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Beginning Traders Start Here.TM | |
FOREX TRADING |
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UNDERSTANDING EUR/USD
 The EUR/USD foreign currency exchange rate is the price of one Euro - the base currency - in terms of U.S. dollars - the quote currency. For example, a bid/ask quote of 1.3625/1.3628 means that one Euro can be bought for U.S. $1.3628 and one Euro can be sold at U.S. $1.3625. If the Euro is expected to appreciate against the dollar, then the above quote might rise to say, 1.3678/1.3681. The forex strategy in this case would be to buy EUR/USD. If, on the other hand, the Euro is expected to depreciate against the dollar, then the above quote might fall to say, 1.3577/1.3580. The forex strategy in this case would be to sell EUR/USD.
EUR/USD FOREX TRADING STRATEGY
 Let's say that a forex trader has been watching the EUR/USD range trade and suspects that, because no important economic release or news item is expected, the exchange rate will continue to range trade. Based on this, the trader employs his "range-trading" forex trading system that says to buy whenever EUR/USD falls to cross the lower Bollinger Band as shown above, and sell whenever EUR/USD rallies to cross the upper Bollinger Band. As is evident over the period charted above, EUR/USD tends to move back within the trading range whenever this happens. EUR/USD has just moved up to and crossed the top Bollinger Band and the trader sells at the market bid with the following details as per the forex trading system:
Based on the rules of this forex trading system, the trader enters a buy stop order to automatically close this position should EUR/USD rally to 1.3623 which will risk 10 pips or $100 on the position. The position will be closed if EUR/USD falls to cross the lower Bollinger Band. The chart below shows price activity over the subsequent 45 minutes.
 EUR/USD did fall back to trade within the range after never having rallied enough to trigger the protective stop order. It crossed the lower Bollinger Band and the trader closed the position with details as follows:
IMPORTANT NOTES
1. The above example of a forex trading system is for informational purposes only and is not meant to construe trading advice. While
prices are actual, the period was selected to best illustrate the particular forex trading system and no implication is being made
that this system will always produced positive results.
2. Increasing (decreasing) the
leverage
and/or notional value in the forex trade example shown above will increase (decrease) the risk, used margin, and
magnitude of resulting profit or loss. In choosing these values, the forex trader should consider the amount of available risk capital, trading experience
and tolerance for risk.
3. The used margin is the minimum amount of cash that must reside in the forex trading account at all times so long
as this currency position is open. Used margin calculation varies in part depending upon the value of the exchange
rate upon establishing the position. For multiple positions, the used margin for all
open positions are aggregated. Should the account value decline below the used margin, a margin call may be issued and
all open positions may be automatically closed by the forex trading platform.
4. The example above assumes the forex trading account is with a U.S.-regulated forex broker. As such and because of the
FIFO rule, the stop
order is an entry order and cannot be tied to the open currency position. It, therefore, must be manually
canceled upon closure of the trade.
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© 2010. World Link Futures, Inc. All rights reserved.Forex trading involves risk and is not for everyone. Only risk capital should be used. See About Us for general disclaimer. Keywords: learn forex, forex education, forex trading strategy, forex trading system, forex strategy, forex trading platform Abstract: This part of our forex education tutorial covers a EUR/USD forex trading strategy from a forex trading system.
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