Learn forex trading today! All these technical terms like currency quotes, technical indicators and economic data sound confusing to new traders that are just joining the dynamic world of forex. Forex trading involves significant risk and therefore forex education is essential for new traders. That is why we created this course, to get you started and give you a better understanding of the fundamentals of currency and forex trading. This course will guide you through the vast jungle of pips, lots and chart patterns, as well as give you the tools to start forex trading today. The main purpose of this course is to ease the learning process by supplying you with the most useful information in the simplest manner possible.
This course will cover the following subjects:
- What is Forex Trading
- How to Read a Currency Quote
- What is Bid/Ask Price?
- What is a Lot?
- What is Spread in Forex?
- What is a Pip
- What is Margin and Leverage?
- What is Swap in Forex?
- Trading Account vs Trading Platform
- Market Orders: Stop Loss and Take Profit Orders
- Fundamental Analysis vs Technical Analysis
- What is Fundamental Analysis?
- What is Technical Analysis?
- Trader’s Psychology
Forex trading is a form of commodity trading. In the commodity market traders buy and sell assets like oil or gold in exchange for physical currencies. In the forex (currency trading) market the assets bought and sold are currencies themselves. As a result, each currency’s value is relative to all other currencies. Overall, forex trading allows you to speculate on the changes in the strength of a currency over time, trading currencies and buying or selling them against each other.
For example, when the currency trader buys an ounce of gold, he must pay for it with US dollars, which creates a quote in which the price of the metal is defined in terms of a currency which is another asset class. However, when the forex trader buys or sells the Euro, he must pay for it with another currency (Australian dollar, Swiss Franc, US dollar etc). In this case the quote created has the same asset class on both sides. The result of this is that it is impossible to speak of absolute value in the forex market because it is possible to value the Euro in dollars, Francs, or Yen, each being a valid choice as a value indicator. In the case of stocks, or commodities, the value can only be indicated in USD and therefore, it is possible to speak of an absolute value.
Upon chosing a forex broker and setting up a live account, the first concept that a trader will encounter, is the forex price quote(currency pair). The quote is simply the record of a previous transaction in which a currency pair changed hands. When two financial actors exchange currencies, the price at which the transaction occurred is called a quote. 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.
When buying and selling currency pairs, the prices for each occasion have a specific name. The price of selling a currency pair is called the Bid price, and the price a forex trader is willing to pay for buying a currency pair is called Ask price. Both Bid and Ask prices are updated in real time.
A Lot is the numeric quantity of the currency pair being traded. It is always measured in units of the base currency. 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)
The spread in forex, is the difference between the Ask and Bid price or in other words, the cost of trading. For example, if the Ask price of EURUSD is 1.2751 and the Bid price is 1.2750, the spread is Ask minus the Bid price which equals 1 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
Two important definitions in forex trading are margin and leverage.
Margin is a fixed minimum amount, a percentage of the money in your account, that a trader needs to have in his account in order to keep a position open. It works as a safety net for brokers, to protect them from any potential losses that traders may experience.
Leverage is a term used in retail forex trading, that represents a form of loan that the broker provides to the trader. It is commonly presented in a ratio form (1:10,1:100,1:500) and allows traders to trade with more capital than their initial deposit. For example, when a trader deposits 100 USD and gets a leverage 1:100, he can actually trade with 10,000 USD (100×100).
In order to understand how to manage your account, you must gain a good understanding of the leverage and margin level requirements offered by each forex broker. Failing to properly manage both the leverage and margin level, will result in a margin call and the broker will liquidate your position in order to ensure that your losses do not reach a level where your margin is insufficient to cover them. Leverage can work both ways: your profits can increase but so does your losses.
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.
Most traders confuse two very simple concepts when they start their trading career, those of a trading account and a trading platform.
A trading account, is the account that you the trader open with a certain forex broker and determine all the trading conditions that you must follow while trading using a trading platform. It is also the place where the trader can manage his funds, documents, and any offers the broker may offer.
A trading platform, is the software which a trader uses to actually trade the markets. The most popular trading platforms are the Metatrader 4 and Metatrader 5 platforms. These platforms are generally available across desktop and mobile devices
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.
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.
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.
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.