Forex Trading

Important: This page is part of archived content and may be outdated.

The current page about forex trading can be viewed on the XM site under the category forex.

Regardless if you might have heard about forex trading at college, at your workplace, from a friend or from an advertisement on a financial oriented website on the internet by reading through below you will get an introductory view of what online forex trading is, how it is practiced and what the chapter called forex trading adds up from. In simple terms the foreign exchange abbreviated forex or even fx from more experienced traders describes the practice of purchasing one currency from either an individual or an institution and simultaneously selling another in order to execute a transaction. Made easy the process of exchanging the first currency for the second is a usual trade which is clearly based on the rates of the two currencies involved at the time of the transaction.

Going down to the basic use of online forex trading you can easily realize that the first group of people that are in direct need for a foreign currency are people travelling which therefore are approaching borders in which products and services are bought with a different currency from the original currency which the country the traveller originates from maintains. Landing in to a foreign country you will sell out a particular amount of money based on your needs in order to purchase the domestic currency at a rate which is determined by the institution or the individual selling the domestic currency; in simple words they will buy your money and give you new money in the equivalent rate. What we have just described can be considered a small trade, a small practice of forex trading.

Online Forex Currency Trading

One of the basic concepts you will have to comprehend in order to understand forex currency trading is that currency trading is always conducted in pairs as currencies are quoted in pairs themselves. A currency pair is a quote that lists one currency abbreviation as first and another currency abbreviation as second, the first abbreviation is the base currency where the second abbreviation is the counter or quote currency. You should understand that the base currency is the basis for the trade meaning that during a buying trade noted EUR/USD you have sold USD (US Dollars) and have bought EUR (Euros) at the forex rate offered during the time of the trade itself.

The determinant factors that can be behind such a trade could vary, but in general terms at their base the core idea is that as a trader at the time of the trade you felt that the USD would be weakening and therefore had decided to change the whole or part of your balance to EUR. What this means is that you have locked out of a falling currency and have locked in to a currency you speculate will rise or remain stable therefore allowing you to switch back to USD when the US Dollar is cheaper to buy based on your speculation meaning that at the end of the day you when you decide to switch back to USD your purchasing power with the same amount of EUR (Euros) will be more.

Reasoning behind a speculation for a rise or a fall of a currency predominant in a particular region can be based on endless factors which contribute their effect as a chained reaction. These factors can be based on inflation, recession, regional crisis, an ongoing war, an alarm of a possible war to come, political instability, political crisis, political scandals, fiscal mishandling and many, many more. As a speculative trader you will realize that over time you will be more and more capable to digest and comprehend daily news and understand which factor influences which currency and what changes around the world bring changes to the forex market which in reality means that you will be in the position to start generating your own forex signals.

How to Calculate Forex Trading Profits and Losses

As the forex trading market does not have a standardized trade size and because many currency pairs are not quoted in terms of US Dollars the method for calculating profits in the forex market is a little more difficult than in many other markets.

To calculate your profit or loss all you really need to do is take that number and multiply it by the number of pips of potential profit and loss you have on the trade, and then multiply that by the number of contracts you are trading. This will give you the total potential profit and loss on the trade in US Dollars.

As an example lets say that I am trading 3 standard contracts of USD/CAD. My profit target on this trade is 100 pips and my stop loss is 50 pips away from my entry price. To get the total dollar amount of potential risk and reward on this trade, I would simply multiply the pip value of USD/CAD which as of this lesson is $9.95 by 100 which would give me $995. This is my potential profit on the trade per 1 contract. As I am trading 3 contracts I would then multiply $995 times 3 which would give me $2985 in potential profit on the trade.

To get my potential loss on the trade I would simply multiply the pip value of 9.95 by 50 which would give me a potential loss of $497.50 for each contract traded. As I am trading 3 contracts I would then multiply that $497.50 by 3 which would give me $1492.50 in potential loss on the trade.

The value of a 1 pip move in currency pairs where the US Dollar is the counter or second currency in the pair is always $10. This is because, as we have learned in earlier sections, a currency quote represents how many of the second currency in the pair it takes to buy 1 of the first currency. As we are trading contract sizes of 100,000 of the base currency a 1 pip move in 4 decimal place currency pairs is equal to .0001 * 100,000 which equals $10 in currency pairs where the USD is the second currency in the pair.

As you will also notice for currency pairs where the US Dollar is not the second currency in the pair the value of a 1 pip move in the market varies. This is because in those instances the counter currency is not the US Dollar and therefore the value of a 1 pip move has to be converted back into US Dollars at the current exchange rate.

So for example if we are trading USD/CAD and a 1 pip move in the market is equal to .0001 CAD * 100,000 which gives you 10 CAD. So, as just stated, in order to get the pip value for the USD/CAD currency pair in US Dollars you must then convert the 10 CAD back into US Dollars.

Since the calculations are done for the trader within the platform it is simply important to know that for any currency pair where the US Dollar is the second currency in the pair then the value of a 1 pip move in the market will always be $10. For any currency pair where the US Dollar is not the counter currency, the value of a 1 pip move in the forex trading market will vary depending on the exchange rate of whatever currency is the second currency in the pair and the US Dollar.

What Influences Prices in Forex Trading?

As far as determining what influences the rates at which currencies float in forex trading once studying or practicing forex trading you will realize that prices of currencies do not fluctuate based on only one criteria as the equation adds up from a number of contributing factors including the supply and demand law, political scenarios that might be held in a particular region of the world which is ruled by a certain currency and even economic events surrounding a particular region like a predicted bankruptcy of a country, an industry problem, a war going on in a particular region and other important facts and rumors that hit the news headlines every day.

Although the pre mentioned example relates to travelers it does somehow explain a fundamental use of forex trading in every day life; transactions similar to the above are executed by millions and millions of people every day which might belong to the above group of forex traders or might be practicing currency trading for commercial reasons because they buy products from a foreign country and retail them in their local jurisdiction. What this means is that these importers will be balled to pay invoices in foreign currency; if they might be from the US and they are importing from the UK they will be called to pay their invoices in GBP which means that based on their resources and their cash flow it is wise for them to maintain reserves of GBP on hand if possible which they had traded on relatively good exchange rates in order to capitalize on their investment. The pre mentioned is just a scenario and in no case does it mean that this is a practice that can be practiced by all institutions as it might be either too expensive to perform, non profitable for taxation reasons or even more non profitable due to lower interest rated that might be provided to them when maintaining GBP.

All the above are circumstances and scenarios which a good trader, a good CEO or a good CFA will keep in mind when performing his payments and his trades in forex trading. However the worldwide currency market is utilized by each countries central bank, commercial bank, investment firms and even individual investors like people that trade with forex brokers listed on This mass utilization is what makes the forex market the worlds most liquid and largest financial market with more $3 Trillion traded daily making any other market seem small.

As an online trader you are in reality categorized in to segment of traders called retail traders which is a group of forex traders which access the forex marketplace via as you will not be directly trading in the interbank market yourself as you trade based on the guidelines of the forex brokers presented on We act as a bridge between you and a number of global banks which the retail trader would not have sufficient funds to trade with otherwise. In difference to other major financial markets like the stock market the forex trading market operates on a 24 hour basis from 1800 Eastern Standard Time on Sunday through 1600 Eastern Standard Time on Friday. The electronic network of banks that allow forex trading start operations in Sydney then move to Tokyo before they move to Europe and close a trading day in US.

Forex Trading Strategies

The rule is that there is many accepted forex trading strategies available which have during the years circulated through forex trading books, forex trading manuals and have been often been discussed at forex seminars or on forex forums, this does not imply that these strategies are fit for all traders and surely it does not imply that as a trader you should take them into full consideration when executing your trades. From our point of view each trader participating in foreign exchange through a forex broker has one main advantage and that is that he is free to perform his trades by himself with no intervention of third parties if he does not wish to bring them along. We strongly believe that forex trading is something that can be tailor made on each and every individual without that meaning that forex traders cannot be categorized cased on common characteristics.

We would advise that you do not follow any forex trading strategy that are available for sale or for free by the book as they are the sole views of the innovator or the writer and they might not be able to be comprehended correctly or they might not be able to implement as they were initially thought of from their author. The goal for you as a trader should be to be able to build up and shape your very own strategy that will allow you to maintain the flexibility to learn, improve and sustain both losses and profits without your losses being final for your trading future. Many strategies require excessive amounts of forex leverage or excessive amounts of capital to be successful and this might not be the case for you individually. We strictly advise that you talk to your account manager before engaging in any sort of forex trading strategies that may cause you to sustain a partial or sum loss of your forex trading portfolio.

Forex Trading Software

The term forex trading software can imply 2 different things and often traders confuse the terms when engaging in forex trading as some users refer to an actual trading platform similar to the MT4 trading platform or it might refer to software programs that enhance trading by allowing forex robot trading or provide additional assistance to the trader in executing trades.

The MT4 (Metatrader) allows the intervention on many third party made software programs and plugins which are compatible with the MQL4 network in addition to the ones provided as add on features to the Metatrader 4 offerings. These plugins are in many cases provided free of charge at the Metatrader trading community on Yahoo on forex forums or can be found for sale at third party sites which offer online trading software.

We must note that before you spend money purchasing any forex trading software you should research or talk to your account manager as the majority are heavily marketed and promise extravagant deceiving results. The plugins provided by the Metatrader 4 itself as far as we are concerned are more than enough to enhance you to trade successfully with no expenses what so ever as the trading platform is offered for free downloading.

The Metatrader (MT4) forex trading terminal which we recommend at is in full compatibility with expert advisors that will allow traders to make their trades executed automatically. As a trader you will have the ability to create custom indicators, scripts and even libraries of functions which will allow automated forex trading with the use of the MQL4 and the help of the user manual of the MT4 and the programming guide for the MT4 which you can request to be sent to you by email through our customer support and will allow you to use forex trading expert advisors, indicators and scripts to help make your trading more automated.

Forex Trading Expert Advisors

Export advisors or forex trading advisors are virtual advisors which can be programmed by the user to engage in forex automated trading on the MT4 after guidelines and settings have been set by the trader himself. Expert advisors in difference to humans will not make decisions on their own but will monitor every single price tick and will execute orders based on the settings the user has implied.

The program has the ability to track each and every currency change and open or close positions based on the limits you have set. MT4 compatible forex automated trading expert advisors have the ability to allow practice or dummy trading based on previous data as a simulator offering in sharpening your skills in both using the settings and programming your preferences.

Additionally the library of the MT4 offers a broad reach to custom indicators, scripts and libraries which the trader can use to make his trading automated and sharp. Please note that knowledge of C++ programming language can be an asset in adjusting custom indicators or scripts but is however not a prerequisite. If you wish to adjust, develop or customize a script or an available program you may request to receive a guide for programming in MQL4 algorithmic language by our support.

As far as forex robots are concerned we understand that a certain category of the forex trading community wishes to use them to trade by constantly opening and closing positions which is why cannot ban them or stop customers from using them if they wish to do so. The Metatrader allows automated forex trading and forex robots compatible to MQL4 but we do certainly advise that automated forex trading is not intended for all traders as a level of experience is needed to use the software and moreover program its functions in opening and closing positions without leading to portfolio waste. Forex robots have the ability to open and close positions in addition to other functions they perform on a 24 hour basis without the trader having to be present but they do involve risk and of course they do need to be scheduled and programmed to do what you intend them to do. Forex robot trading is not a practice we recommend to beginner traders and even if you are a experienced trader we recommend you talk to your account manager before purchasing, utilizing or testing forex robot trading with the Metatrader 4.

Forex Trading Rates

As the word describes forex trading rates are the prices for which the global forex market has been shaped based on political, financial and supply and demand law pressures to present rates at which traders of world currencies are willing to give up a x amount of a currency for a y amount of a different currencies. The reasoning behind the pressures which determined forex trading rates can be best understood by reading through what influences forex prices and how the forex market works.

The table presented on the homepage of and in the actual online forex trading platforms which you can download for free present the bid and ask prices of major currency pairs with the bid ask spread noted. If you are wondering what the spread is you are probably a new trader and you should understand that in forex trading we explain the bid ask spread or simply noted spread to the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.

The size of the spread from one asset to another will differ mainly because of the difference in liquidity of each asset. In currency trading the bid-ask spread is notably the smallest on a worldwide extent as currency trading is considered the most liquid form of trading in the world and the bid-ask spread in the currency market is one of the smallest (one-hundredth of a percent).

Like many other investments, forex trading carries a high level of risk and may not be suitable for all investors. Forex trading requires constant monitoring and an understanding of the relationship between currencies, as well as what factors influence the currencies’ value. If you are a retail investor considering trading in this market, you need to understand fully the market and some of its unique features.

  • Extended trading hours
  • Increased profit opportunities
  • Analyzing major currencies
  • Guidance and Support