Four Steps to Make Your First Forex Trade
“What is forex trading” is the first question a beginner should answer. After deciding that forex trading is for you, these four steps will help you learn how to make your first forex trade.
- Choose a currency pair
Forex trading is exchanging the value of one currency to another. Since this is the case, you always must buy one currency and sell another simultaneously. With this, you need to trade currencies in a pair.
Mostly, beginners start by trading the most offered pairs of major currencies, but you are not bound to that. You can trade any available currency pair as long as you have enough funds in your account. Let us have EUR/USD (Euro/ US Dollar) as an example.
- Study the Market
The trading venture should have research and analysis as a foundation. Emotion will be your guide without this and most of the time, it will not end well.
Upon researching, finding the whole prosperity of forex resources may seem overpowering at first. But while researching a certain currency pair, you will find useful resources that are exceptional among the rest. You should check the current and historical charts regularly, observe economic news and announcements, view the indicators, and conduct other technical and fundamental analysis.
- Read the quote
There are always two prices displayed for currency pairs. For example, a quote of EUR/USD.
- The first-rate is the price at which you can sell the currency pair. It is named SELL.
- The second rate is the price at which you can buy the currency pair. It is named BUY.
- Spread- the difference between the first and second rate. For making the trade, this is the value that the dealer charges. Take note that spreads vary among dealers.
- Pick your position
When trading stocks, bonds, and other financial products, you usually speculate only the one direction of the market which is the up.
It is a little different in Forex trading. Since you are buying one currency and selling another simultaneously, you can speculate the up and down movements in the market.
- Buy Position – you think that the base currency value will go up (rise) compared to the quote currency. For example, if you are buying EUR/USD, then you think that the euro price will step up against the dollar. Shortly, you think that the euro is bullish and the US dollar is bearish.
- Sell Position- you think that the base currency value will go down (fall) compared to the quote currency. For example, if you are selling EUR/USD, then you think that the euro price will step down against the dollar. Shortly, you think that the euro is bearish and the US dollar is bullish.
Let us practice by having a forex trade example. After all, examples can make you visualize what is forex trading.
- Entering a Buy Position
The current price for EUR/USD is 1.0717/19. You think that the euro is bearish and decided to enter a buy position for 1 lot of the EUR/USD. Since you are buying, you entered a trade at a price of 1.0717.
Later that day, you viewed your position. The EUR/USD is 1.2880/85. There is a gain of 32 pips in your trade. You close your position at the current sell price of 1.2880. You take your profit.
- Entering a Sell Position
You think that the euro is bearish and decided to enter a sell position of one lot of EUR/USD. Since you are selling, you entered a trade at a price of 1.0717.
You viewed your position later that day and found out that the EUR/USD is now at 1.2880/85. There is a loss of 36 pips in your trade. You close your position at the current buy price of 1.2880 and accept your losses.