The other week we ran through a bit of background to the FX Markets, so this week I thought we would run through a few basics of FX Trading.

There is a lot to learn when it comes to trading FX and new comers can sometimes feel overwhelmed by all the optionality and flashing numbers on a trading screen. Here at FX Strategy we have tried to simplify this daunting task for you by providing you with the best (in our opinion) trading platforms available on the web. Go to FX Strategy’s homepage to see the list of our recommended sites.

All these sites offer “demo” accounts – and this is your most important learning tool. There’s no charge involved so it can be well worth signing up to a few (or even all) the demo platforms – as it’s a way to “try before you buy” – yes there is a pun in there!!

[note: demo trades are also referred to as paper trades, practice trades, pretend trades]

Each of these platforms offer guides and advice, so read widely and do some paper trades. This will help you find out what works best for you. For example, you may want to use CFDs as your preferred strategy or one platform may offer you a currency pairing that you hope to trade that another platform doesn’t offer – this is another reason to consider having at least 2 accounts open with different providers as it will provide maximum optionality.

While there is no better way to learn FX than by doing paper trades, you do also need to be up with a few basics, such as PIPs.

PIP stands for Percentage in Point. In FX, currencies are priced to 4 decimal points. A pip is one unit of the fourth decimal point, or 1/100th of 1 percent. For example if a currency is trading at 3.0001 and moves up by 1 pip, then it will now be trading at 3.0002.

Currencies are typically traded in “lots” of 100,000 units (eg US$100,000). Hence a move of 1 pip changes the value of a traded currency lot by 10 units (eg US$10).

Here is an example from our friends at Wikipedia:

If the currency pair of the Euro vs. the U.S. Dollar (EUR/USD) is trading at an exchange rate of 1.3000 (1 EUR = 1.3 USD) and the rate changes to 1.3010, the price ratio increased by 10 pips.

In this example, if a trader buys 5 standard lots (i.e. 5 x 100,000 = 500,000) of EUR/USD, paying USD 650,000 and closes the position after the 10 pips appreciation, the trader will receive USD 650,500 and achieved a profit of 500 US dollars (i.e. 500,000 (5 standard lots) x 0.0010 = USD 500). Most retail trading by speculators is conducted in margin accounts requiring that only a small percentage (typically 1%) of the purchase price is required as equity for this transaction.

There’s a lot to get your head but don’t worry because FX Strategy is here to help you!

By Friday Fundamentalist, Published on 26th of October 2011
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