Here is a to‐do list of actions to be taken as you open a trade:
‐ Identify the pair to buy/sell
‐ Decide on the initial investment amount
‐ Choose the appropriate leverage
‐ Consider applying trade limits (covered in the next chapter)
‐ Open trade
Let’s say that after spending some quality time on gazing at the charts of several currencies, you’ve concluded that:
1) The EUR is trending up
2) The USD is trending down
Now, what is the reasonable decision based on this conclusion?
Clearly you can profit by first selling USD and buying EUR, and then buying cheaper USD and sell expensive EUR.We could do this by buying and then selling the EUR/USD currency pair.
A reminder ‐ buying is done at 'Ask' price, while selling is done at the “Bid” price.
Imagine that you bought $100 worth of EUR/USD with a leverage of 1:100 at the exchange rate of 1.5461. The details of your trade are:
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In plain English, what you’ve just done is bought (100X100=) 10,000 Units of EUR/USD, which at that specific rate represents 1.5461 USD per 1EUR.Now, let’s assume that at the end of the day, or possibly even a few minutes later,the EUR/USD rate has risen to 1.5538. You sell those 10,000 Euro/USD Units at the new rate of 1.5538 and get $177 back.
This means that this seemingly insignificant fluctuation in the rate allows you to cash in $77 from an initial investment of $100.In other words you just made 77% profit on your investment, thanks to the movement in the pair's quote.On the example trade that we’ve just seen, your risk and reward was unlimited,and the risk was limited which is good if you are very certain regarding your decisions.
However, as a beginner you shouldn't trust yourself too much, as you are bound to make mistakes. By learning about special trade order features, you will be able to hedge your risks.
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