Profitable Trades in Forex

Currency prices move by fractions of a cent, so the only way to make profitable trades in Forex is to trade large lots of money. A standard lot in a Forex transaction is 100,000 units - the unit being standard currency division i.e. one dollar, one euro, or one yen.

Other sized lots are also possible. For example, the mini lot (10,000 units) is popular with newcomers to Forex trading.

The smallest unit of a currency is called the pip (Price Interest Point). The price of the US dollar, for example, is quoted down to the fourth decimal place ($0.0001). The seemingly small value of the pip is deceptive - remember that Forex traders are dealing in lots of $10,000 or $100,000. At these amounts the value of one pip is $1 for a mini lot or $10 for a standard lot.

Therefore, profitable trades in Forex can be made with relatively small movements in currency prices. If the US dollar, for example, moves just 30 pips (3/10 of one cent), this represents a profit or loss of $300 for a standard lot.

Types of Forex Orders

There are several types of orders available to the Forex trader. Anyone who is new to Forex trading should use a demo account to become familiar with these orders. The various types of orders are used to minimize loss and generate maximum Forex profiting.

Market Order

This is an order to buy or sell at the current market price and can be used for entering or exiting a position. Market orders are a little bit risky because of the volatility of the Forex market. There may be a delay between placing the market order and having it executed, and this could result in a difference between the expected price and the actual price. This difference is referred to as slippage.

Limit Order

This is an order to buy or sell when the price reaches a certain level. Limit orders are used to buy currency below the market price or to sell currency above the market price. If you are buying a currency with a limit order, the order is executed when the price falls to the level specified. If you are selling a currency with a limit order the order is executed when the price rises to the level specified. Limit orders are not affected by slippage.

Stop Order

This is an order to buy above the market or to sell below the market. Stop orders are most commonly used to limit losses if the market moves contrary to expectations. There is no slippage with stop orders.

One Cancels the Other (OCO)

It is possible to place a stop order and a limit order simultaneously. An OCO order specifies that when either of these orders are executed the other one is canceled. This is useful if the Forex trader cannot monitor the market constantly, and is a system to minimize losses and maximize Forex profiting. If the currency price moves contrary to expectations, the stop loss order will be executed with a predetermined loss, but if the currency price moves as expected the transaction will be closed at a profit.

Here is an example of an OCO transaction:

Buy: 1 standard lot USD/JPY  @ 120.55
Pip Value: 1 pip = $8.3
Stop Loss: 120.35
Limit: 121.55

This is an order to buy one standard lot of US dollars for 12,055,000 yen and to sell it if the price falls to 120.35 for a loss of 20 pips (or $166).

If the price rises to 121.55 the lot will be sold for a profit of 100 pips (or $830).