Lesson #4: Buying (going "long") and selling (going "short") in the FOREX market. How to do it and calculate your profit or loss (you won't win ALL the time, but most of the time, YES, if you've got a good trading method).
Here's TWO timeless rules of Investing as they relate to today's lesson:
RULE #1) ~ Cut your losers; let your winners ride.
Let's be frank (we never promised any rose-colored glasses here did we? Well, at least not the ones you can wear ALL the time): 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 Shalt 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.
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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 (which, if you remember from yesterday's lesson, is paired first with the U.S. dollar or USD. Since it is paired first, it is the base currency).
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 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.
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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.
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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
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Stay Tuned for tomorrow's email from us. It will have the following Subject line:
Lesson 5 - The Rapid Forex e-Course
In tomorrow's lesson, we'll cover Candlestick charts |
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