forex lesson #4

LESSON #4:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Buying (going "long") and selling (going"short") in the FOREX market. How to do itand calculate your profit or loss (youwon'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 totoday's lesson:RULE #1) ~ Cut your losers; let your winners ride.Let's be frank (we never promised any rose-colored glasseshere did we? Well, at least not the ones you can wear ALLthe time): YOU WILL HAVE LOSING TRADES.We do. Every FOREX trader does. The key to being aconsistent, predictable, reliable trader is to, at the endof 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* oryour rules are wrong (however you want to look at it).Let's face it - you can't turn a sow's ear into a silkpurse. You can't change the spots of a leopard and you can'tturn chicken poop into chicken salad. The best trades areusually "right" immediately (the techniques, rules, methodsand strategies we teach at RapidForex.com will be your bestindicator for just what a "right" trade really is).Remember, people have been trading the markets for a hundredand sixty years. The smart traders know there's going to beanother trade. Cut your loses short and compound thosewinning positions.RULE #2) ~ Thou Shalt Not Trade the FOREX Without thePlacing of a Stop Loss Order.When you place a STOP order, right along with your ENTRYorder, via your online trade station, you've justautomatically prevented a potential loss from "running" toofar.Before initiating any trade, if you haven't already figuredout at what point you would be wrong and would want to cutyour loses or, at the very least, reevaluate your positionfrom the sidelines, then you shouldn't be putting on thetrade in the first place.Show us a FOREX trader who doesn't use stop loss orders andwe'll show you someone who loses a lot of m.oney.=================To make a profit, in the FOREX, a trader (possibly YOUsoon?) can enter the market as a *buy position* (known asgoing "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 pairedfirst 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 thatprices will rise during a particular timeframe. So you buythe EUR/USD pair (or, technically, you will simultaneouslybuy euros, the base currency, and sell dollars).You open up your handy trading station software (provided toyou for fr^ee by the online broker), which resides on yourdesktop, and you see that the EUR/USD pair is trading at:<<>>REMEMBER: the quote to the left of the / (1.3242) refers tothe bid or "sell" price (what you obtain in USD when yousell EUR). The quote to the right of the / (1.3245) is usedto obtain the ask or "buy" price (what you have to pay inUSD if you buy EUR).So, since you believe that the market price for the EUR/USDpair will go higher, you will enter a *buy position* in themarket. For simplicities sake, let's say you bought one lotat 1.3245. As long as you sell back the pair at a higherprice, then you make money.No worries. This seemingly elaborate process ishandled, and even calculated for you, via the broker'ssoftware mentioned above. The chart software and the quoteboard are in agreement with all sides of the currencies.=================To illustrate a typical FX SELL trade, consider thisscenario involving the USD/JPY currency pair:REMEMBER ~ Selling ("going short") the currency pair impliesselling the first, base currency, and buying the second,quote currency. You sell the currency pair if you believethe base currency (USD) will go down relative to the quotecurrency (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 tradescenario below, may seem somewhat complicated if you'venever been in the FOREX market before, trust us when we say,"this process is nearly seamless through your broker's tradestation (software). We're just showing you this thought-process below so you can SEE how a PROFIT occurs even whenSELLING a currency pair.============================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 $1US for 105.26 YEN.Suppose you decide that the US Dollar (USD) is overvaluedagainst the YEN (JPY). To execute this strategy, you wouldsell Dollars (simultaneously buying YEN), and then wait forthe exchange rate to rise.So you make the trade: selling US $100,000 and purchasing10,526,000 YEN. (Remember, at 1% margin, your initial margindeposit would be $1,000.)As you expected, USD/JPY falls to 104.26/104.30, meaning youcan now buy $1 US for $104.30 Japanese YEN or sell $1 US for104.26Since you're short dollars (and are long YEN), you must nowbuy 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 divide96,000 by the current USD/JPY rate of 104.30.Total profit = US $920.42=============================