FOREX EDUCATION BY Fxbtrade
Dear traders, we have prepared for you a comprehensive Forex course. The course consists of 4 levels: Beginner, Elementary, Intermediate and Experienced. Taking this course will turn you from a newbie trader to a Forex professional.
All materials are well-structured and will become a solid foundation of your Forex education. Note that this section will be constantly updated, so stay tuned!
Explore Forex with FBS and don’t forget to check other pages of our Analytics & Education.
At this first level , you will learn what is Forex, how to “read” currency quotes and buy/sell currency pairs in FBS trading terminal. You will find out how to calculate your financial results. This will be your introduction to the amazing world of currency trading.
Here you will get a deeper insight into fundamental and technical Forex market analysis. You will learn how to use various analytical tools for your benefit.
This level will introduce you to different market conditions, like trends, ranges, and breakouts. You will get to know different trading styles and study Japanese candlesticks, chart patterns, and traders’ psychology.
At this point, we’ll teach you how to manage your risks and use advanced analytical and trading techniques. This knowledge will help you to maximize your profit and limit your losses.
Hello! This is the course for absolute beginners to Forex trading. Here you will find the basic info about this market and will learn how to buy and sell various currencies. Good luck!
What is Forex?
Forex, FX – short for ‘foreign exchange’ – is trading currencies of different countries against each other. Forex is one of the largest global financial markets for trading various currencies. It assists international trade and investments via foreign exchange transactions. In 2016 daily FX volume accounted for $5.1, according to data from the Bank of International Settlements (BIS).
There are many different players in the FX market. Some trade to make profits, others trade to hedge their risks and others simply need foreign currency to pay for goods and services. The main participants of trading are commercial banks, that’s why currency quotes are set at the interbank market. Apart from large commercial and central banks and multinational companies, there are also many risk-seeking investors who are always ready to engage in different sorts of speculations. Among them are typical retail traders – individuals, who trade on the daily/weekly basis to snatch lots of money. Many of them scrutinize economic and political news, statistical releases and public engagement of influential persons to decipher the future movement of currency’s prices. Others rely on technical indicators without paying any heed to what is happening in the world of finances. You as well are able to become a Forex and join this class of currency entrepreneurs.
Forex market is decentralized. In other words, there is no physical location where investors go to trade currencies. Forex traders use the internet to check the quotes of various currency pairs from different dealers. Financial centers around the world – London, New York, Tokyo, Hong Kong and Singapore – function as anchors of trading between a wide range of different types of buyers and sellers. To obtain access to interbank currency market you will need to turn to a Forex broker.
This tutorial is created to acquaint you with Forex basics and explain you in simple terms how to trade currencies. This will be your first step in becoming a successful Forex trader. Please check our next courses to further develop your trading skills.
Why become a Forex trader?
There are many reasons to try out Forex trading. Some of them are listed below.
– You can get extremely big returns in comparison with your initial deposit.
– You don’t need a large amount of money. In fact, you can start with only 50 USD.
– You get a vast knowledge and experience in finance.
– You have your own business and depend only on yourself.
– You are free to manage your time as you wish.
How much money can one make trading Forex?
How much money can you really make trading Forex? There are a lot of websites that claim to double or triple their money every month. However, in practice professional traders return 20-80% a month, so a return of 20-30% is both a realistic and a reasonable expectation. Remember that currency trading is like any investment vehicle, and having realistic expectations for what you can make is going to set you up to succeed more than thinking that you can get rich quickly with only a $50 investment.
What are the risks?
Please do remember that Forex trading is very risky,that is why we are here Forex should be traded with only risk capital. In other words, trade with money you can afford to lose.
At the same time, there is no need to be afraid of the risk. As trader, you have to take reasonable risk, which is exceeded by potential reward, and make efforts to decrease risk. You will find the information on risk management further.
What technical tools do I need for trading?
All you need to trade currencies is an internet access. Trading platforms for FX are called Meta Trader 4 and 5 (MT4 and MT5)
Currency pairs. Base and quote currencies. Majors and crosses
Currencies on the FX market are always traded in pairs. In order to find out the relative value of one currency, you need another currency to compare. When you buy one currency, you automatically sell another currency.
Currency pairs in Forex are given in abbreviations. For instance, EUR/USD stands for the euro versus the US dollar, and USD/JPY stands for the US dollar versus the Japanese yen. If you buy EUR/USD, you are buying euros and selling dollars. If you sell EUR/USD, you are selling euros and buying dollars.
The first currency in the pair is called the base currency, while the second currency is called the quote or counter currency. The price of the base currency is always calculated in units of the quote currency.
For example, the exchange rate for the EUR/USD pair is 1.1000. It means that one euro costs 1.1000 US dollars (one dollar and 10 cents).
Currency pairs are usually divided into majors, crosses, and exotic pairs. All the major pairs include the US dollar and are very popular among the traders: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD etc.
Crosses consist of two popular currencies, but do not include the US dollar. The most common crosses include the euro, the yen, and the British pound: EUR/GBP, EUR/JPY, GBP/JPY, EUR/AUD etc.
Exotic currency pairs consist of one major currency and one currency, representing the developing (Brazil, Mexico, India etc.) or small (Sweden, Norway etc.) economy. Exotics are rarely traded on Forex and usually have less attractive trading conditions.
What are pips and lots?
From the traders’ talk, you probably heard such words as pip and lot. These are the two the most essential things you need to know before trading in Forex market. Without them, you simply won’t be able to define the size of your position and calculate your potential profits and losses. So, let us sort it out before your pockets got drained.
On Forex market the value of a currency is given in pips. Pip is an acronym of “Percentage in Point”. It represents the smallest change an exchange rate can make. Pip is the smallest amount by which a currency quote can change. It is the last decimal of a price/quotation. For example, for EUR/USD a pip is the fourth decimal place – $0.0001; for currency pairs including the Japanese yen like USD/JPY, it is the second decimal place ($0.01). If EUR/USD changed from 1.0800 to 1.0805, this would be a change of 5 pips. If USD/JPY changed from 120.00 to 120.03, this would be a change of 3 pips.
Exchange rates are usually quoted to 5 figures. The first three digits of the quote are called the big figure.
Note that some Forex brokers also count the 5th and the 3rd decimal places respectively. They are called “pipettes” and make the spread calculation more flexible.
Bid and Ask price. Spread
There are 2 types of currency prices at Forex are Bid and Ask. The price we pay to buy the pair is called Ask. It is always slightly above the market price. The price, at which we sell the pair on Forex, is called Bid. It is always slightly below the market price.
The price we see on the chart is always a Bid price. Later on, we will find out how to check the Ask price in our trading platform. Ask price is always higher than the Bid price by a few pips. The difference between these two prices is called spread. Spread is commission we pay to our broker for every transaction. You’ve probably faced a similar logic in a bank exchanger: rates are always different for sellers and buyers.
SPREAD = ASK – BID
For example, the EUR/USD Bid/Ask currency rates are 1.1250/1.1251. You will buy the pair at the higher Ask price of 1.1251 and sell it at the lower Bid price of 1.1250. This represents a spread of 1 pip.
The more popular is the currency pair, the smaller is the spread. For example, spread for EUR/USD transaction is usually very small or, as traders say, tight. Note that the cost of spread on Forex is usually negligible in comparison with the expenses on the stock or options markets. As spread is quoted in pips, a trader can easily calculate the cost of every trade by multiplying the spread in pips by the value of 1 pip.
When is Forex market open?
FX market is open 24 hours a day, 5 days a week. There are trading sessions which correspond to the time during which stock markets are open in a particular region of the world. Usually, trade volume is higher at the intersection of the sessions. FX day always begins in Australia and New Zealand and then spreads to Asia. After that it’s the turn of Europe and, finally, the United States and Canada join in.
You can trade anytime you wish during the working week. You can open your currency position for a couple of hours or even less (intraday trading) or for a couple of days (long-term trading) – just as you see fit.
How can I predict where exchange rates will go?
As any market, FX market is driven by supply and demand:
- If buyers exceed sellers, prices go up.
- If sellers outnumber buyers, prices go down.
There are many different factors which influence supply & demand for every particular currency and, consequently, its exchange rate vs. other currencies. For example, national economic performance matters a lot. If Australian GDP is higher than expected, with all things equal Australian dollar will appreciate versus its counterparts and you can make a profit on buying AUD/USD. You will find all important events in our economic calendar.
Moreover, there are so-called technical tools & indicators. When you see a currency pair chart in your trading terminal, it’s assumed that this chart reflects all information available to the market. As a result, you can use the previous price action to foresee the future. According to this concept, previous highs and lows represent important levels where the currency pair may linger and reverse. If such level is breached, a big move may follow and a big move means good profit opportunities. Moreover, you will be able to identify trends – rising, descending and sideways – and open your positions in direction of a trend getting profit.
You can learn more about these things when you get started. Our analytics will be very helpful for this purpose.
Transaction, profit, loss. Types of orders
The decision to buy or sell the currency pair depends on your expectations of the future price. If you think that EUR/USD will rise, you buy the pair or, in other words, open a long position on this pair. If you think that the EUR/USD will fall, you sell the pair or, as traders say, open a short position on this pair. As some time passes and the price of EUR/USD changes, you close the position and get the profit if the price changed in line with your expectations. If the price moved in the opposite way, you have a loss on this transaction.
To perform these operations, you need to place orders – give special commands to your broker in the trading terminal. There are several different types of orders, the main are market orders, pending orders, take profit orders and stop loss orders. Let’s see what are their functions.
Market orders – buy and sell – are designed to open positions at the current market price. The position will be opened immediately after you place such order. Pending orders, on the other hand, allow you to choose entry levels in advance. In this case, the trade will automatically open once the price level that you have chosen is reached, and you won’t need to be in front of the monitor when it happens.
If you think that the price of the currency pair will rise and then reverse to the downside, place Sell Limit above the current price. If you expect the currency pair to decline and then reverse to the upside, place Buy Limit below the current price. If you think that selling will intensify once the price breaks a certain level on the downside, place Sell Stop below the current price. If you expect that buying will intensify once the price breaks a certain level on the upside, place Buy Stop above the current price.
In order to close profitable positions, use an order type called Take Profit. In order to close unprofitable position use Stop Lossorder. For example, you enter a stop order 50 pips away from your entry point. As soon as the market moved 50 pips against you, your stop order would automatically close you out of that trade protecting you from losing more than 50 pips.
Swap and rollover
Rollover (also known as rollover swap) is a procedure of moving open positions from one trading day to another. If a trader extends his position beyond one day, he/she will be dealing with a cost or gain, depending on prevailing interest rates.
Remember that on Forex market the base currency represents how much of the quote currency is needed for you to get one unit of the base currency. The trader borrows money to purchase another currency, and interest is paid on the borrowed currency and earned on the purchased currency. In other words, your position will therefore earn the interest rate of the currency that you have bought, and you will owe the interest rate of the currency that you sold. Most brokers perform the rollover automatically by closing open positions at the end of the day, while simultaneously opening an identical position for the following business day.
Let’s study an example. Every central bank sets interest rate and these rates may significantly differ. For example, imagine that the New Zealand dollar had a higher interest rate than the US dollar. If you were to buy NZD/USD, you would earn the interest difference between the NZD and the USD or so-called swap on your position every day you held that trade overnight. However, if you sold NZD/USD, you would pay the swap for your position every day you held that trade overnight.
You can look up swaps long and short at your broker’s website. The trading terminal automatically calculates and reports all swaps for you.
Margin, Leverage, Margin Call, Stop Out
How much money should you have on your account to keep trading? It’s logical that you will need money to maintain open positions. The necessary sum is called margin. Forex brokers set margin requirements for clients. Usually, margin equals to 1-2% of the position size. This notion is tightly linked to the term ‘leverage’. When you trade on margin you use leverage: you are able to open positions on bigger sums than you have on your account.
Let’s see how it works on the example. You invested $10,000 supplying the sum by yourself. This is 1:1 leverage (in essence, this is an unleveraged position), as you don’t borrow anything from the broker. If you earn $100, your return will be 1% ($100/$10,000*100). At the same time, if you lose $100, your loss will be just -1% return as well.
Imagine that you don’t have $10,000, but want to trade this amount. Forex trading allows you to do that with the help of leverage. In this case, your broker will require 1% margin equal to $100 on your account. This is your used margin. The leverage is 100:1 because you control $10,000 with just $100. The remaining 99% is provided by the broker. The margin is needed for broker’s security in case the market goes against your position. In the case of $100 profit, your return will be 100% ($100/$100*100). However, if you lose $100, it the return will be -100%. As you can see, with leverage small movements of the currency pairs can result in larger profits or larger losses when compared to an unleveraged position.
In your terminal “Trade” window you can see columns “Balance”, “Equity” and “Usable Margin”. Your usable margin will be always equal to “Equity” less “Used Margin.”
Brokers usually define margin call level. For instance, if it is at 20%, you’ll get a margin call if your account equity drops to 20% of the margin (in our case 20% of $100 is $20). In this case, you will receive a warning from your broker that you need to close your trade or deposit more money to meet the minimum margin requirement. In addition, beware that the broker will have to close your position at the current market price if the ratio of your deposit to your loss will reach so-called stop out level. If stop out equals to 10%, this will happen if your equity drops to $10 (10% of the margin). Sometimes, margin call and stop out are the same, and if your drops below 100% of the minimum requirement to trade the position is closed without any warnings.
Margin requirements, margin call and stop out levels are set by the broker for each account type and shown at its website. As a trader, you should do your best to avoid hitting margin call and stop out levels.
Deposit = $1000
Desired position size = $10,000
Margin Requirement = 1%
Margin = $10,000*1% = $100
Usable Margin = Equity – Used Margin
FX trading is typically done through brokers. Brokers are companies providing individuals like you with access to the interbank market where all the trading takes place. In other words, a broker gives you a special software program, where you can see live currency quotes and are able to place orders to buy/sell currencies with just a few clicks. When you decide to stop your trade, the broker closes the position on the interbank currency market and credits your account with the gain or loss. It will take you only a couple of minutes to open an account with the Forex broker of your choice and begin your trading career. As a reward for the services, a trader pays to his broker spread or commission.
When choosing a broker, pay attention to the company’s goodwill, age and regulation. Fxbtrade is providing high-quality services to its clients since 2010 and is widely recognized as one of the market leaders. Its worldwide success doesn’t prevent the company from being extremely customer-driven and meeting the needs of every single trader. Fxbtrade support is always ready to help you and is available 24/7. In addition, it’s important which trading conditions a broker offers. In particular, compare the execution speed, spreads, swaps and commission. Fxbtrade can boast split-second execution, spreads from 0 pips, 100% deposit bonus for trading, free deposit insurance and many other benefits for traders. We do aim to give you the best of Forex!
Position size, level of risk
Imagine you put $1000 on your deposit and you want to trade. Should you use the entire sum at once? Probably not: remember how we spoke about risk management? So, which position size to choose then?
Step 1. Don’t risk more than 1-2% of your deposit for one trade. This way even if some of your trades aren’t successful, you won’t lose all your money and will be able to keep trading.
For example, if you deposit is $1,000, risk no more than $10 (1% of account) on a single trade.
Step 2. Establish where the stop loss will be for a particular trade. Then measure the distance in pips between it and your entry price. This is how many pips you have at risk. Based on this information, and the account risk limit from step 1, calculate the ideal position size.
For example, you want to buy EUR/USD at 1.1100 and place a stop loss at 1.1050. The risk on this trade is 50 pips, and you can risk $10.
Step 3. And now you determine position size based on account risk and trade risk. Remember that there are different lot sizes. A 1000 lot (micro) is worth $0.1 per pip movement, a 10,000 lot (mini) is worth $1, and a 100,000 lot (standard) is worth $10 per pip movement. This applies to all pairs where the USD is listed second, for example, the EUR/USD. If the USD is not listed second, then these pip values will vary slightly. Note that trading on a standard lot is recommended only for professional traders.
Use the formula: [Account risk/(trade risk x pip value)] = position size in lots.
Assuming the 50 pip stop in the EUR/USD, the position is: [$10/(50x$0.1)] = $10/$5 = 2 micro lots. The position size is in micro lots because the pip value used in the calculation was for a micro lot.
For the number of mini lots use $1 instead of $0.1 in the calculation, to get 1 mini lot [$10/(50x$1)] = $10/$50 = 0.2 mini lot.
The pips at risk will often vary from trade to trade, so your next trade may only have a 20 pip stop. Use the same formula: [$10/(20x$1)] = $10/$20 = 0.5 mini lots, or 5 micro lots.
This was the beginner’s guide to Forex trading. To learn more, check our next courses!