What is Forex (Foreign Exchange)?
Forex or currency trading (AKA CFD’s) is a global marketplace where all currencies are traded. Recently cryptocurrencies such as Bitcoin and Ethereum have also been added to the list of currencies. Similar to cryptocurrencies, Forex is also a decentralized market with orders and contracts reaching an estimated daily trading volume of ~$5 Trillion. What does that mean? Without getting into too many details, it presents opportunities. However, as always is the case with online trading, a grain of salt and hefty dose of skepticism will save you a pretty penny. Forex is also referred to in many cases as CFD’s or contracts for difference since it is exactly the same financial instrument, only CFD’s also offer more diverse types of contracts such as indices, commodities, and stock options.
What is A Forex Contract?
When you purchase a buy or sell contract on a currency such as USD/EUR, you are actually betting for it (call) or against it (put). So if you purchase a USD/EUR put contract and the dollar decreases by 0.12$ against the Euro, you have made a profit depending on the spreads and the leverage. The spreads are the rates the exchange provides you with, and the leverage is how much credit they give you in order to take the risk. The higher the leverage the higher the risk, and this is where most people end up losing their lunch money.
How To Purchase and Sell a Forex or CFD Contract
First you would need an exchange or broker for that. The broker or exchange provide the trading arena, and in return charge a fee which is called a spread. An ECN broker does not mind if you win or lose, they charge you based on volume or lots trades. A lot is the minimum units of trades permitted in order to have “qualified” trades which enable you to cash out.
Stop Loss Order
We use stop loss orders all the time in order to minimize risk. Simply put, a Stop Loss order is a “request” placed with a broker to buy or sell once the stock reaches a certain price. Usually it is used as a risk management tool if a price drops below a certain point, but at times it is also used for executing a call order.
How To Manage Risk In Forex Trading
The name of the game is control. We mentioned stop loss previously, but there is also a “hard stop”, which is executed when or if you use a trading platform technology to lock in a stop loss at a certain level.
Limit the Draw Down
A draw down is the peak of the decline, and when you limit it that means you are asking to do a reverse buy BEFORE it reaches the lowest point. Usually a retrenchment strategy is implemented in this case.
Don’t Get Emotional
Stick to the numbers and don’t let your personal sentiment do the thinking as it is influenced by external factors which are not relevant to the success or failure of a certain trade.
Just like anything else in life if you are not sure just stop and ask. Our staff of trained professionals is ready to assist and help anyone looking to get started trading online Forex and CFD’s.