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Example of a Profitable Transaction in FOREX.
By : Adrian Pablo
There are TWO timeless rules of Investing in FOREX:
RULE #1) ~ Cut your losers; let your winners ride.
YOU WILL HAVE LOSING TRADES.
We do. Every FOREX trader does. The key to being a consistent, predictable, reliable trader is to, at the end of the day, add up more wins than losses. And, when you KNOW (based off your trading rules), without a doubt, that YES, indeed you are, in a losing trade, don't keep losing money (lowering your stop loss) just to *prove you are right* or your rules are wrong (however you want to look at it).
Let's face it - you can't turn a sow's ear into a silk purse. You can't change the spots of a leopard and you can't turn chicken poop into chicken salad. The best trades are usually "right" immediately (the techniques, rules, methods and strategies we teach at RapidForex.com will be your best indicator for just what a "right" trade really is).
Remember, people have been trading the markets for a hundred and sixty years. The smart traders know there's going to be another trade. Cut your loses short and compound those
winning positions.
RULE #2) ~ Thou Shall Not Trade the FOREX Without the Placing of a Stop Loss Order.
When you place a STOP order, right along with your ENTRY order, via your online trade station, you've just automatically prevented a potential loss from "running" too far.
Before initiating any trade, if you haven't already figured out at what point you would be wrong and would want to cut your loses or, at the very least, reevaluate your position from the sidelines, then you shouldn't be putting on the trade in the first place.
Show us a FOREX trader who doesn't use stop loss orders and we'll show you someone who loses a lot of money.
To make a profit, in the FOREX, a trader (possibly YOU soon?) can enter the market as a *buy position* (known as going "long") or a *sell position* (known as going "short").
For discussion, let's assume you've been studying the EURO.
Your trading methods, rules, strategies, etc., tell you that prices will rise during a particular timeframe. So you buy the EUR/USD pair (or, technically, you will simultaneously buy euros, the base currency, and sell dollars).
You open up your handy trading station software (provided to you for free by the online broker), which resides on your desktop, and you see that the EUR/USD pair is trading at:
<< EUR/USD: 1.3242/45 >>
REMEMBER: the quote to the left of the / (1.3242) refers to the bid or "sell" price (what you obtain in USD when you
sell EUR). The quote to the right of the / (1.3245) is used to obtain the ask or "buy" price (what you have to pay in USD if you buy
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EUR).
So, since you believe that the market price for the EUR/USD
pair will go higher, you will enter a *buy position* in the
market. For simplicities sake, let's say you bought one lot
at 1.3245. As long as you sell back the pair at a higher
price, then you make money.
But, no worries. This seemingly elaborate process is
handled, and even calculated for you, via the broker's
software mentioned above. The chart software and the quote
board are in agreement with all sides of the currencies.
To illustrate a typical FX SELL trade, consider this
scenario involving the USD/JPY currency pair:
REMEMBER ~ Selling ("going short") the currency pair implies
selling the first, base currency, and buying the second,
quote currency. You sell the currency pair if you believe
the base currency (USD) will go down relative to the quote
currency (JPY), or equivalently, that the quote currency
(JPY) will go up relative to the base currency (USD).
NOTE: while the Profit Calculations, on the Short-sell trade
scenario below, may seem somewhat complicated if you've
never been in the FOREX market before, trust us when we say,
"this process is nearly seamless through your broker trade
station (software). We're just showing you this thought-
process below so you can SEE how a PROFIT occurs even when
SELLING a currency pair.
The current bid/ask price for USD/JPY is 105.26/105.30,
meaning you can buy $1 US for 105.30 Japanese YEN or sell $1
US for 105.26 YEN.
Suppose you decide that the US Dollar (USD) is overvalued
against the YEN (JPY). To execute this strategy, you would
sell Dollars (simultaneously buying YEN), and then wait for
the exchange rate to rise.
So you make the trade: selling US $100,000 and purchasing
10,526,000 YEN. (Remember, at 1% margin, your initial margin deposit would be $1,000.)
As you expected, USD/JPY falls to 104.26/104.30, meaning you
can now buy $1 US for $104.30 Japanese YEN or sell $1 US for
104.26
Since you're short dollars (and are long YEN), you must now
buy dollars and sell back the YEN to realize any profit.
You buy US $100,000 at the current USD/JPY rate of 104.30,
and receive 10,430,000 YEN. Since you originally bought
(paid for) 10,526,000 YEN, your profit is 96,000 YEN.
To calculate your P&L in terms of US dollars, simply divide
96,000 by the current USD/JPY rate of 104.30.
Total profit = US $920.42
About the Author
Adrian Pablo, FOREX Trader and Freelance Writer.
http://www.1-forex.com
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