Forex Trading Hacks That Can Simplify Your Trading

As a beginner in forex trading, you may come across confusing concepts and definitions.

Learning all this information can be time-consuming and energy-draining. To help you save time and avoid unnecessary trial and error, there are various forex trading tools that you can use, like trading calculators, stop loss, limit orders, indicators, etc. Keeping that in mind, here is a concise guide to the basics and tricks of forex trading that you can look forward to. 

What is Forex Leverage?

Leverage in forex trading allows you to control more money with a smaller initial investment. It's like borrowing money from your broker to increase your trading power. With leverage, you can make more enormous profits from your trades.

For example, let's say you have $1,000, and your broker offers a leverage of 1:100. If you have a capital of $1,000, you can control a position worth $100,000 in the forex market. The remaining $99,000 is provided by your broker as a loan.

How to Choose a Trading Platform?

The right terminal is the most crucial aspect to consider when choosing a trading platform. The trading terminal in your trader's profile typically offers a standard set of options. It allows you to open and close trading positions and monitor the state of your account. The terminal also provides essential tools for technical analysis to help you identify the direction of price trends. This type of platform is well-suited for beginner traders. 

Mobile trading terminals designed for iOS and Android are ideal for active individuals who may not always have access to a desktop computer. Mobile versions of trading platforms provide all the necessary tools for forex trading, including standard technical analysis indicators. However, one drawback of mobile platforms is the small size of mobile gadgets. The screens of mobile devices do not allow for in-depth analysis of the current market situation, which can lead to incorrect trading decisions.

Ultimately, choosing a trading platform depends on your trading style, preferences, and the level of analysis you require. It's essential to evaluate the features and limitations of each platform to ensure it aligns with your needs and allows you to make informed trading decisions.

Trading Terms and Definitions

Forex Currency Quote: 

A Forex currency quote represents the price of one currency in terms of another currency. It is presented as a fraction, such as EUR/USD, which indicates the value of one Euro in dollars. When the first currency in the quote is any currency other than the US dollar, it is called a direct quote.

On the other hand, an indirect quotation has the US dollar as the first currency, indicating that the value of the US dollar is expressed through another currency. For example, USD/JPY is an indirect quote showing the value of one US dollar in Japanese yen.

Then, there are cross rates, where neither of the currencies in a pair is the US dollar. Examples of popular cross rates are EUR/JPY and GBP/JPY. However, I advise beginner traders to gain confidence and experience with major currency pairs before venturing into cross rates.

Understanding currency quotes is essential in Forex trading as they indicate the relative value of currencies and help traders make informed decisions. It's critical to familiarise yourself with different types of currency quotes and gradually expand your trading expertise as you become more comfortable in the Forex market.

What is a Lot in Trading?

A lot refers to the size of a trading position in the forex market. The standard lot size is typically 100,000 units of the base currency (such as dollars, euros, or pounds).

Let's say you decide to enter a trade with a standard lot size and use a leverage of 1:100. In this scenario; you would need to deposit a minimum of 1,000 units of the base currency, the first currency listed in the currency pair.

What are pips in Forex?

The term “pip” stands for “percentage in point” or “price interest point.” It represents the smallest increment by which an exchange rate can change according to the market movements. In most currency pairs, prices are quoted up to four decimal places. The fourth decimal place represents a single pip. Essentially, a pip equals 1/100 of 1% or one basis point. When forex traders buy or sell a currency, its value is expressed about another currency. 

The exchange rates for these currency pairs are shown as bid and ask price, which are accurate to four decimal places. The movement in the exchange rate is measured and tracked using pips. Since most currency pairs are quoted with up to four decimal places, the smallest unit of change for these pairs is one pip. Calculating pips initially can be tricky, so it is better to use a pip calculator to find the pip value in your currency to have a better idea. 

What is a Swap?

Swap is a fee traders pay to keep their positions open overnight. While day trading allows for multiple transactions within a day, if a trader decides to extend a trade beyond the current trading day, the broker will charge a fee known as a swap.

The reason for this fee is the change between the two exchange rates. A swap fee is incurred when a trader uses borrowed funds or deals with a currency different from their account currency. It compensates for the interest rate differential between the two currencies involved in the trade. The swap fee ensures that traders account for the cost of holding positions overnight.

What is Spread in Forex Trading? 

The spread refers to the difference between the price at which you can sell a currency pair and the price at which you can buy the same currency pair. It represents the gap between the demand and supply for that currency pair. The size of the spread can vary depending on the current market conditions and can range from no difference to a few pips.

When there is high demand and many traders are interested in buying or selling a particular currency pair, the spread tends to be narrower. On the other hand, if there is less activity or liquidity in the market, the spread may be wider. Sometimes, a fixed spread value may be specified in advance for specific currency pairs. On a demo account, you can measure the spreads appropriately, as no real-time transactions are happening in the market. Still, on a real account, even a more significant difference in spreads can make a bigger impact. Therefore, you should understand this concept properly. 

What are Stop-Loss and Take-Profit?

A stop loss is a valuable tool in trading that helps protect you from excessive losses. It is a pre-set order in which the position is squared off automatically when the price reaches the stop loss level. The word ‘Stop Loss' means to stop the bigger losses that traders would otherwise encounter if the trade is kept running. Setting a stop loss limits potential losses and manages risk effectively. It's always a good practice to set a stop loss when opening a trade.

On the other hand, a take-profit order is another type of pending order that helps you secure your desired profit. It allows you to set a specific price level at which your trade will automatically close, locking in the expected profit. When the price reaches this level, the take-profit order ensures that your trade is closed, and you can realize the gains you were aiming for.

Using both stop loss and take profit orders can help you manage your trades more effectively by defining your risk and reward levels in advance. They provide a structured approach to trading, enabling you to protect your capital and maximize your potential profits.

Margin Call

A margin call is something every trader wants to avoid. It occurs when the amount of money in your trading account falls below the required minimum level set by your broker. When this happens, the broker will notify you that you must add more funds to your account to meet the minimum margin requirement.

A margin call is a warning sign that your trading account has lost too much money. It's a signal that you risk losing all your funds if you don't take action. At this point, you have two options: close your position to stop further losses or deposit more money into your account to increase the available margin.

Experiencing a margin call can be stressful, and you definitely want to avoid it. It's better to know the margin you intend to use in trading, for which you can use a margin calculator. It can let you know the exact margin you should trade with, which would avoid the situation of margin calls. It's essential to manage your trades and accounts carefully by ensuring you have sufficient funds and understand the risks involved. By practicing proper risk management and not overleveraging your positions, you can minimize the chances of receiving a margin call and protect your trading capital.

Conclusion

While there may be no magical solution or foolproof strategy in forex trading, understanding critical aspects of the market and honing your skills can significantly simplify your journey. Expanding your knowledge base through education and staying up-to-date with relevant news will equip you with a better understanding of the market dynamics. With discipline, proper risk management techniques, reliable tools, and a well-defined trading plan – achieving your targets becomes more attainable in the dynamic world of forex trading.

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