Forex Education: Making Trades
After being able to understand the context of the market based on a good use of graphics and technical indicators, it is time to introduce the trades we’ve decided to take into the market.
In order to position yourself in the market appropriately, it is necessary to master the different possibilities that we have to open trades depending on the platform that we are using.
Enter long or enter short
Of course, and as we said when we explained the spread, whenever we want to enter the market we will have two prices at our disposal: bid price and ask price. The price at which we will serve an order will depend on whether the position we want to take is buying or selling.
If we are going to put long ones in the market, that is to say, we are going to buy the pair of currencies that we are tradin, the price that will serve us will be the ask price. On the contrary, if we are going to bet that the price of a forex currency is going to go down, (shorting or selling), we should focus on the bid price.
The difference between the bid and ask prices, known as the spread, is variable at all times and depends to a large extent, on the market volatility. The spread will, by nature, force us to start a trade with built in losses, since it is present at the same moment of entry in the market.
Ways to enter the market
The fastest and most direct way to enter the market, although probably also the least employed, is to enter at the market price. That is, it is to instantly enter the market at the current price, and it is carried out with the simple click of a button. In general, and since it is not a strategically placed placed entry, it’s not the usual way of placing trades. Of course, it can be interesting to know it well, because it is often used to close positions.
The most common way to take positions in the market is to enter stop or limit orders, which are the two trades most used in Forex. The stop order consists of scheduling a trade that will run once the price advances a little more in the direction that we want to enter. That is, it is a purchase order that we place above the current market price, or a sales order that is below the current price.
In the case of limited orders, they consist precisely in trying to enter the direction of the market but at a better price than it is currently quoting. That is, we want to enter a purchase price lower than the current market price or a sale price above the current price.
Stop Loss and Take Profit
When scheduling a trade in Forex, we will have the possibility to automatically associate a stop loss order and take a profit order.
The stop loss order consists of an order that is introduced at the distance that we decide from the entry price precisely up to limit of possible losses of that we are willing to bear should the price go against us.
That is, if we buy a currency pair at a price of 1.2056, we would introduce a stop loss at 1.2036 if we want to limit the maximum loss of the transaction to 20 pips.
The “take-profit” strategy is to ensure a certain level of profit based on the introduction of an order to exit the trade in the event that it is in our favor. That is, if our strategy in the previous example is to get a profit of 30 pips, we will place the “take-profit” order at 1.2086.
When the Stop loss or Take Profit command is executed, the unpunched order of both is automatically canceled, with no orders remaining to be executed.