The A-Z of forex exposed

Placing an Order
Orders to buy or sell currencies can be placed
any time the market is open. With most
trading platforms, placing a forex order is as
easy as a click of the mouse.
If a trader wishes to buy a currency pair, he is
said to be taking a long position on that pair.
The trader who is long will profit when the
currency pair increases in value. A trader who
sells a currency pair is said to be going short.
That trader will profit if the currency pair
decreases in value.

It is an important principle to understand that
the forex trader can place an order to sell a
currency pair that he does not "own". To exit
that "short trade", the trader simply places an
order to buy the currency pair in the future.
See below for more information on exiting
trades.
More about long and short in forex trading
The concepts of buying, selling, long and short
can be confusing in currency trading, since in
every forex trade one currency is exchanged for
another - essentially there is a buy/long and a
sell/short in every trade. For simplicity, it
might be easiest to think of a currency pair as
being an abstract financial instrument to
which a price is assigned by the forex market.
At the same time, it is important to maintain
perspective and remember that the abstract-
appearing instrument, in a very real way
represents the actual relative value of two very
real currencies. When a currency pair is
purchased, the trader is purchasing the base
currency and selling the quote currency. When
a currency pair is sold, the opposite is true:
the trader is buying the quote currency and
selling the base currency.
Order Types
Orders are the instructions that traders give
brokers to buy or sell currencies. Those orders
are usually issued directly to the forex broker
through the trading platform.
Various types of orders are used in forex
trading. The forex order types will be familiar
to traders experienced in equities or futures
trading. Three common types of orders are the
Market Order, the Limit Order, and the Stop
Order.
The Market Order instructs the broker to buy at
the current market rate, and in the electronic
age, is carried out with the click of the mouse.
In the forex market, this order type is usually
executed immediately, at the price displayed in
the trading platform at the time the order is
placed (at the instant of the mouse click).
That ability to place orders instantly is in
marked contrast to many other markets, when
the actual price at which a market order is
executed might differ greatly from the price at
the time the order is placed.
The Limit Order instructs the forex broker to
execute a trade to enter a forex trade at a
specific price. The trade could be either to buy
currency when (if) it reaches a specific price
below the present market price, or to sell the
currency pair when (if) it reaches a specific
price above the present market price.
For example, consider a trader who wants to
buy USD/CAD, thinking that it is likely to
increase in value. However, the trader believes
that the pair will decrease in value slightly
below the present market price before
climbing. Since the trader wants to take buy at
the lowest possible price, he therefore wishes
to wait until the pair reaches the lower price
before entering into the trade.
Without a limit order, the trader would need to
patiently watch the trading platform, waiting
for the price to dip to his target entry price,
and then placing a market order.
The limit order automates the process. The
limit order can be placed, and the trading
platform will wait for the price to drop to
target price entered by the trader.
A drawback to using a limit order is that it is
only effective at the specific price, and not one
pip away. However it does mean that a trader
does not have to continually monitor the
market waiting prices to meet his entry price.
The Stop Order is similar, but opposite to the
Limit order. This order type is normally used
to exit an existing forex trade by liquidating a
position when the market price changes
against the expectations (and position) of the
trader. The Stop Order is an order to buy
above the present market price, or sell below
the present market price. This order is
normally used to limit losses if the currency
pair price changes unfavorably in a forex
position. For that reason, it is also known as
a stop-loss order.
Exiting a Position
A trader exits a position, that is, completes
the trade, or leaves the market, when he
executes the opposite trade by which he
started. If he bought USD/CAD he then sells
USD/CAD. Note that the trader could also
have sold USD/CAD initially, and then bought
USD/CAD later to exit the trade and close the
position.
Calculating Profit or Loss
Once a trade is completed, profit or loss can
be calculated-this is usually done
automatically by the trading platform (and
most platforms calculate profit and loss
continuously throughout a trade. Profit/Loss
is the difference between the value of the
currency when the trade was entered, and
when it was completed (or exited). It is
important to understand how profit and loss is
calculated, in order to better understand forex
trading.
Just as in an auction, a transaction in the
foreign exchange market uses the terms Bid
and Ask to describe the value of the currency.
The Bid is the price at which the currency pair
can be sold by a trader, while the Ask is the
price at which the currency pair can be
bought. In a long trade on a currency pair,
profit loss is the difference between the Ask
price when the trade is entered, and the Bid
price when the trade is exited. Conversely, in a
short trade profit/loss is calculated as the
difference between the Bid price at the time of
entry, and the Ask at the time the trade is
exited. An example will help to clarify.
Assume that a trader believes that the Euro
will increase in value as compared with the US
Dollar. The trader places a market order to buy
EUR/USD, and the trade is executed at the
(then) current price of 1.3490/93. Since the
trader must buy at the Ask price (and this is a
Full Size account), the purchase is for 100,000
Euros at the price of $134930 US Dollars.
As the trader hoped, the value of the Euro
does in fact, increase relative to the US Dollar.
The trader closes the trade by selling EUR/
USD, at the market price of 1.3505/08. Since
the trader must sell at the Bid price, he sells
the EUR/USD for $135050 US Dollars.
The profit on this trade is $80 US Dollars
($135050-1354930)
However, if the trade did not work out as well
as the trader hoped, and the trade was exited
below the entry price, the profit/loss would
look much different.
Let's assume that the trade was closed by
selling the EUR/USD position when the price
was at 1.3484/87. At that price, the 100,000
Euros are sold for $134,840. The trade results
in a loss of $90 US Dollars ($134,840-
$134,930)
Account Balance, Leverage and Margin
A quick review of leverage and margin might
be helpful.
Every trader is required to maintain funds in
their trading account with the brokerage. (This
deposit is normally held in a segregated fund,
in trust - often as regulated by the legal
authority under which the brokerage operates,
but be sure to check, since requirements vary
from authority to authority, and possibly from
brokerage to brokerage).
The minimum amount of this account is often
set by the brokerage terms. In addition to the
established minimum, the account also has a
very practical use for margin. In order to enter
and maintain a trade, the trader must commit
some of the trading account; this amount is
called 'margin', and the trading account itself
is sometimes referred to as a margin account.
The amount of margin committed by the trader
for any specific trade is a percentage of the
trade value, in a ratio usually called leverage.
Leverage ratios are commonly in the range of
100:1 to 10:1. If the ratio is 100:1, the trader
must reserve 1% of the trade value as margin.
For example, consider the trader who enters a
full size trade for USD/JPY. That trade has a
value of $100,000 US Dollars. If the leverage
offered by the broker is 50:1, the trader must
maintain and commit 2% of the trade value in
his margin account, or $2000. If the USD/JPY
trade gains in value, the trader's account
balance will increase by the amount of the
profit (thus providing additional funds that the
trader might use to enter additional trades).
However, if the trade loses funds, even
temporarily, the trader must commit
additional margin funds to the trade, thus
reducing the amount in the margin account
that would otherwise be available to commit
to other trades. If losses in the trade exceed
the balance available in the trader's account
the trading platform usually exits the position
automatically.