How to Make Entry in a FOREX Trade?
The foreign exchange (FOREX) market is the largest, most liquid trading market in the world. In 2010, average daily FOREX volume was approximately $4 trillion. To make a FOREX trade, you select a currency pair, composed of a base currency and a counter currency. You then specify an entry price for the currency pair; when that price is reached, your trade is activated. Because of the combination of volatility and leverage featured in the FOREX market, individual traders should set loss limits on any FOREX trades they enter.
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Instructions
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Select a currency pair to trade and determine its exchange rate. For instance, if you are interested in trading the US dollar against the euro, your currency pair will be EUR/USD. Rates are specified to four decimal places; this is known as "percentage in point", or pip, pricing. An example EUR/USD rate of 1.4947 denotes that 100,000 euros can be exchanged for 149,470 dollars.
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Enter an order size. A standard contract is 100,000 units of the base currency---in our example, the base currency is the euro. Accounts that are set up for mini-contracts can place 10,000-unit orders, and flexible accounts can be used for any size order.
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Select a level of margin, if applicable. Some brokerage accounts allow you to specify on a trade by trade basis the amount of margin you want to use, whereas other accounts provide a fixed margin percentage. Margin is the amount of cash or other collateral you must provide to execute a trade -- the remainder of the trade amount is lent to you by your broker. Margin levels up to 100:1 are available, but prudent traders may limit their leverage to 5:1 or less.
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Choose whether your entry order will be a purchase or a sale---i.e. a long or short position, respectively. You profit from a long position if the value of the base currency increases relative to that of the counter currency. Conversely, a short position on a currency pair profits from a weakening of the base currency.
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Enter your desired entry price, "if-done" trailing stop-loss percentage and take-profit price. Your order will execute if market prices "touch" your entry price, at which point your trailing stop-loss and take-profit order will automatically activate. The trailing stop-loss specifies what percentage loss you will tolerate before your position is closed. When your take-profit price is reached, your position will be closed at a profit.
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Tips & Warnings
Most FOREX trading software provides a simulation mode in which you can test your trading strategies before committing real money to trading. This can be a valuable learning platform that prevents you from making rookie mistakes.
Never enter a trade without a also entering a stop loss, as the market may turn quickly against you. This way, you are protected even when you are away from the computer.
Use leverage conservatively. Many traders are wiped out in the FOREX market due to aggressive use of margin. When prices move against you, high leverage results in faster margin calls---i.e. forced transactions in which your broker liquidates your position.
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Resources
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