Learn forex trading - basic terms part 2 of 3
A smart trader in forex market, must have a deep understanding of the market and currencies to have a chance of succeeding, it's crucial to be patient enough while learning forex trading on your first days, and to start only concentrating on the fundamentals. It takes a combination of knowledge, skill, and discipline to trade in forex market. It's basically very recommended to create a diligent plan of education to establish a strong foundation of trading forex.
Introduction to basic terms of forex - part 2 of 3
This is session 2 of our journey teaching the basic terms of trading currencies in the forex market. First of all, if you haven't seen session 1, I strongly recommend you watch it before continuing with us. In this article (Session 2), we will see other basic terms that a beginner trader in the forex market should learn to establish a solid understanding. Let's go.
Stop loss order
A stop-loss order is one that is placed at a specific price level for the sake of automatically closing a trade to limit large potential losses. A stop-loss is a powerful tool that enables traders to manage the risk of losing their funds in case the market moves unexpectedly against their positions. We’re pleased to have you onboard.
Forex market provides two types of stop loss, a standard stop loss that is typically fixed at a specific price level at which a trade would be closed, and a trailing stop loss that is a dynamic position, specified to follow the price when the market moves in favor of our trade, allowing traders to lock in profits protecting themselves from potential losses in case the market unexpectedly turns against.
It's very essential to place a stop loss at a realistic level to avoid emotional decisions that might lead to a big loss. By using this, you manage your risk and increase your chances of staying alive in the market. It's very important to understand the different types of stop-loss orders available in the market and choose which one is best for your trade. Additionally, a stop-loss order is an essential tool that helps you limit potential losses and better manage your risk.
Now i will tell you the most important info when you use stop loss orders, is the right level of the stop loss order. Many traders make a common mistake when placing stop loss closer to the entry position, which potentially increases risk for the trade to be stopped out prematurely. This is known as "stop loss hunting", as it can be caused deliberately by market makers or by algorithmic traders who target tight stop loss levels in favor of their placed orders.
In addition to all of the above, it's very important to keep in mind the impact of market movements overnight when placing stop-loss orders because market conditions change significantly. Therefore, traders should better consider using a wider guaranteed stop loss at a realistic level to protect their positions from unexpected market movements overnight.
Take profit order
A take-profit order is a lovely tool and concept in the world of trading; it's a placed order at a pre-determined level for the sake of getting the profit, which triggers automatically closing out the trade with a profit. By setting a take-profit order, traders can lock in their profits and avoid the risk in case the market turns against them. This can be very useful for those traders who are looking to minimize their risk. In the forex market, a trader should set a take-profit order at the upcoming resistance or support zone when the analysis predicts that the market is going to turn around once it reaches that specified level.
A good rule of thumb, is to set take profit order at a support or resistance level that are likely to be reached, not too close to the trade position that could potentially be closed out prematurely. A take-profit order is a valuable tool for traders who don't want to miss out on potential gains. It is a profitable tool to control risk and make sure you are getting the best return on your investment. Understanding where to set take profit effectively, helps you achieve more profit in the forex market. It is always necessary to establish a good strategy and use take-profit orders as a part of it.
Traders should always consider their risk tolerance and overall trading strategy when using take profit levels. The forex market could unexpectedly turn around due to unpleasant breaking news or events. Be careful, trades are not always profitable. We're going to do everything in our power to support you throughout your time with us.
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Currency pairs
Currency pairs are the fundamental tools of the forex market, considered to be the most liquid and stable due to their high volatility and large amount of volume in the market. The most commonly traded currency pairs are known as "major currency pairs", which are considered the most heavily traded pairs, as well as "minor currency pairs", "exotic currency pairs", and "cross currency pairs". We will discuss all these different types in the following chapters.
In the forex market, there are more than 180 different currencies that can be traded through spot transactions, swaps, and option contracts. However, the most commonly trades in forex ( buying and selling currencies) are made using (USD) the U.S. dollar, (EUR) the European Euro, (GBP) the British pound, (JPY) the Japanese yen , and the (CHF) Swiss franc. Currency pairs are vital components of the forex market, as they offer more opportunities for traders. Understanding the mechanism of trading currency pairs helps traders make informed decisions and be successful in their trading journey.
Major currency pairs
Major currency pairs, which are the most traded products in the forex market due to their high liquidity and stability, consist of the US dollar, euro, Japanese yen, British pound, and Swiss franc. These major currency pairs are considered the most heavily traded and accepted currencies in the world. Here below are some of the most popular major currency pairs at present:
Forex trading is very complex and challenging, well-understanding these currency pairs and analyzing them effectively can give traders valuable insights about global economic conditions and help them make informed decisions when entering or exiting trades. Major currency pairs are essentially the most common choice among traders of all experience levels.
Minor currency pairs
Minor currency pairs are often less liquid and more volatile than major currency pairs. Also known as crosses or cross currency pairs, they are basically those pairs without the U.S. dollar. Here are displayed below are the most popular minor currency pairs at present :
Traders should thoroughly research the currencies they are willing to trade before entering a position because minor currency pairs come with additional risks, such as low liquidity and high volatility. Therefore, traders should keep analyzing and monitoring live news and data releases, as well as the economic and political conditions relevant to the countries whose currencies are being traded. When trading this type of currency pair, it's very important to have proper risk management. placing stop-loss order to limit potential losses.
Exotic currency pairs
Exotic currency pairs are those including a currency from a developing country, such as the Turkish lira, the Mexican peso, and the South African rand. These are considered more "exotic" than minor currency pairs and majors, which include currencies from highly developed countries. Here are displayed below some examples of the most common exotic currency pairs at present: USD/MXN, EUR/ZAR, and USD/TRY.
Trading with exotic currency pairs usually offers unique opportunities for traders who are looking to diversify their trades. But be carefull, exotic currency pairs come with additional risks, as they can be less liquid and more volatile than minor currency pairs and major. Let me tell you that exotic currency pairs could have a higher cost of trading and wider bid-ask spread due to their lower liquidity. Traders of this type of currency should implement proper risk management to limit potential losses.
Cross currency pairs
Cross currency pairs are the same as minor currency pairs, also known as "crosses," with less liquidity and higher volatility than major currency pairs. They are also the only currency pairs that do not include the U.S. dollar. These types of pairs can provide exposure to different economic and political conditions than U.S. dollar-based pairs. Additionally, cross-currency pairs are influenced by cross-rate movements, which are driven by the weakness or relative strength of the US dollar.
When trading cross-currency pairs, it's very important to use the risk-reward ratio concept to ensure gains outweigh losses and to set stop-loss orders to limit any potential losses.
Leverage in forex
Leverage is a powerful double-edged tool in the world of forex trading, as it will either amplify your profit or cause a fatal decrease in your account funds. Let me give you an example. Assuming a trader with only $1000 in his account can control a $100000 position with 100:1 leverage, this means the trader can make 100 times his initial investment, but keep in mind that he is also exposed to 100 times the risk. So, it's very important to use leverage wisely and to always have a solid risk management strategy in place.
By using leverage, expert traders can potentially make a larger profit on their investment with a smaller amount of capital in a shorter period of time. However, remember that leverage also increases risk, if a trade unexpectedly goes against the trader, they can lose a large amount of their initial investment. That's why we should use appropriate leverage levels, set stop-loss orders, and diversify our portfolio. We're going to be an excellent addition to your level of experience.
Keep in mind to choose a broker that offers the leverage which is appropriate for your trading style and risk tolerance. Some brokers offer leverage as low as 1:50. while others may offer the leverage as high as 1:500. Also, you have to understand the concept of margin when you tend to use leverage. Margin is the amount of money required to open and maintain a leveraged position. The higher the leverage, the lower the margin required. For example :
Keep in mind that the lower the margin, the higher the risk, and you should have enough money in your account to cover your margin requirements. I confirm you can achieve greater returns on your investments and minimizing significantly your risk, the day you understand the concept of margin, create a solid risk management strategy, diversify your portfolio, use appropriate leverage levels wisely, and to be with a broker that offers the leverage level that is appropriate for your needs.
Exchange rate
The exchange rate is the value of one currency in relation to another in a pair such as EURUSD. If the exchange rate between the USD and the EUR is 1.20, that means 1 US dollar is equal to 1.20 EUR. A pair's exchange rate can be changed by many factors such as country's interest rates, (GDP) Gross Domestic Product reports, and other political instability. Before making any trade, it's very recommended for traders to do analysis and to stay up-to-date with all current economic events in the big developed countries.
Exchange rates are constantly fluctuating and can also be affected by speculative market sentiment. EUR/USD pair exchange rate tells us how many USD 1 Euro can buy. The exchange rate of this pair changes depending on the relative strength of the two currencies. A weak EUR will result in a lower exchange rate, while a strong EUR will result in a higher exchange rate.
Traders often use the exchange rate of a currency to determine the best time for buying or selling. They make analyses of exchange rate data such as interest rates and GDP to predict how exchange rates may change, and so they look for trends to identify potential profitable opportunities. Keep in mind that exchange rates are dynamically changing. Trades can be affected by small changes in the exchange rates. Therefore, it's very important to stay up-to-date with all factors that can impact exchange rates.
Forex Signals
A forex signal is a message through which we can notify other traders that there is an opportunity to place or execute an order instantly on a currency pair. This message contains the type of order, entry point, stop-loss level, take-profit level, and the reasoning behind the trade. This signal is created by professional traders or sophisticated algorithms dedicated to helping other traders make potential profits.
But keep in mind that not all these signals are 100% accurate, because nothing in the forex market is 100% accurate. As we know, the forex market fluctuates depending on many economic or political factors that sometimes aren't in our favor. On the internet, a variety of websites offer free signal services, while others offer paid ones. Also keep in mind that no signal provider can guarantee a profit, and all those signals should be used in conjunction with your own analysis and research.
Signals can be delivered in a variety of ways, such as via text message, email, or through a dedicated trading platform. If you tend to use this popular tool, it's highly recommended when looking for signal providers to choose a reputable one and do your research to read his reviews.
Using forex signals can save traders time and effort, as it can be very difficult for an individual trader to do a professional analysis and make a profit, but signals providers are able to analyze the market and provide real-time advice.
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Conclusion
In the forex market, exchange rates and currency pairs are considered the two most important aspects of trading forex. Understanding how currency pairs and exchange rates work is essential for those traders looking to succeed in the forex market. Additionally, traders should stay up-to-date with all the latest news, economic indicators, and other factors that might affect exchange rates.
Market orders, limit orders, and stop orders are also important to understand to be able to use them effectively in forex trading, they are the instructions we use to buy or sell a currency at the current market price. We use limit orders to enter or exit a trade at a pre-defined price, while we use stop orders to protect our investments against potential losses.
In summary, exchange rates, currency pairs, and orders are the most fundamental components in the forex market. By using these tools and resources with the right knowledge, they can help us make informed decisions and earn profits in the world of forex trading.
If you require additional help or support, contact us at contact us page. I hope you enjoyed your stay. Can I help you in any way? Thanks a lot for visiting our website.
