I received a lot of mails regards this subject. This prompt me to shed more light on the basic of the of forex trading to make sure you know everything about forex so you can make the most out of the market, don’t express the ‘Fear Factor’ be confident on your decision on forex trading because it’s a lucrative business any one can venture into without regretting. But first you have to know the basic thing or terminology used in forex market or trading.
You can also read the part one of the post where I shared how to trade and who to trade with and what to trade with here What Is Forex Trading And How To Trade With Profit Arcade
Basic terms used in forex market
1. Bid and Ask: The Bid is the price at which you can sell the base currency. For example, on GBP/USD pair below, it means you can sell GBP for 1.6044USD and buy it at 1.6047USD
Bid Ask
1.6044 1.6047
Spread
This is the difference between Bid and Ask prices. In the example above, I have the spread as 1.6044 - 1.6047 = 0.0002 or 2 basis point or PIPS.
Percentage in Point PIP:
PIP stands for percentage in point. This is the tiny increment movement of currency prices. Typically the fourth digit in the price quote.
1.6044 Exception is Japanese YEN which has PIP to second decimal point e.g. USD/JPY 77.93. 1PIP = 0.0001
In YEN 1PIP = 0.001
The value of PIP varies depending on the currency pair and lot. PIP can be used in calculating Profit or Loss e.g. in a quote GBP/USD – 1.5475. The GBP is the base currency while the USD is the counter. If the price moves up to 1.5495. It means the GBP has gained 20 basis point or PIPS.
If a trader places a standard lot trade of 1.0, which equal $10 per PIP. For traders who go long or buy will make $200.
Calculation:
Quote: GBP/USD - 1.5475
Increment: GBP/USD – 1.5495
Difference: = 1.5495 – 1.5475 = 0.0020 = 20pips
1 standard lot = $10
Profit = + 20 x 1 x $10 =$200
Leverage and margin
Leverage is one of the main attractions of the forex market. Leveraged trading simply implies you are not required to put up the full value of position. Leverage is provided by your broker. For example on a $10,000 lot if using a leverage of 1:500, you are only required to provide $20 (10,000/500). This $20 amount provided to enable the trade is called Margin. Read Also: How To Calculate Pips, Profit, Loss And Value In Forex Market
Lots/size
The volume or size of your trade determines how risk averse you are. It determines your profit or loss. There are Standard, Mini and Micro lots. A standard lot is of 1.0 lot size or 100,000 unit of the basic currency. This gives a profit/loss of $10 per pip depending on the currency pair. A mini lot is of 0.1 or 10,000 to 0.9 or 90,000 and gives $1 to $9 per pip while a micro lot is of 0.01 to 0.09 (1,000 to 9,000 lot size) and gives 1cent to 9cent per pip. Your investment should determine which lot size you trade.
Tips for a successful online forex trading and other online markets
Qualitative training: Common one day seminar I once did. But it kick-start my interest, it is not and never enough for successful trading.
Broker: Many traders including me have had one or two bad experiences with brokers. One needs to carry out due diligence on brokers before investing in forex so to limit the risk of losing your money. Some brokers are regulated and liquid while some other who are market makers are scammers and illiquid. Please seek a professional advice first if you are in doubt.
Trading deposit: Investment of $100 or $200 as canvassed by some brokers are easily wiped off hence discouragement sets in especially for new traders. Also large deposit must be well managed and not exposed to risk. Scam brokers do encourage low deposit. This is where you’ll have to use your number 6 brain.
Overtrading: This could be either in form of having many open positions or high volumes size in relation to deposit or investment and it could back fire you. This exposes traders to a high profit or loss risk. Be careful when investing large amount of money.
Fear factor FF: The fear factor makes trader lose money and interest and also prevents them from taking other trades. Maturity and psychological fitness are important, do not trade if you are not fully prepared. Ask yourself this question and be sincere to answer it deep inside your mind ‘’am I ready to do this business of trading?’’ decide whether or not to start.
Technical analysis: Your inability to accurately read charts and other trading tools is a big hindrance towards a successful trading and this usually happened due to lack of efficient training. Be prepared to do it, get yourself necessary tools and do some research on how they work.
You can also read 7 Sure Ways To Improve Your Chance Of Getting A Job Immediately After Graduate From University Or College
Profit management: Many traders make this mistake of re-trade with their profits. I have had to teach even senior traders this strategy. A trader should have more than one trading account and profit management. Never make the mistake of using your profit to trade in because it is difficult to know for you to analysis whether you are making progress or not. Keep your trading money separate and your profit in another separate account.
Comparative returns: Most traders fail to set a benchmark for their returns against alternative investments. Hence there is tendency to double or triple investments even in a short run. Pressure from investors also does take a toll on money managers as well.
Consider a trader who with an investment of $1,000. Such trader should be able to take a minimum of $20 daily. This translates to two per cent. Where is this obtainable on funds and securities investments in the whole world? Except forex! If successful in twenty trading days that amounts to $400 and whooping 40 per cent return in a month bearing in mind that the trader practices profit management.
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