Forex Broker Guide

The foreign exchange is the World's largest market and is potentially the most lucrative. Traders are offered the ability to turn in big profits with relative ease.

In essence, forex trading involves a simple process – trades are executed on a pair of currencies, where one currency is purchased against another. Traders make logical interpretations of the market, in an attempt to gain profit from the change in values of the currencies. Typically, when the values of the currencies move in the traders’ desired direction, the purchased currency is sold to materialize the profits. Forex trades are very dynamic in duration, where some are relatively short in nature, usually lasting up to a few days, while others can be held for several months or longer.

Trading in the foreign exchange market has become very easy and accessible to all with the introduction of online brokers. Performing various trading actions has been simplified to allow traders to trade with the click of a mouse, making the forex market a real option for anyone.

In order to have a better understanding of the trading process, there are a few key terms an aspiring trader should be familiar with:

• Bid/Ask – Each currency pair is traded via two live prices: Bid (Sell) and Ask (Buy). In other words, a trader will always see two prices for any given pair, and depending on the direction of the trade, a different price will be offered.The Bid (Sell) price will always be lower than the Ask (Buy) price.
• Spread – This refers to the difference between the Bid and Ask prices. If the spread of EUR/USD is 3 pips, a trader will see that the Bid price is 3 pips lower than the Ask price (see definition of ‘pip’ below).
  
  Example: EUR/USD price – 1.3005/1.3008
• Pip - The term refers to the smallest incremental change possible to the exchange rate. Normally, the pip refers to movement in 4th decimal point (0.0001). For instance, if the EUR/USD moved from 1.3001 to 1.3003, there was a 2 pip change.
• Leverage – Leverage is one of the main features that have made Forex trading so lucrative to many investors around the world. This tool allows traders to open large trades with relatively low funds. Thus, a trader can maximize profits by trading with higher volumes. For example, if a broker is offering a 1:300 leverage, a trader has the ability to trade with 300x his account equity. Leverage is used to provide many small traders access to the foreign exchange market. Without leverage, the small movements that occur in currency exchange quotes would not suffice to provide a worthy profit to traders.

Example: A trader has an account equity of $1,000 and wants to buy USDJPY.

a. Leverage: 1:1 (No leverage): the trader can open a trade of 1,000 USDJPY

b. Leverage 1:300: the trader can open a trade of 300,000 USDJPY

There are also a few key tools that are imperative to becoming a successful trader:

• Stop-loss – A trader can set a price at which to exit the trade. In essence, this limits the risk to the client’s account, since the amount of money that can be lost on the trade is restricted based on the trader’s decision. This tool allows investors to go about their daily lives without concerns, since the maximum level of risk is limited.
• Take-profit – This is the rate at which the trade will automatically close with your pre-specified level of profit.If the market reaches the price set by the trader for the position’s ‘take profit’, the trade will automatically close.

These two tools are essential to any trader. They help you control your losses and have an accurate way of executing your profitability goals, as well as provide a great way of maintaining an organized and effective trading method.

Let’s use an example to show how a Forex trade would look like:

A trader will Buy 100,000 EUR against the USD at the Ask price of 1.3431 (1 Euro = $1.3431).

The trader bought EUR, meaning that he is expecting the value of the Euro will appreciate against the USD. If the market price rises above the Ask (Buy) price of 1.3431, the trade will be profitable.

Let's assume that the market has moved by 0.2 percent in favor of the client:

0.2 / 100 x 1.3431 = 27 pips.

At this point, the trader decides to sell the 100,000 EUR against the USD at the Bid price of 1.3455, materializing his profit.

At this point, we can calculate the profit made from the movement in the market:

The trader bought 100,000 euros, which were worth $134,310 (1.3431 x 100,000) at the time of purchase. Once the market has moved in his favor, the trader sells the 100,000 Euros when it is now worth $134,550, turning a profit of $240 (134,550 – 134,310 = 240).

As you can see, trading Forex is much easier than many would like you to believe.As demonstrated, profit can be made with relatively small amounts of money. While there are naturally risks to consider, Forex is also one of the most lucrative trading markets in the world. It is highly recommended to research and analyze the currencies you trade and the economic conditions of their respective countries. Doing so will likely increase your likelihood of success and substantially improve your results.