How to Make a Trade in FOREX

Right, so you think you're ready. You want to study forex and you want to make your first trade. What do you do and how do you do it?

Well the first thing is to find the right FOREX broker. Brokers are institutions who are licensed to make trades on your behalf with the market. There are lots of them, so you should look carefully and make sure of the following:

* They are licensed to trade
* They have a good reputation in the market
* Their customer service is good
* There spreads (costs) are low
* They offer a lot of choice

Fortunately there is an enormous amount of information on FOREX brokers on the web and it is relatively easy to check out individual brokers. Some of the companies I have dealt with include FXCM, FOREX, FXPRO, FXDD, and FOREXMETA. These can all be searched for on Google.

So How Do You Place A Trade?

Let's assume you have chosen a broker, and created an account. At this stage it is worth repeating. Please trade on paper or with a virtual account first so that you can get used to all the terms and the way the FOREX markets work.

All credible brokers will have a virtual training account available for you to practice trading with. Please use it.

So everything is set up.

I am now going to describe the mechanics of making a trade which you must study forex in order to master.

When you are ready to trade you will see a list of possible FOREX pairs to trade like EUR/USD, GBP/USD or USD/CHF and for each pair you will see a pair of figures quoting the price. Let's take the EUR/USD as an example:

With this pair you will see figures quoted like:

1.3428 / 1.3431

The first figure is known as the BID price and the second figure as the ASK price. As usual currency traders come up with strange terms for these things, but essentially:

The BID price is the price that you sell a currency at, and the ASK price is the price that you buy the currency.

If you look at the example the figures have a slight difference of 3 PIPS. A PIP is the fourth decimal point (the one on the right hand side) of the figure. So looking at our example again, the PIP is highlighted below:

1.3428 / 1.3431

So as the values change by 1 PIP, you will see an incremental change in the figure on the right hand side

The fourth decimal point is true for almost all currencies expect that Japanese Yen which is the 2nd decimal point on the right hand side.

The difference between the BID/ASK price is called the SPREAD. This is the cost of trading that currency pair.

The SPREAD will vary between brokers and also at certain times of the day and week. For example if there is a major economic news announcement due the SPREAD will be increased, and they are also generally increased during the holiday seasons.

The next term to learn is LEVERAGE. This allows you to control a much larger trade than the money that you actually have. Typically leverage of 100:1 and 200:1 are provided by different brokers.

This can be very useful because it will allow you to increase your profits. However the risk is also increased because if the trade goes against you and uses up the balance of money in your account then you will get a margin call.

This is where the broker will call you to demand that you add additional funds to your account to cover your losses. Not nice!!

One way to bypass this risk is to chose a broker that will automatically close your position once the funds have been exhausted so that you never get that phone call.

It is also worth mentioning that if you have a proper risk management plan then you will never have this problem.

The final term you should be aware of is the LOT. The 'lot' is the unit of money that you wish to deal with when trading forex. One 'lot' is typically worth $100,000 and it is possible to deal with fractions of a 'lot'' like 0.1. This allows you to deal with smaller sums at the beginning.

The number of lots that you deal with is dependent upon the amount of money that you deposit to start trading.

So let's run through a typical example in a trade. We will assume that you are trading the EUR/USD trading pair as mentioned above. You select the pair and get the following quote:

BID 1.3540 / 1.3543 ASK

After your analysis you decide that the EURO is going to get stronger than the USD so you BUY the EURO and SELL the USD. This is done at the same time when you make the transaction as it is a PAIR.

We will also assume you are using 100:1 leverage on your account.

So you decide to BUY 100,000 euros at the ASK price of 1.3543 so paying $135,430 (100,000 * 1.3543) to do so. Your margin is 100:1 or 1% so you actually pay only $1,354 for this trade.

Let's assume that the EURO rises and you are quoted a new price of

BID 1.3578 / 1.3581 ASK

You are now in profit and wish to sell so that you can pocket the money.

You SELL the euros at the BID price of 1.3578, thus pocketing $135,780. Now then, you bought the euros at $135,430 and sold the euros for $135,780. That is a difference of $250 which is your profit.

Congratulations!!

This article has explained the basics of how you make a trade in FOREX. It is very important to understand these principles before you make a trade. You must study forex hard before trading with real money. Trading in FOREX is easy wants you understand the principles.