Forex trading, the term drawdown is used to simply express how far a trading account has slipped into the red, whether through closed loss trades or open trades that have gone into the red.
An example: Our trading account is 1000 EUR. We open a position and after a short time it is closed with a loss of 100 EUR due to our set stop-loss. Now we have only 900 EUR on our account and our drawdown is 10% (100 EUR from 1000 EUR =10%).
Example 2: Our trading account is 1000 EUR. We open a position which initially slides 75 EUR into the red, the price then turns around and we end up closing the trade with 100 EUR profit. Now we have 1100 EUR on our account but the drawdown is 7.5% because the trade went negative first.
If you have a drawdown of 100%, then you have lost your trading account at the same time, because all capital was used up.
The balance is simply the account balance from our trading account. This is the amount that is in the account. It is only changed if I win a trade, then my balance (my credit) increases or if I lose a trade (then my credit) decreases.
Leverage is a “tool” which is provided by the broker. Without it, trading on the Forex market would be virtually useless or not profitable at all for private individuals.
For example, if you get a leverage of 1:500 from your broker and you open a position over 1 lot (which corresponds to 100,000 EUR) then we only need to deposit a 500th of the margin. In our case, this would be 200 EUR to enter the trade. If you would trade without leverage you would have to deposit the full 100,000 EUR as collateral. Leverage can increase our profits, but conversely, it can also increase our losses because even small price movements can bring or take a lot of capital.
You profit in the Forex market mainly by the fact that you can achieve enormous profits or returns with a) the necessary knowledge and background or b) with the right partner at your side. The Forex market is much more suitable for the simple way to let your capital work for you and to let it increase. End with the times of 0.5% interest per year. In Forex trading it is possible to reach this 0.5% per trading day!
A small sustainable example of this: Karl decides to trade on the Forex market and wants to start with 1000 EUR. He subscribes to a Copytrading provider and wants a sustainable trading strategy which will be used for 1 year. The provider manages to make 0.5% profit per trading day. Thanks to daily compound interest Karl’s capital has risen to 3310,20 EUR after 12 months. (0.5% daily at 240 trading days/year with compound interest, without profit withdrawal and tax consideration).
Due to this result, a return of an incredible 231% has been achieved in only one year! How long do you have to leave 1000 EUR on an overnight deposit account to get such returns? You can work out what 0.5% with 10.000 EUR capital etc. can cause.
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