Forex trading can be difficult and complicated, especially for beginners, due to unrealistic yet common expectations when it comes to newcomers to the financial market. The first and foremost question on everyone’s mind is: how to learn Forex from scratch? Technical terms like currency quotes, technical indicators, and economic data can and will most likely add to the confusion.
When it comes to Forex trading significant risk is involved and therefore forex education is essential.
What Is Forex Trading?
Forex is a form of foreign currency and exchange. Foreign currency and exchange are the processes of changing one currency into another currency for a variety of reasons which can include commerce, trading, or tourism.
The foreign exchange better known as FX or forex is a global marketplace created for traders to exchange national currencies against one another. Because the markets place global reach in trade, commerce, and finance, forex markets have a tendency to be the largest and most liquid asset markets in the world. Currencies trade against each other in the form of exchange rate pairs.
What Is The Forex Market?
The foreign exchange market is a financial market with a global reach where currencies are traded and Currency trading is needed in order to conduct foreign trade and business. A unique aspect of the foreign exchange market is that there is no centralized marketplace and currency trading is conducted electronically over-the-counter or OTC, meaning all transactions happen via computer networks between traders around the world.
The foreign exchange market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney—across a large time zone. It is estimated that $5 trillion worth of forex transactions take place on a daily basis, with an average of $220 billion per hour.
The market is largely made up of institutions, corporations, governments, and currency speculators. Speculation plays an important role as it makes up for almost 90% of the trading volume. Most of this is concentrated on the US dollar, Euro, and Japanese Yen.
What Is Spot Forex?
Spot Forex is a form of Forex trading that involves the buying and selling of real currency.
For example, traders can buy a specific amount of pound sterling and exchange it for euros, and then once the value of the pound increases, the trader can exchange their euros for pounds again, receiving more money compared to what they originally spent on the purchase.
What Is CFD?
CFD or Contract for Difference is a contract that is used to represent the movement in the prices of financial instruments. What this means is that instead of buying and selling large amounts of currency, traders can take advantage of price movements without having to own the asset itself. CFDs are also available in stocks, indices, bonds, commodities, and cryptocurrencies.
What Is Day Trading?
Day trading is the act of trading forex or other financial instruments within the same day. A day trader looks for the opportunity to take advantage of the intraday movement of the markets and financial instruments to make an incremental profit.
Forex Terminology Explained
How To Read A Currency Quote
When choosing a forex broker and setting up a live account, the first concept that a trader will come across is the forex price quote or currency pair. A currency pair is the quotation of two different currencies, with the value of one currency being quoted against the other. The first currency of the pair is called the base currency, and the second – is the quote currency.
Currency pairs indicate how much of the quote currency is needed to purchase one unit of the base currency and currencies are identifiable by an ISO currency code or a three-letter alphabetic code associated with it on the international market.
The currencies that trade the most volume against the U.S. dollar are referred to as the major currencies.
These include the(major currency pairs):
|Currency Pair||Countries||FX Geek Lingo|
|EUR/USD||Eurozone / United States||“euro dollar”|
|USD/JPY||The United States / Japan||“dollar yen”|
|GBP/USD||United Kingdom / United States||“pound dollar”|
|USD/CHF||The United States/ Switzerland||“dollar swissy”|
|USD/CAD||The United States / Canada||“dollar loonie”|
|AUD/USD||Australia / United States||“Aussie dollar”|
|NZD/USD||New Zealand / United States||“kiwi dollar”|
Here is an example:
EUR/USD = 1.2752
In the above quote, the currency on the left side is the currency that was bought by the trader, while the one on the right is the one that was sold by the broker. The first currency quoted in a currency pair and forex trading is called the base currency. The second currency quoted in a currency pair is called quote currency. The number signifies the value at which the currencies were exchanged.
Or to put it in short and simple mathematical terms, when we buy one Euro, the value of this one Euro is equal to 1.2752 USD, and we had to pay that much to buy that currency. Upon executing this trade, we now long the Euro, and short the US Dollar (we buy Euro, and sell US dollars) and we have an open position.
What Is Bid/Ask Price?
Simply put – the Bid/Ask Price is the price at which a market-maker or dealer is prepared to buy securities or other assets.
When buying and selling currency pairs, the prices for each occasion have a specific name, and the price of selling a currency pair is called the Bid price, for buying a currency pair is – Ask price. Both Bid and Ask prices are updated in real-time.
What Is Spread In Forex?
The spread in forex is the difference between the Ask and Bid price or the cost of trading. For example, if the Ask price of EUR/USD is 1.2751 and the Bid price is 1.2750, the spread is Ask minus the Bid price which equals 1 pip.
What Is A Pip?
A pip is the smallest price amount by which the value of a currency pair can change. The pip is usually the fourth decimal point in a currency pair. All major currency pairs are priced to four decimal points.
A common exception is for Japanese Yen (JPY) pairs which are quoted to the second decimal point. For example, when the value of the EUR/USD pair goes up by one pip, the quote will move from 1.2345 to 1.2346.
When trading it is important to know the monetary value of a pip in order to be able to calculate potential losses or profits. This value is always in the quote currency.
The formula for calculating the monetary value of a pip is the following:
Amount of base currency(in lots) x Decimal amount of pips
An example: When trading 1 lot of EURUSD, the monetary value during that trade is 100,000 EUR x 0.0001 = 10 USD which equals 1 pip.
What Is A Lot?
A Lot is the specified amount that any currency or CFD is traded in Forex is commonly traded in specific amounts called lots which basically refers to the number of currency units a trader will buy or sell.
The standard size for a lot is 100,000 units of currency, and now, there are also mini micro and nano lot sizes that are 10,000, 1,000, and 100 units.
Some brokers will show quantity in “lots”, while others may show the actual currency units.
There are three types of lots:
1) A standard lot, is equal to 100,000 units of the base currency(1 lot of EURUSD = 100,000 EUR)
2) A mini lot, is equal to 10,000 units of the base currency(1 mini lot of EURUSD = 10,000 EUR)
3) A micro lot, is equal to 1,000 units of the base currency (1 micro lot of EURUSD = 1,000 EUR)
What Is Margin?
Margin is basically the amount of money that a trader needs to produce in order to place a trade and maintain the position.
Margin is not a transaction cost, but more a security deposit which the broker holds while a forex trade is open. Trading currencies on margin enables traders to increase their exposure.
What Is Leverage?
Leverage in Forex is the relation of the trader’s funds to the size of the broker’s credit. Basically, leverage is borrowed capital used to increase the potential returns. The Forex leverage size usually exceeds the invested capital multiple times.
In order to understand how to manage an account, traders must have a good understanding of the leverage and margin level requirements offered by each forex broker as failing to properly manage both will result in a margin call and the broker will liquidate a traders position in order to ensure that their losses do not reach a level where their margin is insufficient to cover them. Leverage can work both ways: a traders’ profits can increase but so can their losses.
What Is A Swap Or Overnight Fee?
A swap or Overnight fee(or rollover fee) is the interest that a trader pays or earns when a position is left open overnight. Swaps are usually presented in pips per lot traded and vary among brokers and currency pairs. Some forex brokers offer swap-free or Islamic accounts for traders usually from Islamic countries, as this is against their religion.
What Is Slippage In Forex?
Slippage is when an order is executed or stop loss closes an open position at a different rate than the one specified and intended by the trader.
Slippage is more likely to occur when trading forex or CFDs and the volatility is high. The reasons vary from news events, trading a currency pair outside the peak market hour or the broker is facing connectivity and liquidity issues
What Is Short Selling?
Short selling or opening a sell order or short order is a trading strategy that speculates on the decline or drop of a financial instruments price, whether that is a stock, currency pair or commodity. Selling an instrument is having a bearish view and expectation.
What Is A Long Position?
A long position or going long or opening a is a trading strategy that speculates on the increase in value of a financial instruments price, whether that is a stock, currency pair or commodity. Holding a long position has a bullish view and expectation. A long position is the opposite of a short position or short selling.
Market Orders: Stop Loss And Take Profit Orders
After examining the basic concepts, let’s briefly discuss how trade is opened, and have a look at a few basic ways to control risk and manage our funds.
While most trading platforms are straightforward with order entries and the opening or closing of positions, concepts like stop loss and take profit will sound very confusing to any new trader.
Stop Loss Order
The stop-loss order works as a safety mechanism that puts a ceiling over the losses that a potentially bad trade can cause. By entering the stop-loss order, a trader specifies the maximum amount of unrealized losses that he is willing to tolerate. Needless to say, the stop loss order should be set in the opposite direction of the opened position. The execution of a stop-loss order is automatic.
Take Profit Order
The take-profit order has a reversed role compared to the stop-loss order. The take profit order specifies the price quote at which the trader wants the position closed and makes the desired profit. It can also act as a safety net in the case that the price reaches a certain level and then drops back down again. This way you can somehow guarantee a certain level of profit. This order is also executed automatically.
Trading Account Vs A Trading Platform?
These are two very simple concepts that are easily confused.
A Trading Account: is the account that a trader opens with a chosen forex broker and this account will determine all the trading conditions which a trader must follow whilst trading using a trading platform. Here, traders can manage their funds, documents, and any offers the broker may offer.
A Trading Platform: on the other hand, is the software which a trader will make use of to trade the markets. The most popular trading includes the Metatrader 4 and Metatrader 5 platforms which are generally available across desktop and mobile devices.
Further than these basics, most trading platforms are straightforward with order entries and the opening or closing of positions, and concepts like stop loss and take profit will sound very confusing to any beginner in the field. Just to break down the terminology – a Stop loss order works as a safety mechanism that puts a “cap” on the losses that can result from a bad trade and by entering the stop-loss order, a trader specifies the maximum amount of unrealized losses that they are willing to tolerate.
Fundamental Analysis Vs Technical Analysis
To analyze price action and determine where the markets or a specific currency pair will move, forex traders use two main kinds of analysis. Those who concentrate on price action, and ignore most other factors use technical analysis, while traders who prefer to study the economic events that cause market fluctuations use fundamental analysis. Then there are the traders who combine the information provided by the combination of these two types of analysis to create trading signals and strategies.
What Is Fundamental Analysis?
Fundamental analysis is the method of evaluating security or trying to make sense of price movements in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the value of a security or asset, including macroeconomic factors (e.g. economy and industry conditions) and microeconomic factors (e.g. financial conditions and company management). In simple words, a fundamental analyst tries to study all the aspects of economics, including politics, law, social sentiments, as well as many other aspects of society. The goal of fundamental analysis is to produce a quantitative value that a trader can compare with a security’s or currency pair’s current price and indicate whether it is overvalued or undervalued.
The greatest benefit derived from the study of fundamental analysis is the ability to understand the reasons that drive price action. By understanding the dynamics of the financial markets, a trader can be confident in maintaining a position as long as the trigger for a specific trader still exists.
How To Trade The News When Trading Forex
The Forex Trading Market
When trading Forex, a great bonus is a fact that the market is open 24 hours a day for five days a week. The fact that the market is open for such an extended period of time means that it responds to worldwide news as it breaks. And it’s not just the U.S economic news either – the trading is affected by all kinds of news from across the globe.
The Economic Data Releases
Given the fact that there are at least eight large currencies that most brokers have available to trade, as well as over 17 different derivatives, there is always some sort of economic data scheduled for release. Traders can then use this data to inform them of how best to proceed with their exchanges. There are usually at least seven data items that are released each day from the eight majors. So, if you trade news, opportunities are plentiful. For this reason trading, new has become very popular among traders. Let’s have a look at when the different economic news items are released and how Forex traders can make the most of the data.
Different Data Releases Have Greater Significance Than Others
Given that The U.S. Dollar (USD) is on one side of the trades in over 90% of major currency pairs, it’s not difficult to imagine how the economic releases in the US usually have the biggest impact on the trading market.
If you follow news trading, you will need to pay close attention to the market at the times when the most important releases are made. The U.S. releases its data between 8.30-10.00 am (EST) whereas Japan’s is 6.50-11.30 pm (EST). The UK is in the early hours of the morning between 2:00-4:30 am (at least, if you’re operating on Eastern Standard Time – for Greenwich Mean Time, add on 5 hours to the stated times).
Key Data Releases
These key data releases include information such as a decision about the interest rate, retail sales, inflation rates, unemployment figures, industrial production information, business sentiment surveys, consumer confidence surveys, trade balances, and surveys in the manufacturing industry. The importance of each of these different releases is dependent on the country’s current economic state. You also need to be mindful of the fact that trading news doesn’t just last for a few hours or a day. The effect of a release may have far-reaching effects on the market for several days or even a week. The key, when trading Forex, is knowing when the releases are, and exactly which ones are important.
What Is Technical Analysis?
Technical analysis is the method used to evaluate securities and price action, as well as to identify trading opportunities and trends, by analyzing statistics gathered from recent and historic trading activity. Unlike fundamental analysts, who attempt to evaluate a security’s or pair’s intrinsic value, technical analysts focus on charts of price movement and various analytical tools to evaluate an asset.
Technical analysis is based on three underlying assumptions:
1) Price discounts everything and all public information
2) Price movement is not random and therefore can be determined using technical tools
3) Price moves in trends that repeat themselves
In other words, past developments provide guidance on the direction and volume of future price action. Technical analysis is a very simple and straightforward method, with tools available to all traders of any background and experience.
How To Trade A Trend When Forex Trading?
If you’re new to Forex trading, then trading with the trend is a much safer bet to engage in the capital markets and maximize profits. Forex leaders use strategies in trend trading as one of their main approaches to the markets.
What Is A Trend?
What is a trend exactly? A trend is the behavior of a price, either an overall decrease or increase in the exchange rate. A currency pair trends when it is either increasing or decreasing for a longer period of time. Trading trends come in different forms.
Some are like channels with lower and upper parallel trendlines while other have just one trendline. It’s important to remember that because the market is based on human activity, the trends are not always going to follow symmetrical lines. When you are trading, you need to react to the market actions.
How To Follow A Trend?
Beginners often think that following trends is easy: you simply identify the trend and get ahead by going in next to the prevailing price action. But, in reality, it’s much more complex than it appears.
First up, we need to be sure it is actually a trend rather than just a retrace. Secondly, have you spotted the trend early enough or are you too late to get in on it now? Lastly, is it worth the risk?
In terms of whether or not a new trend is forming, it’s important to wait to ensure that the trade sets up properly and breaks certain levels. If you don’t wait, you might end up getting in at the end of a retrace and end up being stung by a price reversal.
Things To Be Aware of When Trading A Trend
Those who are daring catch new trends early. In doing so, they get ahead of the price action before it is defined. Knowing a trend does help you to get ahead. However, you must exercise caution as trends come in waves. These waves are called impulse waves or corrective waves. Impulse waves are waves that follow the trending direction.
Corrective waves are the opposite and go against the trend. If you count the waves or the pivots in a wave, it is possible to anticipate if a trading opportunity will be buck the trend or follow it. One theory suggests that an impulse wave has about five swings whereas a corrective wave has about three.
If you combine the moving average with the number of pivots and analyze and observe further, you can make a successful trade at the right time. But, remember that this is a well-practiced craft. It takes time and effort, as well as patience, to ensure profitability. So you have to be very careful when you follow trading trends.
When trading forex, a trader should discipline himself and keep his head in the game. Objectives must be clear and decisions should be taken with a clear head. Apart from studying the forex markets, trading strategies, and putting them to the test, traders must also learn self-control while trading.
The biggest challenges that a trader can face, especially with the amounts of money involved, are greed(for more money), fear(of losing money), euphoria(of earning too much money), and panic(of losing and taking bad decisions). A lot of traders lose sight of proper risk management strategies and end up losing the money they invest.
The Flaws Of Human Nature
So, what is this human ‘flaw’? It’s fear. Our fight or flight response can be our downfall. We cannot change our make-up but, in being aware of our primal responses, we can alter our approach. Studying Forex trading psychology can be enormously beneficial for Forex traders.
Fear limits our behavior. We always look for the safest option and so if we are trading and we think we are going to lose profit, we naturally want to pull out and withdraw to inhibit further loss. However, this could mean that you deviate from your planned strategy. Moreover, fear could cause you to make decisions that are not well thought through in the hope you can turn around your trade. Such rash decisions may mean that you end up losing more money than you did, to begin with.
Understanding Trading Psychology
Understanding the psychology behind trading can set you in good stead and diminish your feelings of fear as you make trading decisions. Ultimately, traders cannot fall into the trap of emotions when trading. Let’s have a look at some of the more common psychological biases that you may experience in Forex trading:
- Loss Aversion bias – You think that a price might come back. Your brain is wired to want to make the lowest possible loss which could mean that you pull out of deals too soon.
- Confirmation bias – You believe that something proves you were right. Looking for justification for your actions can lead you to find links that weren’t there. This can be a difficult cycle to break and traders should learn to trust different strategies to get the most out of Forex trading.
- Anchoring bias – Coming up with links that suggest something may be right even when it isn’t. Your brain tends to rely on previous experience in making decisions. This can cause you to be afraid to try new strategies and go against your experience.
- Over-confidence bias – You are overconfident in your decisions and believe you know where the market will go. Your brain is wired with the need to feel validated, which means that when things are going well, you may think that you are invincible in future deals.
Finally – in addition to simply choosing a broker, traders should always take the time to look at the currency trading software and platforms a broker has on offer. Traders must ensure that they can trust a trading platform to offer the results they expect. Traders must be able to trust not only the accuracy of the quoted prices; the speed of data transfer and the fast execution of orders is essential to be able to trade Forex successfully. All information must be available from a broker in real-time and the platform must be available at all times when the Forex market is open, ensuring that a trader can take advantage of any opportunity that presents itself.
It is very important for traders to ask – Will my funds and personal information be protected? A reputable and regulated Forex broker and Forex trading platform will take steps to ensure the security of a trader’s information. The best broker or brokers will also segregate a traders’ funds from its own funds and if a broker cannot disclose the steps, they will take to protect their client’s account balance, it is better to look elsewhere. A trustworthy Forex trading platform must allow traders to manage their trades and account self-sufficiently, without having to ask their broker to take action on their behalf. What this ensures is that a trader can act as soon as the market moves, capitalize on opportunities the moment they happen, and control any open position.
Last but not least, does the platform provide embedded analysis, or does it offer the tools for self-regulating fundamental or technical analysis? Most Forex traders trade by using technical indicators and can trade more efficiently if they can access this information within the trading platform, rather than having to divert from the platform to find it.
When trading forex, a trader must stay disciplined and keep their head in the game. Objectives must be clear and decisions should be taken with a clear head. Apart from studying the forex markets, trading strategies, and putting them to the test, traders must also learn self-control while trading. The biggest challenges that a trader can face, especially with the amounts of money involved, are greed, fear, euphoria, and panic. A lot of traders lose sight of proper risk management strategies and end up losing the money they invest.
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There is a very high degree of risk involved in trading securities. With respect to margin-based foreign exchange trading, off-exchange derivatives, and cryptocurrencies, there is considerable exposure to risk, including but not limited to, leverage, creditworthiness, limited regulatory protection, and market volatility that may substantially affect the price or liquidity of a currency or related instrument. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable, or that they will not result in losses. Learn more at Wikipedia.
Director of Research & Analysis
Chad Smith is the Director of Research & Analysis here at ForexBrokerListing.com.
Chad previously served as an Editor for a number of websites related to finance and trading, where he authored a significant number of published articles about trading and the impact of technology in transforming investing as we know it.
Overall, Chad is an active fintech and crypto industry researcher with more than 15 years of trading experience, and you can find him teaching his dog how to trade in his free time.