FOREX Entry Strategies
To enter a FOREX trade, a trader must first analyze a currency pair, comprising a base currency and a counter currency. When a trading strategy indicates a profitable opportunity, a trader submits an entry price to buy or sell the currency pair. A trade will not execute unless and until the market price is equal to or more favorable than the entry price. FOREX traders use real-time trading platforms to place trades in their brokerage accounts.
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Entry Point
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Traders use technical and fundamental analysis to identify a specific exchange rate as a trade entry point. Exchange rates are expressed as a fraction that specifies how many units of the counter currency (the denominator) are required for one unit of the base currency (the numerator). Rates are calculated to 1/100 of a percent; this is known as "percentage in point", or pip, pricing. For example, a DOL/CHF (US dollar vs. Swiss franc) rate of .9507 denotes that $100,000 can be exchanged for 95,070 Swiss francs. A trader might set a buy entry point of .9505; the transaction will not execute unless the U.S. dollar weakens by two pips.
Order Size
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To manage risk, a trader might limit the size of any one FOREX order to some maximum percentage of available funds. A standard contract is 100,000 units of the base currency -- in our example, the U.S. dollar. Accounts set up for min-contracts can place 10,000 unit orders, and flexible accounts can be used for any size order. An example strategy would be to limit any single order to 5 percent of investment funds.
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Leverage
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Margin is the amount of cash a trader must use to collateralize a trade -- the remainder of the trade amount is lent by a broker. Leverage is the degree to which a trader will borrow trading funds. Higher leverage translates into higher risk and higher potential returns. A trader's strategy will dictate how much leverage to use. Leverage levels up to 100:1 are available to risk-seeking traders, but prudent investors may limit their leverage to 5:1 or less.
Trend
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A trader forecasting an uptrend in the price of the base currency relative to the counter currency will open a position with an order to purchase the currency pair -- a long position. Conversely, a short position in a currency pair profits from a downtrend in the base currency. A trader establishes a short position by entering an opening order to sell the currency pair.
Trade Discipline
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Trade discipline helps limit losses not only from losing positions but also from failure to promptly close profitable ones. A critical strategic component of successful trading is establishing a stop-loss price coupled to the entry price. The stop-loss specifies how much loss a trader will tolerate before closing a position. Traders quickly learn never to enter a trade without also entering a stop-loss, as the market may turn quickly against a position. A further refinement is the take-profit order, which closes out a profitable position at a specified price.
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References
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