How to Trade Forex

You’ve read what forex is and what the benefits of forex are, so what next? In this article, we’ll make it easy for you to understand just how to trade forex and what the process is like, so you can go in with a clear idea of what to expect when making your first trade.

Forex Terms Explained

First, let’s cover some basic forex terminology.

All currencies are traded in currency pairs and each currency has an official abbreviation. For example, GBP stands for British pound, USD for US dollar and EUR for the euro. A currency pair would be displayed as GBP|USD or some other combination.

When trading forex, you sell one currency to purchase another. The first currency in a pair is the base currency, this is the currency you are spending. The second currency in a pair is the quote currency, this is the currency that you are purchasing.

The exchange rate is the rate at which one currency will be exchanged for another or the value of one currency in relation to another, and it shows you what you need to spend in quote currency to purchase base currency.

How to Trade Forex

Before you go through with the actual mechanical action of trading a currency, be sure to research and get to know the various economic and political factors that can have an effect on currency values. An educated trader is a better trader, so always do your due diligence.

Make educated predictions about the economy. A weak US economy is bad for the US dollar, so if you believe that the economy will weaken, then you would probably want to sell USD in exchange for a currency that will be propped up by a strong economy.

Research a country’s trade and production. If a country is or will be producing goods that are in demand, then that country will likely have large exports and monetary inflow. Such a trading advantage can boost the economy, and hence the value of its currency.

Follow politics and news developments. Elections are an especially prime period for both a rise and drop in currency values. Things like an election winner having a strong fiscal policy or a government loosening regulations for economic growth can have a positive effect on currency.

Read economic reports and analysis. Regular economic reports and the release of data on economic factors like employment and inflation will influence the value of a country’s currency. Make sure you follow an economic calendar to be up to date with any upcoming economic releases.

Once you’ve used the techniques above to decide on a currency pair to trade, you can go ahead with a trade order.

Types of Forex Orders

A trader who wants to open a new trade position will likely use either a market order or a limit order. These order types work the same way as in the equities market. Ensure that you check the specifics of the order type (expiry date, date of settlement) when you put it in.

A market order gets you the currency at whatever exchange rate it is trading in the market at the moment, while a limit order allows you to specify an entry price you are comfortable with. If you already hold an open position you may want to apply a take-profit order to lock in a profit.

As an example, consider that you are confident that the GBP/USD rate will reach 1.7600, but aren’t certain that the rate will increase. In this scenario you could use a take-profit order that would automatically close your position when the rate reaches 1.7600, and lock in the profit.

You could also use the stop-loss order if you have an open position. This order type lets you specify how much the exchange rate can decrease before your position is automatically closed to prevent further losses. In our example, if the GBP/USD rate begins to decline, you can place a stop-loss order that will close the position at 1.7592 for instance to avoid bigger losses.

It is critical that you understand these order types before placing your first trade.

Ready to make your first trade? Open an account with Equiti or test your skills with a free demo account, which can help you learn margined forex trading hands-on before you move on to the real thing.

Margined Forex and CFD trading are leveraged products and can result in losses that exceed deposits. The value of your contract can fall as well as rise, which could result in receiving back less than you originally deposited. Please ensure you understand the risks and be sure to manage your risk exposure effectively. Equiti does not provide any investment advice.

About the author

The author is an expert in the field of multi-asset trading.