What is forex trading? A very legitimate question I asked myself in 2016, when I first heard that money can be traded online. After a thorough amount of search time all I could gather was that forex was short for Foreign Exchange. If you are that much much interested in a topic, you will definitely know that such shallow knowledge is not satisfactory at all.
So the inquisitive me kept on asking the question that had been the lord of my mind; what is forex trading? Well, later on I got to find my answer nowhere other than the internet. I read through tons of pages continuously but none of them seemed beginner friendly. Nonetheless, I acquired some helpful knowledge eventually. That is my whole motivation to develop a starter’s course which would not overburden forex noobs.
There’s a high probability that you’re on this page because you are new to currency trading. However, you have committed no crime if you just want to revise the basics of trading. This course is actually simple and brief because I had you in mind whilst creating it. It has been fine-tuned to your easy comprehension. I also know that; not all people like simple and brief, for that matter, I have provided you with links to more detailed courses.
For newbies, this course is to get you started in the fastest possible way. People with some sort of experience in the markets might want something weightier than just the basics. That weightier matter is a strategy. Newbies can proceed here for the strategy right after the basics. I promise that it would be worth your while. After this course, I promise you that you would not be asking “what is forex trading” but you’d be answering to it!
To access the content of this course click here or see the immediate right of this “Overview”; there’s the “Curriculum”. You can as well see below.
Introduction to Forex trading.
Foreign Exchange trading simply known as “Forex” is the process of buying and selling currencies with the intent of making a profit. Statistics prove that about five trillion dollars exchange hands in this market every single day. The currencies that make up the forex market are eight(8); USD (United States Dollar), EUR (Euro), JPY (Japanese Yen), GBP (Great Britain Pound), CHF (Switzerland Francs), CAD (Canadian Dollar), AUD (Australian Dollar) and NZD (New Zealand Dollar). Do not confuse the above eight which are major currencies with major pairs.
There are other countries with emerging strong economies that also have their currencies traded on the market; MXN (Mexican Peso), ZAR (South African Rand), SGD (Singapore Dollar), HKD (Hong Kong Dollar), DKK (Danish Krone), SEK (Swedish Krona), NOK (Norwegian Krone), THB (Thai baht) and a lot. These currencies are getting stronger by day as a result of strong economic fundamentals.
How currencies are traded.
Currencies are sold and bought simultaneously and are therefore traded in pairs. For instance, if you buy the pair EUR/USD, you have bought Euros and sold Dollars at the same time. Conversely, if you sell the pair EUR/USD you have sold Euros and bought Dollars at the same time. The first currency in a pair is the base currency and the second currency is the quote or counter currency. The base currency is the basis for going long (buying) or going short (selling). In the example above, EUR is the base currency and USD is the counter currency. You make money in forex when you sell a weak currency against a strong currency or when you buy a strong currency against a weak one.
Big players (banks, hedge funds, international and commercial companies) and retailers (us) are the parties involved in forex trading. For retail traders, the market is open 24/5 comprising three sessions; Australasia (Tokyo), Europe (London) and North American (New York) sessions.
NB: The major cities represent the financial capitals of each session. Click on the link to check the forex market hours with respect to time zones. You can find yours here.
Terminologies in Currency trading.
Currency trading, just like any other field comes with some terminologies one needs to know of, i.e, if he or she is willing to succeed in the long-term. The purpose of this lesson is to aid your comprehension in these key terms; bid, ask, spread, volume, leverage, margin and rollover.
Bid/ Ask & Spread
A currency quote is made up of the Bid/Ask price. The ask price is also known as the Offer price. Take the Bid as the price at which you will sell to your broker (at which your broker will buy from you) and the Ask(Offer) as the price at which you will buy from your broker(at which your broker will sell to you). The Spread is the difference between the Bid/Ask prices. The spread is your broker’s profit for giving you the platform to conduct an exchange. You actually pay the spread. See from the picture below, pairs with bid/ask and spread. The spread is in pips. There are brokers who offer spread-free accounts. In such an instance where you do not pay the spread, commission is charged.
Currencies are quoted in decimal places and the last decimal is known as a Pip. Pairs usually go out to 4 decimal places except JPY pairs, which go out to 2 decimal places. However, most brokers make use of fractional pips known as Pippetes which goes out to 5 decimals for other pairs and 3 decimals for JPY pairs. If GBP/USD moves from 1.51250 to 1.51251, the .00001 move higher is 1 pip. If CAD/JPY moves from 88.650 to 88.648, the .002 move lower is 2 pips.
The change in the pips of a currency pair is what determines profit or loss. Forex is traded in units of measurements known as Lots(Volume); this is to make the money gained or lost significant. The larger your lot size, the more significant your profit or loss is. The inverse is true. Lots come in units of measurements known as Standard (100,000), Mini (10,000) and Micro (1000).
Some brokers go the extra mile to offer Nano lots (100) which is the smallest. In Meta Trader which is the commonest forex trading platform, 1, 0.1 and 0.01 represent Standard, Mini and Micro lots respectively. When the quote or counter currency is USD, a 1 pip move in a Standard lot is worth $10, in a Mini lot it is worth $1 and in a Micro lot is worth $0.10. These are not the exact lot values when the quote currency is anything other than USD; depending on the currency pair and exchange rate at a specific time, the pip move becomes relative. For those who are strict about their math lessons, this is how to calculate the worth of a pip in monetary value.
Leverage & Margin
Back in the days, you needed to have a fat wallet to trade forex. With the advent of the internet in relation to retail trading, anyone can trade with as little as a 5$ deposit*(strictly not advisable though allowed)*. The use of a double-edged sword known as Leverage is what gives that advantage/disadvantage. Leverage maximizes your profits as well as your loses. When the evil side of leverage grips you, you can suffer a Margin Call. This is when your broker closes all your open positions because they moved past the “usable margin”. Your broker uses a margin call to prevent your account balance from falling to negative. Anyone who loves you dearly will tell you to desist from using the almighty leverage.
Trades can be opened and closed within seconds or hours but the ones which are left for days, weeks, months or even years come at a daily cost which is known as Rollover (Swap). It is solely based on interest rate differentials. Positive interest rate differential means the base currency has a higher interest rate than the quote currency but if the base currency has a lower interest rate in comparison to the quote currency, the differential is negative. If you go long on a currency pair with positive interest rate differential, you earn the swap. Inversely if the interest rate differential is negative you pay the swap. Be sure to check with your broker for rollover policy since it is usually adjusted for many reasons.
How you enter and exit a trade is known as trade management. Yet another important aspect of trading which needs rapt attention. Now that you have gained knowledge about the terminologies, I’m here to tell you it is not enough. You need to put it to good use through market calls and in this lesson, I will show you how to do it.
- Trade management aka Forex Entry and Exit strategies.
Market order, Stop Order, Limit Order, Stop Loss Order, Take profit Order, Trailing Stop Order.
- For Entry: Market Order, Limit Order, Stop Order
- For Exit: Stop loss Order, Take Profit, Trailing Stop
A market order is made when you buy or sell a currency at the best available price. It is also known as instant execution.
Stop and Limit orders are used when you would not be available to place a trade at a particular point.
Stop orders: These orders are based on predicting directions one way.
- Buy stop: Place a buy stop to buy above the market price. Buy high.
- Sell stop: Place a sell stop to sell below the market price. Sell low.
Limit orders: Orders based on market turning points (support or resistance). Read my module to learn about it if you’re a noob.
- Buy Limit: Place a buy limit to buy below the market price. Buy low.
- Sell Limit: Place a sell limit to sell above the market price. Sell high.
If you would not be available to close your open positions at market price at a particular time, you use the exit orders.
- Stop loss: You set an SL to close out your position and take you out of a trade for a loss at your predefined level.
- Take profit: You set a TP to close out your position and take you out of a trade for a profit at your predefined level.
- Trailing Stop: This affords you the opportunity to move a Stop loss order to entry price to break even and secure capital or past entry price to lock in profits. Trailing stops are also used to ride out trends and profit from big market moves.
If your trade management game is on point, your success as a forex trader would not be difficult.
“Trading is risky” this is a clear warning across any forex broker’s website and it is actually the truest statement when it comes to currency trading. Risk management is so key to trading success; a trader without a good strategy who knows how to manage risk is likely to turn out with a positive balance within a specified period.
Which one would you rather do? Let go of $10 to gain $2 or let go of a dollar to gain $5. Your guess is as good as mine. Risk management is not very important, except for the fact that, in trading you can’t be on the right side always. It is a profit or loss affair. How much you lose when you are wrong versus how much you win when you are right.
This brings us to risk to reward ratio (R:R). When you expose $50 to the market and gain $100, your risk to reward is 1:2, when you gain $150, your R:R is 1:3. This is how successful trading should be. When hunting for trades and the market presents you with an opportunity, check to see whether the R:R is 1:2 or more. If it is less than that, move on and search for another trade.
Doing it right:
Risk management is so important because, with a good risk to reward, you can strike a low win rate and still be profitable. Consider a trader with $100 to spare. He risks $20 per trade with a risk to reward of 1:2 only; this means he gains $40 anytime he wins. In 5 trades, he loses 3 and wins 2. That right there is a 40%-win rate and that is so low but after doing the math he gained +20.
Starting Balance: $100
A good trading strategy is important but never ever underestimate the power of a good risk to reward. There is trading advice which proposes 1:1 or lower because trades hardly hit target, but even if 1:2 is too ambitious for you, do not go below 1:1. It might work out a few times by compounding small wins and making them big; in the long run, it takes one or two loses to wipe out the trader’s balance. Risk management is win big, lose small.
Aside managing risk, there’s another crucial aspect of trading that deals with psychology. It is part of the success factors and I talk about it here.
Forex Trading Brokers.
What/Who is a broker?
After getting some understanding on what Forex is like, you might be wondering where and how to trade. In the retail aspect of trading, online brokers facilitate buy and sell orders . A broker is viewed as the intermediary between trade participants.
Prepare yourself before going on a broker hunt. You must be 18 and above with a valid national ID. You will be required to submit a bank statement or utility bill for further verification. These items are really personal and it is both you and the broker’s duty to ensure that security of data is guaranteed. Also, ensure that you are okay with a specific brokers transaction costs (spreads/commissions) before opening an account with them.
Choosing a broker can be a headache looking at the number that are in existence now. Just like it is in every other field, there are scam brokers so it takes a lot of effort to find a reputable one. There are some constant factors you must consider when looking for a broker that will not rip you off.
This is the most important factor when looking for a broker out of the many. Duly regulated and licensed brokers are reputable. Regulation ensures safety of depositor’s funds and sees to it that a broker is well capitalized to sail through unforeseen crisis.
With this said, not every regulatory agency is up and doing. When looking for brokers, have a bias towards the ones that are regulated in countries like USA, England and Australia. These countries are widely known to have strict regulatory laws, therefore, there is a high chance that brokers here have a reputation to protect.
Aside England, Broker that are also regulated in European countries that are part of the European Union are also known to be reputable.
Quality of customer service is also a very important factor. Excellent customer service is a big plus for the broker and great satisfaction to the trader. A good broker does not delay in answering customer queries and any other concerns.
When you enter trades, a broker would charge either a commission or a spread. Because of the charges every trade you enter would start as negative before moving into profit; that is, if it goes well. For that very reason, always make sure that you trade with a broker whose charges minimal in order to experience profits earlier.
Availability of trading platforms:
This is an important factor because a trading platform is as complicated as Forex trading itself when you are new to it. A good broker must give you unlimited access to a demo account on whichever trading platform it is using. This should be so in order for you to familiarize yourself with it if you are new. For trading platforms, I have a bias towards the cheapest and most popular, Meta Trader; it doesn’t really matter if it is 4 or 5.
These are some of the underlying factors you need to consider in making a choice; you might also want to check out their deposit & withdrawal options and terms and the type they are.
Setting up Metatrader 4 for Forex Trading.
The MT4 is one of the many trading platforms that affords retail traders the opportunity to buy and sell. It passes out as popular among traders. In fact, many traders start out using the Meta trader 4 before switching to other platforms because of various reasons. You can access this tutorial by pdf online or you can simply download it. Any format that suits you would be just fine.
The trusted broker offers MT4 for a both live accounts and demo accounts. You can request to open an account here.