Learn forex trading today!
Forex trading for beginners can be especially difficult 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 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 centres of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney—across a large time zone.
What is Forex Trading?
Forex is a form of foreign currency and exchange. Foreign currency and exchange are the process 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 of the markets place global reach in trade, commerce and finance, forex markets have a tendency to to be the largest and most liquid asset markets in the world. Currencies trade against each other in the form of exchange rate pairs.
Featured Forex Brokers
We decided to do all the hard work for you and guide you through the all the noise of the financial betting market. Our team of expert analysts, has created a unique collection of forex broker reviews, based on various criteria and data points for you to choose from.
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, the second – 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 EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD.
Currency pairs that are not associated with the U.S. dollar are referred to as minor currencies or crosses and they have slightly wider spreads and are not as liquid as the majors. Exotic currencies pairs on the other hand include currencies of emerging markets which are not as liquid, and the spreads are much wider.
Here is an example:
EUR/USD = 1.2752
In the above quote, the currency on the left side is the currency which 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 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 a 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 has a specific name and the price of selling a currency pair is called the Bid price, for buying a currency pair – Ask price. Both Bid and Ask prices are updated in real time.
What is Lot?
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 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 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. In 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 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 of a value during that trade is 100,000 EUR x 0.0001 = 10 USD
What is Margin & Leverage?
Two very important definitions in forex trading are Margin and Leverage.
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.
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 for 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 Swap in Forex?
Swap is the interest that a trader pays or earns when a position is left open overnight. Swaps are usually presented in pips per lots 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 a Trading Account Vs a Trading Platform?
These are two very simple concepts which 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 then these basics, most trading platforms are straightforward with order entries and the opening or closing of a positions and concepts like stop loss and take profit will sound very confusing to any beginner in the field. Just to break down on the terminology – a Stop loss order works as a safety mechanism which 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.
Other trading terminology made easy:
What is Spot Forex?
Spot Forex is a form of Forex trading which 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 a CFD?
CFD or Contract for Difference is a contract which 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 a 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 incremental profit.
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 a 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 a positions, concepts like stop loss and take profit will sound very confusing to any new trader.
The stop loss order works as a safety mechanism that puts a ceiling over the losses that a potential 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.
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 make the desired profit. It can also act as a safety net in the case that the price reaches a certain level then drops back down again. This way you can somehow guarantee a certain level of profit. This order is also executed automatically.
Fundamental Analysis vs Technical Analysis
To analyse 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 a 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 financial markets dynamics, a trader can be confident in maintaining a position as long as the trigger for a specific trader still exists.
What is Technical Analysis?
Technical analysis is the method used to evaluate securities and price action, as well as identifying 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.
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.
This covers the basics of forex trading. Here is a list of regulated forex brokers to choose from and start your journey.
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 clients 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, capitalise 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.