With today's technology, investors now have the ability to trade in the foreign exchange markets with real-time information via the Internet. As with any investment class, having a strategy is key to success. With the tools currently available on forex trading platforms, you can easily implement your forex trading strategy. A basic strategy consists of three components: the price you are entering the market, your target profit levels and the maximum loss you can sustain on this trade.
With dbFX, for example, when you open a trade you have the ability to link a profit target and a maximum loss level to that trade. The direction of the limit or stop loss orders will be in relationship to your original trade or position and the current market.
Let's look at an example. If you have bought EUR/USD at 1.4695, then your profit target or limit order will be to sell the EUR/USD at 1.4745 above the current market and your maximum loss or stop loss order will be 1.4670 selling below the current market. Conversely, if you have sold the EUR/USD at 1.4695, then your profit target or limit order will be to buy the EURUSD at 1.4650 below current market and your maximum loss or stop loss order at 1.4717 will be to buy above the current market. In both of these examples, half of the profit target has been risked using a 1 to 2 risk reward ratio, for every 1 in risk we are targeting 2 in profits.
Many forex brokers offer trading platforms that allow you to link a stop loss orders on your open positions. If a currency rate reaches a certain level - the level you designated - you will be automatically exited from your position. It is also important to note that you cannot place a stop loss order below the usable margin amount (margin being the amount of capital loaned by a broker to supplement your trade). If you do and you have insufficient margin in your account, your positions will be closed out despite your stop loss.
Additionally, you can use a trailing stop loss which is a special type of stop loss order. Some forex brokers, including dbFX, the online forex trading platform from Deutsche Bank, offer this order type. A trailing stop loss automatically adjusts in increments on a tick-by-tick basis, allowing the level of your stop loss to move or trail as the market moves in your favor. This allows you to limit your maximum loss as the market moves in your favor.
You should realize, however, that forex brokers do not guarantee stop loss orders. While they try to fulfill them as directed, moves on the forex market can be so swift and sudden that your position goes beyond the level so quickly that nothing can be done.
To learn more about the advanced order types available with dbFX, visit www.dbfx.com to access the trading platform videos.