Important: it is advised to focus mainly on “Stop-Loss” and “Take Profit” orders (see below). Later on, in more advanced chapters, we will make a thorough study of them, understanding exactly how to use them in practice.
Market order: Buying/Selling execution at the best available market price (the live price quotes presented on the platform). This is obviously the most basic, common order. A market order is actually an order you pass to your broker at the real-time, current prices: “buy/sell this product!” (In Forex, product = pair).
Limit entry order: A Buying order beneath the actual price, or selling order above the actual price. This order allows us to not sit in front of the screen all the time, waiting for this point to appear. The trading platform will automatically execute this order when the price reaches the level we have defined. Limit entry is very efficient, particularly when we believe that this is a turning point. Meaning, at that point the trend will change direction. A good way to understand what an order is is to think of it as setting your TV converter to record e.g.. “Avatar”, which is due to start in a couple of hours.
Stop entry order: Buying order above the existing market price or a selling order beneath the market price. We use a Stop entry order when we believe there is going to be a price movement in a clear, specific direction (uptrend or downtrend).
The two most important orders you need to learn to become a successful trader:
Stop Loss Order: A highly important and useful order! We recommend using it for every trading position you open! Stop loss simply eliminates the chance for extra losses beyond a certain price level. In fact, it is a selling order which will take place as soon as the price meets this level. It is extremely important for traders who are not sitting in front of their computers all the time because the forex market is very volatile. For instance, if you are selling a pair and the price goes up, the trade will close when it reaches the stop loss level and vice versa.
Take Profit order: An exit trade order set in advance by the trader. If the price meets this level, the position will automatically be closed, and traders will be able to collect their profits up to that point. Unlike a Stop loss order, with a Take Profit order, the exit point is in the same direction as market expectations. With Take Profit we can ensure at least some profits, even if there might be the possibility to gain more.
More advanced orders:
GTC – Trading is active until you cancel it (Good Till Cancelled). The trade will stay open until you manually close it.
GFD – Good for the Day. Trade until the end of the trading day (usually according to NY time). The trade will automatically be closed at the end of the day.
Tip: If you are not an experienced trader, do not try to be a hero! We advise you to stick with basic orders and avoid the advanced orders, at least until you will be able to open and close positions with your eyes closed… You must perfectly understand how they work in order to use them. It is important to first practice Take Profit and Stop Loss!
Volatility – Level of instability. The higher it is, the higher the level of trading risk and the greater the winning potential as well. Liquid, volatile market tells us that currencies are changing hands in large volumes.
(Pip; Spread; Margin; Leverage)
When looking at a currency table on your trading platform, you will notice that the price of the various currencies tends to jump up and down. This is called “fluctuation”.
Pip – The smallest price movement of a currency pair. One pip is the fourth decimal place, 0.000x. If EUR/USD rises from 1.1035 to 1.1040, in trading terms it means 5 pips movement upwards. Nowadays, brokers are offering prices within a decimal of the pip, such as 1.10358… but we’ll explain this in detail below.
Any pip, of any currency, is translated into money and automatically calculated by the online trading platforms you trade on. The trader’s life has become really simple! There is no need to calculate data by yourself. You just need to fit them into your own wishes and expectations.
Remember: If a pair includes Japanese yen (JPY), then the quotation of the currencies goes 2 decimal places out, to the left. If the pair USD/JPY moved from 106.84 to 106.94 we can say that this pair went up 10 pips.
Important: Some trading platforms present quotations showing five decimals. In these cases the fifth decimal is called a Pipette, a fractional pip! Let’s take EUR/GBP 0.88561. The fifth decimal is worth 1/10 pip, but most brokers do not show pipettes.
Profits and losses are not only calculated in money terms, but also in the “language of pips”. The pips jargon is the common way of speaking when you enter the Forex traders’ room.
Spread – The difference between the buying price (Bid) and selling price (Ask).
(Ask) – (Bid) = (Spread). Take a look at this pair quotation: [EUR/USD 1.1031/1.1033]
The spread, in this case, is – 2 pips, right! Just remember, the selling price of this pair is 1.1031 and the buying price is 1.1033.
Margin – The capital that we will need to deposit in ratio to the capital we want to trade with (a percentage of the trading amount). For example, let’s assume that we deposit $10, using a 5% margin. We can now trade with $200 ($10 is 5% of $200). Say we bought euro in ratio of 1 euro = 2 dollars, we bought 100 Euros with $200 with which we are trading. After one hour the EUR/USD ratio goes up from 2 to 2.5. BAM! We have gathered a $50 profit, because our 200 Euros are now worth $250 (ratio = 2.5). Closing our position, we exit with $50 earnings, all this with an initial investment of $10!! Imagine that in return for your initial deposits you get “loans” (without having to worry to pay them back) from your broker, to trade with.
Leverage – Risk level of your trade. Leverage is the degree of credit you wish to get from your broker on your investment when opening a trade (position). The leverage that you ask for relies on your broker, and most importantly, on whatever you feel comfortable trading with. X10 leverage means that in return for a $1,000 transaction, you will be able to trade with $10,000. You cannot lose a higher amount than the amount you have deposited in your account. Once your account reaches the minimum margin required by your broker, let´s say $10, all your trades will close automatically.
The main task of leverage is to multiply your trading potential!
Let’s go back to our example – a 10% rise in the Quote price will double your original investment ($10,000 * 1.1 = $11,000. $1,000 profit). However, a 10% decrease in the quote price will eliminate your investment!
Example: Say we enter a long position (remember; Long = Buy) on EUR/GBP (buying Euros by selling pounds) at a ratio of 1, and after 2 hours the ratio suddenly jumps to 1.1 in favor of the euro. In these two hours we made a profit of 10% on our total investment.
Let’s put that into numbers: if we opened this trade with a micro lot (1,000 Euros), then how on top are we? You guessed right – 100 Euros. But wait; say we opened this position with 1,000 Euros and a 10% margin. We chose to leverage our money x10 times. In fact, our broker provided us with an additional 9,000 Euros to trade with, so we actually entered the trade with 10,000 Euros. Remember, we gained in these two hours 10% earnings, which has suddenly turned into 1,000 Euros (10% of 10,000)!
Thanks to the leverage we just used we are showing 100% profit on our initial 1,000 Euros that we took from our account for this position!! Hallelujah! Leverage is great, but it is also dangerous, and you must use it as a professional. Therefore, be patient and wait until you have finished this course before jumping in with high leverage.
Now, let’s check different potential profits according to different levels of leverage, related to our numerical example:
Profits in Euros at various leverage
Hopefully, you have a better understanding of the outstanding potential to reach profitable investments that the Forex market offers. For us traders, leverage constitutes the widest window of opportunities in the world, to make impressive profits on relatively small capital investments. Only the Forex market offers such opportunities, you will learn how to recognize these opportunities and use them in your favor.
You must remember that proper use of leverage will give you the opportunity to make nice gains but incorrect use of leverage can be dangerous for your money and may create losses. Understanding leverage is critical to becoming a good trader.