Step 1 - Making the Decision to Trade
The first step you need to take is determining the market and instrument you wish to trade. In the following example, the EUR/USD currency pair has been selected. In simple terms, when buying this pair, we expect the price of the EUR Euro to rise as the price of the USD falls. In forex trading, you are essentially buying one currency by selling another, yet with CFD trading, this is done by trading on the price movements of the currency pair, without actually owning it. The value quoted at the time of the trade was 1.18152, i.e. EUR cost 1.18152 US dollars at the time the trade was executed. Plus500 will always quote two prices (Buy/Sell) for any currency pair and the difference between the two prices is known as the spread.
In this example, the Forex currency pair EUR/USD was chosen based on a strategy known as ‘News Trading’. Overnight there was a market event on the news, which led to major market uncertainty and had a direct effect on the USD. The USD tumbled against all of its cross currencies.
We chose to trade EUR/USD believing that the news would cause the USD to fall in value whereas the EUR would gain in value.
Step 2 - Evaluating the Trade
Now that we have decided on the currency pair to trade, there are a series of steps or strategies that need to be determined.
Do we want to buy the instrument (Go Long) or sell it (Go Short)?
What price are we willing to enter the market?
What is the target profit price (Close at Profit)?
What is the target loss price (Close at Loss)?
What is the size of the contract?
We start this process by reviewing the Buy and Sell prices for EUR/USD. We need to determine which direction to trade.
After careful evaluation, we find the price range that the EUR/USD was trading shortly after the initial shock of the news hit the markets. We also noted that market volatility had eased somewhat. The lower the volatility, the closer we are to placing a stop order (known as ‘Close at Loss’) to protect the balance of the trading account.
After identifying the trading range, we decide to Buy the EUR/USD only if the currency pair dips once again to the bottom of the earlier trading range.
We set a stop loss order at the lowest point the currency pair had traded in the last 24 hours and a take profit (a market order used to close a profitable position once it reaches a certain level) slightly above the top of the earlier identified trading range.
It is now time to place the trade.
Step 3 - Placing the Trade
We click on the ‘Buy’ button to begin the trade set up.
We decided to set up the trade to open immediately at the current market price. We selected a trade size of €100,000 with an initial margin requirement of € 333.33.
We then set up close at profit and close at loss settings, and Click Buy to open the trade.
Step 4 - Monitoring the Trade
While closely watching the trade on the screen, we decide to set up alerts to learn about sharp changes in the instrument’s price.
After an hour or so, we notice that the trading channel was holding, but the currency pair is seeing very low trading volumes and the market begins to contract tighter.
Step 5 - Closing the Trade
Once the price has been reached, we decide to close the trade. After covering the spread fees, the net profit was $65.37. This could also have been a loss, if the market moved in the opposite direction, or if we had opened a Sell trade, instead of a Buy trade.