Trading costs are the expenses forex traders incur in their trading activity. Forex brokers do not typically charge any additional fees or commissions, and the spread is the only trading cost incurred by traders. The spread is the difference between two prices for a currency pair, the price of buying and the price of selling, or the bid and ask prices.
Calculating Profit and Loss
Calculation of profits (or losses) in forex is very simple. Everything you need to know is the position size, the amount of price movement, and the direction of the trade.
To determine the amount of profit or loss, it is necessary to multiply the position size by the amount of pips the price has moved. The result is a profit if the price moves up in a long position or down in a short position. In case the price moved down in a long position or increased in a short position, it would be a loss.
Forex trading involves high risks, and it is beneficial to apply proper risk management to mitigate them. Fortuna- tely, forex traders have access to a wide range of risk management tools. The most common are stop-loss orders. Set a stop-loss when entering a trade to limit the amount of possible losses if the market moves against your trade.
Hedging is another risk management tool widely employed in forex trading. It includes direct hedges, trading multiple currency pairs at the same time, and foreign exchange options. Hedging is a powerful tool to mitigate risks, however, it is best utilized by experienced traders.
Last but not least, it is vital to control your risk exposure, or total amount of risk you take at a time. Carefully consider the position size, the amount of leverage you use, and the number of trades you open.
There are a lot of different trading strategies in forex. Here we talk about some of the most popular strategies.
Position trading is a trading strategy with a long holding period (a trade can be open for weeks or even months) and a wider stop-loss.
Swing trading is a strategy aimed at making profit from a single move, or swing, of the market. It is a medium- term strategy not suitable for riding big trends.
Day-trading is a short-term strategy aimed at profiting from an intraday volatility. Day traders hold their trades for minutes or hours and close their positions by the end of the day.
Scalping is a very short-term strategy which purpose is to benefit from market movements that occur within minutes or even seconds.