How to buy

Forex Trading Nigeria

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Posted by on Saturday May 18, 2013 13:4:11:

As an online forex trader, the business you are into is buying and selling global currencies on the internet.

Just like normal traders who buy and sell goods, you can make some profit too by buying and selling currencies when they appreciate. So the goal in buying a currency at the first instance is to hold it and then sell it at a future date and at a higher price.

When it comes to buying, it means that you already have the funds to buy and for you to have such funds, you'd need to add it to your account. Now I've already talked about how to add funds to your trading account and this can be by liberty reserve, bank transfer or any other acceptable online payment methods.

So as long as there is money in your account, mostly in US dollars, you can start trading with real money. If you don't have money in your account, you can as well do virtual trading and this is with virtual funds.

Let's assume you then have $200 of real money in your account already and want to buy, you'll need to decide on which currency you want to buy with your US dollars. It could be Euro, GB Pounds, Austrailian dollars, Yen or others. You'd need to decide at which price you want to buy that currency with your dollar or default account currency.

If you wanted to buy some Euro, it should be a logical decision based on the fact that you feel it is currently undervalued against the dollar and then you make the order. Le't say the Euro is at $1.25 relative to the US dollar and then you want to buy, with $200 in your account, you would be able to buy up to 160 Euros.

When you buy or sell Euro with your US dollars you are said to be trading the EUR/USD(EU) currency pair or just trading EU. So with your $200 as we mentioned, you'll be able to buy up to 160 euros if the price was currently at $1.25.

What you do next is set your exit price which is the price you want to sell back that Euro to get back some dollars with profit. If you set the target exit price at $1.3 i.e. when the Euro appreciates to $1.3, it means that you are going to gain $0.05 by the time that position is closed.

When you initiate a buy order and that order has been executed, your account would be holding a position and when you have exited that position with a sell exit order at 1.3, your position would have closed.

You could close orders manually anytime and at any price but it may cost you some loss due to quick price fluctuations so it's better to set an entry and exit price anytime you are making a buy order or buy entry.

In the above trading example I talked about, your gain on a 1.25 to 1.3 or 50 PIP move is just $0.05. As a forex trader, you'll probably want to make more profit from your trades and that's why trading with leverage comes in handy.

Forex brokers like AGEA offer a trading leverage of 100:1 which means that with $200 you can trade with $20,000 capital and with $1000 of your own money, you can trade with $100,000. However that means you are doing margin trading and would be required to leave at least a percentage of that capital untouched and this is normally 5% with AGEA. Check with your forex broker to know the margin requirement needed when doing margin trading.

So, let's then assume you are now trading with $200 of your real money but want to take advantage of the 100:1 leverage and considering a 5% margin requirement, you would then be able to trade with a total of $4000(i.e. 200/0.05) as capital keeping a margin of $200 as security for the loan. Using about 25% of our capital($1000) now to buy Euro at 1.25 to hold it till 1.30, that means we would be able to buy 800 euros. If the euros then appreciates to 1.3 against the US dollar, we then automatically sell and have a gain $40 from the $1040 total sales it brings.

The above scenario is a 50 pip gain from a buy or LONG position and it closed in our favour. What if it doesn't close in your favour? That's where stop loss comes to importance.

Stop loss is an exit loss value you use to get out of a losing position so as to protect your total capital. In most cases when buyer make a buy decision, they are likely to gain if they did it right but if the market goes against them, they need to protect themselves by limiting their losses at least to a pre-planned minimum and that's what stop loss helps you to achieve.

In our above scenario for the Long position, we bought Euro with Dollars at a price of $1.2500 and set our exit profit point at $1.3000. But we also needed to set our exit stop loss at a reasonable point. It could e any point but it should be at a price at which your want to control your loss.

So, let's say you want to limit your loss on a $200 capital account to at least $10 a day, you should know how many pips would cost you that $10 and for how many trades it could be. It may be from a single trade or multiple trades and it mostly depends on you. Most traders however tend to use a 1:2 and that means on a $40 gain, we won't mind a $20 loss. This means that we would put out stop loss at 1.2480 while using your exit profit point at 1.3000.

What that stop loss would help you to do is exit the trade assuming the euro you have just bought starts falling and keeps depreciating below 25 points. At that 25 pip loss, your position would automatically close and you would have lost only $20 instead of more.

You could as well also limit your loss to $10 by trading only 400 units of euro with a $600 and $20 profit target. You can do single trades daily or multiple small trades and manage your account profitably.

So anytime you are creating a buy position you should manage your capital and use good stop loss and profit targets as that would help you exit the trade automatically.