Guide to Forex Trading on MT4 Platform

In this article:

  1. MT4 Installation for Mobile Users
  2. FX Trading Basics
  3. Managing Trade Size
  4. Managing Positions
  5. Pips
  6. Profit & Loss Calculation
  7. Margin and Leverage
  8. Understanding the Platform

1. MT4 Installation for Mobile Users

1.1. Downloading MT4 from app store

1.2. Setting up a demo account

Step 1, go into “Settings”, click “New Account” and then “Open a demo account”.

Step 2, select the “ECNTrade-Demo” server.

Step 3, fill in the personal information section and change leverage to “1:100” and account type to “Forex_AUD”. There’s no need to give your real personal details. You might also want to change your starting deposit (i.e. how much money you’ll be given to trade).

2. FX Trading Basics

2.1. What is exchange rate

FX market is where the buying and selling of currencies occur. Every market needs to have a price, and exchange rate is essentially the price of one currency quoted in another.

Every currency pair involves two currencies. The currency at the front is the base currency, and the currency at the back is the quote currency. The exchange rate tells you how much quote currency is needed to purchase 1 unit of the base currency.

For instance, take a look at “AUD/USD 0.7180”. In this example, AUD is the base currency and USD is the quote currency. It means that 0.7180 USD is needed to purchase 1 AUD. In another word, the price of 1 AUD is 0.7180 USD.

2.2. Quotations

There are 3 types of quotations – direct, indirect and cross. The quote is direct when the base currency is USD (e.g. USD/CHF). The quote is indirect when a foreign currency is quoted against the USD (e.g. EUR/USD). The quote is cross when it does not involve USD (e.g. EUR/CHF).

2.3. Buying long and selling short

The principle of trading is to buy low sell high. If you expect a currency to appreciate, you might want to take long positions now hoping the price will go up.

However, if you believe a currency pair is going down, you might benefit from a short position. In another word, sell high buy low. Short selling is a complex process of borrowing an asset to sell now hoping to buy it back at a lower price.

3. Managing Trade Size

3.1. Lot size

A lot is a measurement of trade size. 1 standard lot is equivalent to 100,000 units of the base currency. 1 mini lot equals to 0.1 standard lot, or 10,000 units of the base currency.

For instance, if you’re trading 1 standard lot of AUD/USD, you’re buying or selling 100,000 units of AUD, or AUD$100,000.

3.2. Importance

Lot size is important because it affects 2 things – the profits and loss (i.e. risks) you’re exposed to, and your margin level. You’ll see later in this article.

4. Managing Positions

4.1. Opening a trade position

To enter into a trade, tap on the currency pair you want to trade, then press “Trade”.

On the order-placing screen, you are able to adjust your lot size (i.e. how much you’re trading in this position) and the direction of your order (i.e. buy or sell).

4.2. Unclosed trade positions

On the “Trade” screen, all the positions that you have currently open are shown in the “Positions” section.

4.3. Closing a trade position

When you open a trade, you will need to take the opposite position to close that trade in order to realise the profits/loss from that position.

For instance, if you took a short position in EUR/USD before and the pair dropped, you will need to close that position to cash out and lock-in the profits.

To close a position, press on the position for about 3 seconds, press “Close” and then “Close with Profit/Loss xxx”.

5. Pips

5.1. What is a pip?

1 pip measures 1 unit movement in the 2nd last decimal value of the standard quoted price. In FX trading, it is very common to measure movements in terms of pips rather than percentage changes. This is because due to the large leverage sizes that some retail traders take on, every pip movement can be significant to their P&L. Let’s take a look at a few examples.

For most currency pairs, the standard is to quote the exchange rate to the 5th decimal place. If EUR/AUD moves from 1.60058 to 1.60068, it is said to have gone up by 1 pip.

For some currency pairs, however, the standard is to quote only up to the 3rd decimal place. This is usually the case for currencies whose quote value is very large, such as USD/JPY. If USD/JPY moves from 111.777 to 111.977, it is said to have gone up by 20 pips.

6. Profit & Loss Calculation

6.1. P&L calculation

The rule of thumb is that, 1 pip movement in a 1 lot position translates into USD$10 (~AUD$14) profit or loss depending on the direction of the movement.

For example, if EUR/USD moved from 1.12372 to 1.12079, it has gone down by 29.3 pips. For a 5-lot short position, this translates into AUD$2,051 profits according to the rule of thumb, which is fairly close to the AUD$2059.69 actual profit. This also shows the importance of lot sizes in determining the P&L you’re exposed to.

7. Margin and Leverage

7.1. Margin

Margin is the amount of money required to open a leveraged position. It is essentially the safety deposit you need to give your broker in order to trade on margin. This margin amount will be returned to your once you have closed your positions.

The margin required to open a leveraged position equals to trade size divide by leverage size.

Therefore, the higher the lot size, the more margin you will need to put up.

7.2. Leverage

Leverage size is the other factor that determines how much margin you will need to put up in order to open a leveraged position.

For instance, to short sell 1 lot of AUD/USD, means to trade AUD$100,000. With 100 times leverage, you will need to put up AUD$1,000 as margin to execute this trade.

7.3. Leverage and risk

Does higher leverage directly translate into higher risks? The answer is no. It is the lot size that affects the P&L you’re exposed to. Leverage only reduces the initial capital outlay required to open a position.

For instance, let’s consider trading 1 lot of AUD/USD. With 50 times leverage, you will need AUD$2,000 as margin. With 100 times leverage, you will only need AUD$1,000 as margin. However, the P&L you’re exposed to is the same no matter which leverage you use – it is the lot size that directly affects the risks.

8. Understanding the Platform

8.1. Balance

Balance amount is essentially the total deposit you have put into your account, plus net P&L you’ve realised from your closed positions in the past, minus the total amount of money you’ve withdrew from your account.

8.2. Profit

Net unrealised P&L from your currently unclosed positions is shown at the top.

P&L of individual position is shown next to the unclosed position.

8.3. Equity

Equity equals to the balance plus net unrealised P&L.

8.4. Margin

Margin amount shows the total amount of money you have put up as margin in order to open leveraged positions. Margin amount will decrease as you close out positions.

8.5. Free margin

Free margin equals to equity minus margin. This amount shows how much money are available for you to open more leveraged positions.

8.6. Margin level (%)

Margin level equals to equity divide by margin.

Margin call occurs when your margin level reaches below 80%. This is when you cannot open anymore positions.

When margin level reaches 20%, the system will starts automatically closing out positions for you in order to free up some margin.