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How to trade FX with an America Forex broker
If you’ve been thinking about forex trading and the possibilities it can create, it’s a good idea to do your research before opening an account with forex brokers. With that in mind, we’ve put together a guide on how to trade Forex in America.
What is forex trading?
Forex is short for the foreign exchange market, and it’s the place where traders can trade currencies. Although many people may not realise it, currencies need to be exchanged every day so that foreign trade and business can be conducted. If for instance you live in America and want to buy a product from Portugal, either you, or the company you’re purchasing the product from will have to pay the Portuguese for the product in Euros. That means the American importer needs to exchange the same value of U.S. dollars into Euros.
How to understand Forex quotes
Sometimes investors who are new to the Forex market are confused by currency quotes. The reality however is that they’re fairly straightforward. A fairly typical quote may look like this:
USD/JPY = 110.11
To understand the quote, you firstly have to know the currencies in the quote. In this case it’s US Dollars and Japanese Yen. Next, it’s important to know that the base currency is always the first currency in the quote. The base currency is also always valued at 1. In the above quote the base currency is USD, so we can assume 1 U.S. Dollar equals 110.11 Japanese Yen. If you were to trade Japanese YEN, you would need to trade 110.11 to receive 1 U.S Dollar, conversely you would receive 110.11 Japanese YEN for trading 1 U.S. Dollar.
What is the difference between bid and ask prices?
Trading within the forex market also requires a knowledge of bid and ask prices. To start, we’ll take a look at bid prices which is the price the market will pay for a specific currency pair. It’s the price a Forex trader will purchase their base currency in. For instance, if the EUR/USD pair is quoted at 1.2526/31, then the bid price is the same as the number on the left of the quote, meaning a trader is able to sell their EUR for 1.2526 USD.
The ask price is what the market is prepared to sell a currency pair for. It is the number on the right of the quote. Taking the same quote as above of EUR/USD 1.2526/31, it means the ask price is 1.2531. That means one EUR can be purchased for 1.2531 USD.
Pips is a term used by forex traders to measure a change in value between currencies. If, for instance, EUR/USD moved from 1.2526 to 1.2527 during the course of an hour, there would be a .0001 USD rise. That rise in value is one pip.
Understanding forex trade sizes
Those who trade forex will know that the size of a trade is measured in lots. A standard lot is 100,000 currency units. Although you can also get nano lots of 100 currency units, micro lots on 1000 currency units and mini lots of 10,000 currency units.
Successful traders will take advantage of pips by trading large amounts in order to see significant profits. A value change of 0.0001 (one pip) may not seem like a lot, but if you were exchanging one entire lot, the profit would soon add up.
What is leverage and what are the main advantages and disadvantages?
In forex, leverage means borrowing money in order to invest. Within the forex market, money is nearly always borrowed from a broker. High leverage levels are available in forex trading, meaning for an initial margin requirement, a single trader is able to build up as well as control large amounts of money.
The advantage of leverage is that it allows a trader who may only have $1000 at their disposal to trade at around the $50,000 mark. That means plenty of small forex traders have huge opportunities when it comes to maximising their profits, as long as they’re having a good day.
The disadvantage is that it can work the other way and result in large, catastrophic losses. Over the course of a bad trade, leverage acts against the trader, meaning a large part of their margin gets eaten up.
When trading Forex, you should be running profits and limiting losses
Two of the most successful strategies experienced forex traders routinely employ are diversification and knowing how to limit losses. Diversification works by executing large numbers of small trades in different markets where the correlation is low. This gives them a better chance when it comes to turning a profit. Those who choose to lump all their money into one large trade tend to regret it.
Controlling losses is essentially risk management. All successful traders have built up experience and know when it’s time to cut their losses on a trade. Usually they’ll either use a hard or a mental stop. A mental stop is when a trader chooses to set a limit on the amount of drawdown or pressure they are going to take for a trade. A hard stop is where they put their stop loss at a particular level just as they initiate the trade. Both work well for ensuring losses are always limited.