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Forex Trading – Trade Foreign Exchange With The Best Forex Brokers
Forex trading is one of the most active and volatile markets – making it ideal for traders. Our guide to forex trading provides a starting point for beginners; plus tips, strategy and education for seasoned investors too. We explore forex trading hours, explain how to compare online trading platforms, how to manage risk and even where to find the best forex trading demo accounts.
So start your journey into the world of foreign exchange here, and join a market which sees over $5bn traded, every day…
Top Forex Brokers
A Forex Definition
Forex (foreign exchange) is the exchange of one currency for another. Global businesses, governments and holiday makers all need to exchange currencies at different times (though is hugely different volumes). The forex markets allow them to do this. The usual forces of supply and demand will dictate the movement of those exchange rates – and forex trading is the active speculation of those exchange rates.
Forex trading revolves around ‘pairs’. These represent the two currencies being exchanged. The exchange rate is stated as how many of the second currency, are required to buy 1 of the first. So if the EUR / USD pair is showing ‘1.1811’ , it means 1.18 US Dollars are required to purchase 1 Euro. Exchange rates will often be quoted down to 6 decimal places. Online forex trading platforms will allow retail investors to speculate on the movement of these rates.
How To Start Forex Trading
Retail investors can start trading forex using the online platforms and software of numerous forex brokers. One difficulty however, is in selecting which broker to choose. One key issue, is that the best broker for one trader, may not be as suitable for another.
There are a huge variety of comparison factors when looking at forex brokers. Many people will look at the offers and spreads, the leverage or margin required to trade, the available assets like gold or Bitcoin or even if the broker is based in a well regulated jurisdiction like the UK or Switzerland.
We cover all of these popular factors in our reviews, but we also try to include some comparison factors that might get overlooked, like the minimum deposit and trade size, the type of spread (is it fixed or variable) and deposit and withdrawal methods such as Paypal or Skrill. Some of these factors will be important to some traders, but irrelevant to others. This makes it hard to suggest a “best” broker that will be right for everyone – but we do still give each broker a rating.
In addition to our comparison lists, potential new traders can use demo accounts to trial different brokers and see which they prefer. This is especially important when it comes to usability or look and feel. Opinions on different online trading platforms will often vary. The best way to judge a particular platform is to use it. This also allows new customers to check the assets they trade frequently are available, and spreads are competitive.
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To summarise, here is a list of comparison factors that are worth considering when judging different forex brokers:
- Offer/ Spread (Trading costs)
- Margin or Leverage flexibility
- Minimum Deposits
- Software Integration – e.g. MT4 (MetaTrader4)
- Assets (Are the markets you want to trade available, e.g. Oil, GBP/ JPY or Bitcoin etc)
- Demo Accounts
- Mobile Trading App
Beyond these there might be other important considerations such as does the broker accept traders from a particular country? Some regions such as Australia and the US have different regulatory bodies and many brokers may not service those regions. Our broker tables will generally only show relevant brands, based on your IP.
How To Start – Video
This short demo video from IQ Option introduces the basics of forex trading for beginners:
Benefits of trading the forex market
One of the biggest advantages of options trading in the forex market is that brokers are flexible and allow you to trade variations. Moreover, you can achieve high returns as much as 80% or more in a matter of minutes simply by predicting the price movement of a currency pair.
Make the most of your forex trade
A typical trade involves choosing a currency pair. For example, you choose EUR/USD and decide whether the pair will end above or below its current price over an hour. You would choose a ‘Call’ option if you predict the price will move upwards or a ‘Put’ option if you feel the price will fall below the current price. If the closing price is above the price you purchased with the ‘Call’ option, you will be ‘in the money’ at the time of expiry. If you choose a ‘Put’ option and the closing price is below the price you purchased, you will also be ‘in the money’ and make as much as 60 to 80% or more on the trade. Even the smallest fraction of a pip over or under your strike price can fetch you as profits in less than an hour. However, in traditional forex trading you will need to gain at least 81 pips on a $1000 x 100 leverage trade.
A powerful hedging tool
With short expiry terms you can take advantage of any news event that can trigger market fluctuations rather than place a stop-loss. One of the most interesting applications of forex binary options is that they can be used as a powerful hedging tool. It allows traders to transfer any risk from below the buying point to above it. If you take a traditional long position EUR/USD with a stop/loss and also purchase a binary ‘Put’ option, you are likely to cover any losses or even profit in the event of an unsuccessful long position trade. The risk is transferred from below the stop/loss to above it. If a rally continues in the right direction you can end up with a successful trade. This makes investing in binary options more fun, exciting, and less stressful for the novice trader as well. For more about hedging, read this great article by Mifune.
Fundamentals of Trading Forex Binary Options
One of our professional traders, and founder of a money management and trade advisory firm, shares his thoughts on the fundamentals of trading forex binary options and the system he personally uses.
The strategy I want to talk about is nothing secret – however it is also not very common – and the reason for its success is its simplicity.
The currency pair that I mainly (90%) trade is the euro dollar pair. This is simply because it is the most volatile and predictable pair. Euro-Dollar is the most traded pair, and since the opening of the Forex market to retail investors, its daily volume has increased dramatically. Euro-Dollar is also a common pair used by financial firms to hedge their client’s revenues against market swings.
The main problem I see every day when reading through binary options forums, is the sheer number of different strategies. It seems that traders think that the more complex the system, better the profits. Then, when they fail, they blame the system they were using, when in reality, the problem is behind the screen. No system will adapt itself to ever changing market conditions; it is up to the trader to adapt the approach.
I know that some will argue that this won’t work in this or that market condition, but they forget that the market itself is binary; the price can only go up or down. Such a thing as a ranging market doesn’t exist. Also every trading system is at its core the same – the system’s job is to detect the best entry and exit points for the trader.
As an example: A seasoned trader will quickly detect support and resistance levels on a chart. A rookie will not. The rookie will implement a strategy using stochastic, MACD and RSI, but what he doesn’t realize is that these indicators give him the same entry points the seasoned trader uses.
For binary options, the knowledge of finding the best entry point accompanied with a prediction of the next price move is key. With binary options every 10 th of a pip counts.
Disclaimer: This sections represents my personal opinions and a strategy I personally use. Please read through everything carefully, and do not jump to using the high-risk strategy before understanding fully how the strategy works. Please trade using a demo account before going live. This strategy is the Holy Grail for me because I do not get too greedy and if I do not feel the trade I simply pass, and wait for the next one.
It is important to understand what forex is and what its main usage is: Exchange of currencies ruled by the laws of supply and demand.
A simple hypothetical example: Apple sells 1 million Iphones in Europe in September for 500 euros a piece with Euro as base currency, they deal through HSBC, meaning their invoicing receiving account is under HSBC. But Apple reports in dollars, and the governing account is with BOA.
So Apple made 500 million euros that now sit in their HSBC account in Luxembourg. That money has to be now transferred to their BOA account and changed to USD.
Now it gets interesting. The transfer order comes in on Tuesday at 4 pm GMT. It won’t be transferred right away. The bank accumulates all the dollar orders during the night. The orders can be from yesterday or a month ago. The bank sends operation orders to their partners (like us) and the commission structure, and order deadline.
Euro-Dollar is trading on Wednesday at 6 GMT at 1.27000. Apple’s account at BOA will receive 635 million USD at 8 am EST. The order is fixed at 1.27000. So how do us, and both banks get the maximum profit from that order?
BOA get their commission from Apple, but what about HSBC?
At 8 am GMT, London open, the liquidity is 380 million euros, and price is 1.27010. So 500 million euros is equivalent of 635 050 000 USD. Not good enough yet, and not doable as there isn’t enough money yet in the market.
Euro outlook is bullish, Asian markets rose during the night, and the US fiscal cliff is getting resolved. Millions of retail investors and outlets take BUY orders and place their stops 10 pips under the current price. The market pending liquidity is 300 million euros and current liquidity is 380 million euros. So, the total equivalent liquidity in USD on the market at the moment is (1.27010) 482 638 000 USD and 381 030 000 USD pending (equivalent of stops).
The data tells us that the stops are at 1.26910, so at 8.15 am GMT, the order comes to SELL 2,8 times the available liquidity (840 Million Euro sell order) this pushes the price to 1.26905, where OUR (Banks + us) BUY orders are triggered and retail investors make new buy orders to cover their losses. The price flies to 1.27099, and this is when we start to exit our BUY positions gradually, and because the trend still seems strong, people buy our orders. On your chart this is shown by the green candles getting smaller in size after a good run upwards.
So the market liquidity jumped to 380 + 300 = 680 million euros, and we exit at 1.27099 for a profit of 9.9 pips (from 1.27000). Not a lot you say, but we were provided with a leverage of 10 from Barclays on our position for a commission of 0.1 pip. So our 500 Million euros had a leveraged market value of 5 billion euros, or 5 billion / 100 000 = 500 000 lots X 10 USD = Pip value 5 million USD X 9.9 pips = 49.5 Million USD, or 36.1 million euros. This is then shared between HSBC, us and Barclays.
The numbers above are just an example, the truth is that the volumes are huge (4 trillion USD daily) and a lot of players, but that example is to show you how FX works, and this is necessary when analyzing SR levels and trends.
SR levels are defined by the Big players (Smart Money) and they also hold really well because retail investors use them as well. The smart money cycle happens in 3 price cycles, and then we see a short-term channel where the price is stuck for a bit accumulating strength (GBPUSD last week during US session).
A Forex System – Fibonacci
These price cycles do not happen randomly, they have a sequence, and in fact every candle or price move has an inside cycle and sequence. This sequence is defined by a set of numbers called Fibonacci numbers.
Fibonacci numbers were not developed for trading, and they happen everywhere around us in nature, where many biological systems can be described in terms of Fibonacci-like sequences.
The big players don’t use indicators like RSI, CCI or MACD, their algos are based on the Fibonacci numbers.
And combining Fibonacci algos with extremely precise price channel calculator and information on how others trade, you got the formula to rule over all other systems and strategies.
Now, why would you care when trading binary options? Because unlike with spot FX, you need to be right every time. Basically you have to have the ability to predict whether the candle is going to be red or green.
During day trading that doesn’t involve Smart Money orders, I want to bag easy pips, so I need to use something that defines the price cycle moves and reversals. For binaries and spot fx day trading I use 3 indicators with very precise functions.
Forex correlations are an important trading tool. If you don’t know what they are, they may be hurting your trading without you even being aware. Correlations show us which forex move together, which ones moves in opposite directions, and which ones have very little relationship to each other. This information then helps us determine which trades we should take, helps control risk, and may even provide additional trading opportunities not easily seen on the price chart.
Forex correlations are typically shown in a table, with values ranging from -100 to 100. A value of -100 (negative numbers are called inverse correlations) means two forex pairs move exactly opposite each other–when one rises the other falls, and when one falls the other rises. A value of 100 means two forex pairs move in sync–when one rises the other rises, when one falls the other falls. It is very rare to find an asset that has a 100 or -100 correlation to another asset. Although as figure 1 shows, there are a number of forex pairs which have very high positive or negative correlations to each other.
Figure 1. Daily Forex Correlations (July25, 2020)
Consider anything over -/+ 70 to be a noteworthy correlation, whereas anything over -/+80 a strong correlation. Using the chart above, find GBP/USD on the left and then locate the EUR/USD along the top, then scroll down to the box where the row and column meet. It shows that the correlation between the GBP/USD and EUR/USD is 89.6. That means that most the time, on a daily basis they move in sync with each other. This is important to know for reasons which will be discussed in the next section.
Now, locate the USD/CHF along the left, and then the EUR/USD along the top. Find the box where the row and column meet, and it shows that the correlation between these two pairs is -95.4. That means that they share a very strong inverse correlation. When the EUR/USD goes up, the USD/CHF goes down, and vice versa.
Sometimes there is no relevant correlation. If a pairs has a correlation value (positive or negative) less than 60 the correlation is not very strong, and as we approach 0 there is no correlation between the pairs at all. Take for example the NZD/USD and the EUR/USD; the correlation between these pairs is -1.7, which means there is no discernible correlation, on a daily basis, between these pairs. In other words, the NZD/USD rising or falling tells us absolutely nothing about what the EUR/USD might do.
Correlations tables are typically offered based on hourly, daily and weekly timeframes. All these timeframes provide valuable information depending on what timeframe you trade on. For short-term trading, the hourly and daily correlations will be the most important important.
It is also important to note that correlations change all the time. Pairs that have a very strong correlation right now, may not down the road. Therefore, it is important to monitor correlations frequently to be aware of the changing relationship between pairs.
Why Forex Correlations Matter?
There are a number of reasons to care about forex correlations. The main reason I monitor them is to control risk. For example, you may think that by taking several trades at once you’re “diversifying.” That may not be the case though.
If you go long (buy calls) in the EUR/USD, GBP/USD and sell (buy puts) the USD/CHF you have essentially taken 3 very similar positions. If one goes against you, they will likely all go against you. You haven’t reduced your risk through diversification; you’ve actually tripled your risk!
Another reason forex correlations matter is that they can provide you with trades you may not have seen. For instance, you believe the EUR will appreciate against the USD (ie. the EUR/USD will go up), but you look at the chart and don’t see a great trade set-up. Since you know that the GBP/USD typically moves with the EUR/USD (based on the current correlation), you can also check out the GBP/USD to see if there is a better trade set-up. You may also want to see if there is a trade set-up to go short (buy puts) in the USD/CHF since it typically moves in the opposite direction of the EUR/USD. High correlations (positive to negative) provide you with alternative trades; choose the one with the best trade set-up.
I also like to use forex correlations to confirm trades. Upon finding forex pairs with high correlations, I will use one pair to confirm trades in the other. For example, if the EUR/USD is rising, and I want to go long (buy calls), I also want to see the GBP/USD rising. Since these pairs are highly correlated they should be moving together. If they aren’t, it warns me that maybe I should look more closely at my trade. It doesn’t mean I won’t take the trade–since correlations do change and two pairs never move perfectly in harmony– it just means I better have very good reasons for taking the trade (as you always should anyway).
Correlations can be a complex statistical topic, but hopefully this introduction gets you familiarised enough with the concepts to do a bit of homework on your own as well. Check correlations studies frequently to be aware of relationships between forex pairs which may be affecting your trading. Use the correlation data to control risk, find opportunities and filter trades. If you are having trouble seeing how correlations work, try looking at the figures in the correlation tables and then pulling up price charts of the two forex pairs in question. Notice how the pairs move relative to one another; doing this will help create a general understanding of correlations.
Forex represents rich hunting ground for signals and alert services. With no central market, and multiple driving factors, volatility is high. Forex pairs are traded 24 hours a day, for 5 and a half days of the week. Trading volumes of currency traded are huge. All these factors mean opportunities are large, and signal services provide regular trading suggestions.
As a more established trading vehicle, signal providers for forex are more established than binary platforms. Many of the best services have been going for well over a 10 years. Potential clients can therefore check a large amount of past performance to see how good a service is.
The service providers also have greater confidence in their systems, given their long term performance. For traders, this means free trials, or discounted membership for new customers. The signal services know that traders will only be impressed via results – so they encourage traders to give them a go risk free.
Best Forex Signal Provider?
We have seen a lot of forex signal services, and related ads. For us, results are the important thing. To that end, we suggest Signal Hive deliver the best forex signals, and here is why:
Take a look at these monthly performance figures – since 2004:
This service, named Master T-2000 v2, has delivered annual profit for nearly 14 years. Signal Hive is a market place for different systems, but this one is the most consistent. 14 years worth of performance cannot be ignored.
Crucially, you not have to take our word for it. The system is available on the free trial the firm operate. So you can receive these signals absolutely free, with no risk.
The software can be automated with some of the leading brokers. With MetaTrader 4 integration and real time indicators, the software is as good as anything we have seen. After the free trial, the full pro service costs $50 per month. If you are not satisfied after the trial period however, simply walk away.
Drill Into The Signal Details
Beyond the headline numbers, the system is ultra consistent. Data can be analysed per hour, or per day of the week and over the long term, every single period is profitable. So the software and algorithm simply select solid trades.
Signal Hive provide a range of signals though – as the name suggests. In addition to the Master T-2000 v2, there is a system call MELISA (Multi-Entry Logic Investment And Savings Algorithm). This algorithm performs well during times of turmoil in more traditional markets. Again, it has shown a profit each year for the last 14 years. With investors looking for safer havens at present, this system might provide an element of diversity.
All these systems and more are available at Signal Hive, and with a no strings, free trial on offer, there is no harm in giving them a try.
Are you new to trading forex or an experienced trader that wants to test a new strategy under real market conditions? Forex trading is a practice that involves a strong perception of the currency markets, skill, and excitement. It involves researching the economy in depth, identifying and seizing opportunities and having a strong sense of self-control over your actions. Forex trading also involves high risks, which is why newbies to the industry should always take baby steps to minimize their losses. The best way to do this is by starting your trading on a demo account
What is a demo account in forex trading ?
A forex demo account is a trading account that gives traders free, unlimited access to a trading platform where you can learn or test new trading strategies under real market conditions, using virtual money. Here, traders can change their leverage, adjust or reset their starting balance or profit/loss at any time, and use different trade sizes to test their comfort level.
Most top forex brokers allow traders to open a free demo account on their platforms, providing them a simulated experience of what it will be like trading forex on their platform. These pretend accounts usually contain most, if not all of the features and capabilities contained in a real account. This way, it allows newcomers in the market to learn how forex trading works and test their skills and processes with zero risks.
Benefits of demo accounts:
Forex Tutorial For Beginners
A Concise Guide
Welcome to Forex Tutorial For Beginners basics guide. If you are new to Forex trading and willing to start learning, you have landed at the right page.
This is a step by step Forex trading tutorial for newbies. This tutorial aims to provide all the necessary information to newcomers in one place.
This tutorial is created by a Forex trading expert; AKA Technician. Technician has been in the markets for over a decade . He is specialized in technical analysis and running for the Chartered Market Technician(level 2) certification. In addition to a MasterвЂ™s degree in finance .
In this guide, we will explain the most basic definitions and concepts. The concepts you must know before you start learning how to analyze the markets, and make trades.
We will explain things like, what Forex trading is, and how trading works. Also, what is a Forex broker and how to choose one. How to read the prices and much more .
After completing this tutorial, you will be ready to start the intermediate level tutorial. The intermediate tutorial covers analysis and forecasting: Forex Technical Analysis Tutorial.
We ask you to be patient while reading, especially in the beginning. If you feel that a topic is not clear keep going, it will be clearer by the end of the tutorial.
If you have any questions after completing, please drop it in the comments section. It is at the end of this page.
What is Forex Trading
Trading is the action of buying and selling a product, aiming to generate profit,over a short period of time. And that what makes trading different than investing. Investors usually hold their positions(trades) for a longer period, more than a year.
The products that you buy and sell can be several; a currency, a companyвЂ™s share, a commodity or any other вЂњSecurityвЂќ (also called Instrument). A security is any tradable asset. Such as Microsoft shares, or the Euro currency, or commodities like oil or gold.
In this Forex Trading tutorial for beginners, our main focus is the Forex market. The Forex market is where currencies trading happen.
Trading Forex allows you and me (individual retail traders) to speculate(bet) in the currencies market, also called the Forex market.
To be able to do so, we need to open a trading account with a Forex broker, then we can start buying or selling currencies, aiming to generate profits.
In Forex, we simultaneously buy and sell currencies. Simply, just like if you want to travel from the U.S. to Japan, you will go to the bank to exchange your dollars to the Japanese Yen.
Simply, Forex Trading is exchanging a currency with another currency aiming to generate a profit.
In the USD and Japanese Yen example we just mentioned, since you exchanged your bucks to Japanese yen, you would generate profit if the Japanese Yen rose in value against the U.S. dollar.
LetвЂ™s say you exchanged $2,000 to JPY at an exchange rate of 100 Yen for every dollar.
$2,000 x 100= 200,000 Yen
After a couple of months, the exchange rate changed to 90 Yen for every U.S dollar.
This is a 10 percent decrease in the value of U.S. dollar against the Japanese Yen.
Now, if you exchange back the JPY you have to U.S dollars.
200,000 / 90 = $2,222
A good $222 profit from this trade.
Since trading has a short time horizon. Traders buy and sell frequently.
In fact, there is a type of traders called вЂњscalpersвЂќ that make dozens of trades each day.
Scalpers enter the market for seconds or few minutes then exit. They buy a product then sell it for a tiny profit. And keep repeating the process(This trading style is not recommended).
Trading types or styles vary, the main styles are:
- Day trading: traders enter and exit their trades before the end of trading day. This type of trading is more applicable in the stock market, as the market closes every day. The Forex market only closes on weekends (we will discuss this later in the tutorial).
- Short-term swing trading: traders can hold a position for one day up to few weeks.
- Position trading: traders trade for a long time horizon. They hold their position for months.
Next, letвЂ™s have a quick introduction to the Forex market structure.
Where Trading Happens
Trading happens in the marketplace. Our focus in this Forex trading tutorial is the the Forex market, also called Foreign Exchange, or FX.
The Forex market is the market where buying and selling of currencies happen .
The Forex market is the largest financial market. Its average daily trading volume is more than $4 trillion. Putting all the worldвЂ™s stock markets together, their trading volume would only equal around 20 percent of the Forex market.
That makes the currency market the most liquid market worldwide.
What liquid means in simple words, is how fast you can sell a product. It is that if you have more buyers and sellers in a market, you are likely to sell your product much faster.
Buying and selling stocks happens in the stock exchange. If you are looking to trade stocks, your trades will be processed through one of these stock exchanges. So, it is a physical entity that facilitates the trading of shares to investors.
Accordingly, the stock market is a centralized market, where the exchange is the center.
Unlike the stock market, the Forex exchange is a decentralized market. It is called the over-the-counter market (OTC).
That simply means that there is no physical exchange like the New York stock exchange or NASDAQ that complete the trades between traders. Instead, trading is done through a computer network with no centralized physical location.
The Forex market is a network of multiple banks and financial firms that exchange currencies directly or indirectly.
At highest levels, major banks trade directly with each other. These major banks are called the interbank market.
At the next levels, small sized banks trade indirectly with major banks through an electronic brokerage service.
Next are the brokerage firms, hedge funds, and regular corporations. And finally, the retail Forex traders(Individuals).
Generally, each level provides the next lower level with liquidity.
For example, if a retail trader placed an order to buy euros at a broker, the broker passes this order to a bank at the higher level which has sizable amount of euros. The bank executes this transaction by selling the broker the euros, the broker then reflects that in my trading account. This happens instantly through a trading software.
Usually higher level firms like banks, provide lower level firms or clients liquidity, and therefore they are called liquidity providers.
Largest Banks such as Citibank, JP Morgan, HSBC to name a few, are the main liquidity providers in the market.
WhatвЂ™s Available for Trading
In Forex, you can trade mainly currencies. One currency against another, and thatвЂ™s why it is called a currency pair. The value of one currency against another currency.
For example, the EUR/USD is a currency pair, which is the value of one Euro in U.S. dollar.
Remember: Major and most traded currency pairs in the Forex market are the EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD and NZDUSD.
In the past decade, Forex brokers have expanded their offering to include other types of instruments. If you open a trading account with any good broker nowadays, you would be able to trade several types of products. For example:
- Precious metals such as gold and silver.
- Energy, such as Oil and Gas.
- Global stock indices. Such as S&P500 and NASDAQ.
- And recently, even Bitcoin.
Forex trading tutorial hint: When you are ready to start trading, always look for brokers that have a wide variety of instruments. You never know where the opportunity resides.
How to Connect to the Forex Market
As a Forex retail trader, you donвЂ™t have direct access to the inter-bank market. And here comes the role of a Forex brokerage firm.
Step 1: Broker Types
To be able to start trading, you must open a Forex account with a Forex broker. We will give a quick introduction about forex brokers, and at the last section of the tutorial вЂњHow to Choose a Forex brokerвЂќ we will revisit this topic with greater details.
Forex Market Makers
The Forex market maker is a company that is always ready to buy or sell a financial instruments, and sets both the sell and the buy prices for their clients. They make transactions at these prices with their customers. ThatвЂ™s why it is called a вЂњliquidity providerвЂќ for its clients.
If you want to sell, the Forex market maker will be the buyer and if you want to buy it will be the seller. Market makers must take the opposite side of your trade.
In Forex, we simultaneously buy and sell currencies. Simply if you want to travel from the U.S. to Japan, you will go to the bank to exchange your dollars to the Japanese Yen.
So if you buy EUR/USD, it basically means that you are buying euro and selling U.S. dollars at the same time.
Now, letвЂ™s have a look on how the exchange rate of the Euro against the U.S. dollar will look like, itвЂ™s called a price quote:
The first price is the selling price(called Bid as well) and the second one is the buying price. The selling price is the price that you will get if you want to sell the EUR/USD, while the Ask is the price you will get if you want to buy it.
The difference between the bid and ask prices is called the spread, and it goes to the Forex broker as sort of commission on the trade.(We will discuss price quotes later in this tutorial).
ECN Forex Brokers
ECN Forex brokers provide access to the inter-bank market by using an electronic system that passes prices from multiple liquidity providers to clients. Such as banks and market makers connected to this electronic communication network (ECN). The broker then displays the best bid/ask quotes on their trading platforms for traders.
ECN brokers provide the tightest spreads in the industry. An ECN broker usually charges a commission (in addition to the spread) on each trade made by clients.
Step 2: Open a Demo Trading Account
To trade Forex, you need to open an account with a broker. Then using their trading platform, you can start making trades. But, before opening a real account, a common and necessary practice among new Forex traders is to start trading using a demo account.
To open a demo account start by downloading the trading software. A widely used software to trade Forex is the MetaTrader platform. It is used by most Forex brokers. We will use MetaTrader software as our default trading platform for this tutorial. You can download it here.
The Basics of Metatrader 5 Platform
LetвЂ™s first introduce you to the Metatrader 5 terminal. Go ahead and open the MT5 terminal if it is not already open. The default window should be like this:
- Market Watch Panel: On the left-hand side is the market watch panel, where all the pairs that you can trade are shown, along with their prices. The initial list is far from complete. To show the rest of the pairs, right-click on any of the pair and click вЂњShow AllвЂќ.
- Navigator: Just below the market watch, the navigator panel. Here you can access your accounts and many other tools that we donвЂ™t need at this moment.
- Toolbox(called Terminal in MT4): At the bottom is the Toolbox panel. This is where you can see your capital and your trades along with many metrics that we will explain shortly.
You can move along the tabs, one important tab is history, which show you closed positions.
- Connection Status: In the right down corner of the platform you will find if the connection with the broker is on or off.
- Charts: Here you can see all the charts you open.
- Make an order: You can place new orders through this button.
Those are the main elements that you need to know at this stage. Go ahead and explore the terminal and just try, its demo money we do not have to worry :).
The Basic Terms of Forex Trading
Forex Currency Quote
A currency quote is simply the current live price of the currency. And it consists of two prices, the one on the left is the Sell or Bid price, which is the price that you will get if you sell the EURUSD. The price on the right is the Buy or Ask price, which is the price that you will get if you buy the EURUSD.
All currencies are quoted this way, first currency/second currency.
The first currency is called the base currency, and the second currency is called the quote currency.
You always buy or sell the base currency. For example, If you decided to buy EURUSD then you bought the EUR and sold the USD. If you decided to sell the EURJPY, then you sold to EUR to buy the JPY.
Examples of currency Quotes:
The U.S. Dollar against the Japanese Yen:
This translates to,
- The selling price for 1 U.S dollar = 107.35 Japanese yen
- The buying price for 1 U.S. dollar = 107.37 Japanese yen
- Spread = 2 pips(we will explain what is a pip shortly)
- USD is the base currency, and JPY is the quote currency
The Euro against the British pound:
- EURGBP = 0.7810/0.7013
- Means, 1 EUR = 0.7810 British pound
- Spread = 3 pips
- EUR is the base currency and GBP is the quote currency
Note: In the last example, the USD is not included in the pair. It is called a вЂњCross CurrencyвЂќ. A cross currency pair is a currency pair that doesnвЂ™t include the USD. More examples of cross currency pairs are the GBPJPY and the NZDCHF.
Forex Pips and Pipettes
In Forex, a pip is the fourth decimal place of the price(0.0001). For example, if the Bid price of the EUR/USD is 1.1356, the last and fourth digit is 6. If the price changed from 1.1356 to 1.1357, then it moved one pip higher.
In the USD/JPY, because it has only two decimal points, the second decimal place is a pip. For example, if the price changed from 107.35 to 107.34 then it moved one pip lower.
In recent years Forex brokers introduced a fifth decimal place for more precision. It is called a pipette. And it is a 1/10 of a pip.
For example, EUR/USD at 1.13561. The fifth digit (1) is a pipette. If the price moved from 1.13561 to 1.13571 then it moved 10 pipettes, which is equal to one pip.
Forex Leverage and Lot
As a retail Forex trader, your starting capital is probably limited. Perhaps you have few thousands to dedicate for trading. LetвЂ™s assume the following:
(1) You decided to buy 1000 Euros worth of the EUR/USD pair at 1.1350 prices. At 1.1350 exchange rate, this 1k of euros is equal to 1,1350 U.S. Dollars.
1000 x1.1350 = $1,135
Note that, on average, a pair like the EURUSD can move 100 pips in a single day. It can move more or less depending on how active the trading day was.
(2) letвЂ™s say that after buying this amount, the EUR/USD pair moved 100 pips higher toward 1.1450 within the next two days. Now your investment is equal to:
1000 x 1.1450 = $1,145
So, you have just gained 10 dollars from this trade. Trading 1000 euros in a period of two days have returned 10 dollars.
This is a small amount and apparently not worth the time and effort you would dedicate and risks associated with Forex trading.
Leverage came to solve this issue.
So basically, leverage in Forex is the ability to boost their trading capital. For example, what if the 1000 euros you used in the prior example turned to 100,000? (multiplied by 100).
If we repeat the same trading example with 100,000.
(1) At 1.1350 exchange rate:
100,000 euros is equal to
113,500 U.S. Dollars
100,000 x1.1350 = $113,500.
(2) After buying this amount, the EUR/USD pair moved 100 pips higher toward 1.1450.
Now your investment is equal to:
100,000 x 1.1450 = $114,500
You gained 1000 dollars from this trade. 100 times more than the first example, obviously that is because the amount you traded is 100 times more. Each pip is equal to $10 dollar while in the first example each pip was equal to 10 cents.
In the above example, our Forex trading leverage was 1:100. Forex Brokers provide different leverage options for clients, you can choose to have up to 1:1000 leverage in some Forex brokers.
Forex Trading Tutorial Hint: The bigger the leverage the bigger the risk. High leverage is not recommended.
Forex Industry gurus have also introduced a standard unit called a вЂњlotвЂќ in trading. In Forex, a standard lot is worth 100,000 units of the base currency of the pair being traded. A mini lot equal to 10,000 units and a micro lot 1,000 units.
For example, one lot of the EUR/USD pair is 100,000 Euros. Which equals to 100,000 x EUR/USD rate in dollars. if the exchange rate is 1.1350, then 1 lot of EURUSD is equal to 113,500 U.S Dollars.
So, to be able to open a one lot trade position of EURUSD you need to have 113,500 dollars?
No. Here comes the leverage. If you choose to have a 1:100 leverage with your Forex broker, then you need only $1,135 to open a position of one lot. Which is 113,500/100. And this is called the Required Margin for your 1 lot trade or EURUSD.
Accordingly, the higher the leverage you have the less amount of money you need to control one lot.
We explained that you need 1,135 to control one lot of EURUSD if you have 1:100 leverage. If you have higher leverage, letвЂ™s say 1:200, then you need only 567.5. For 1:400 leverage you need 283.75. And so on.
Calculating Pip Value
Note: You donвЂ™t have to calculate pip values manually. There are plenty of calculators available online here or here.
To get the value of one pip in a currency pair, we have to divide one pip in decimal form (0.0001) by the current exchange rate, and then multiply it by the position size.
- In case the USD is the Quote currency:
For one lot positions size (100,000 unit), the pip value for the EURUSD equals:
(0.0001/1.1300) X (100,000)= 8.85 Euros.
Now to get it in U.S. dollars , we multiply by the exchange rate:
8.85 euro x 1.1300 = 10 USD
The pip value for the EURUSD is 10 USD for every bought or sold 100,000 units (one lot).
Remember: If we apply that to all the currency pairs that have the USD as the Quote currency, like EURUSD, GBPUSD, AUDUSD, NZDUSD, etc. We will find that the pip value is equal to $10 in all the currency pairs with the USD as the quote currency. Otherwise, the pip value is variable.
- In the case of the USD is the base currency:
LetвЂ™s take the USDCAD as an example
(0.0001 / 0.9800) x (100,000) = $10.2
In this case, we do not need the last step of multiplying by the exchange rate, because the outcome is already in USD term.
The pip value for the USDCAD at the current price is 10.2 USD for every 100,000 units(one lot).
In the above case, where the USD is the base currency, pip value is not constant, it depends on the price of the pair.
- In the case of cross currencies, the same concept applies:
In this case, the GBP is the base currency and the JPY is the quote currency. So the result will be in GBPs.
LetвЂ™s take the GBPJPY as an example:
(0.01/current exchange rate) x position size
(0.01/ 130.80) x 100,000= 7.645 British Pound
To get the value in USD, we have to convert the pounds to USD. So simple we multiply by the exchange rate of the GBPUSD:
7.645 GBP x 1.2740 = 9.74 USD
The pip value for the GBPJPY is 9.74 USD for every 100,000 units(one lot).
Forex Balance, Equity and Margin
Go ahead and open the Metatrader 5 platform.
Metatrader will automatically create a $10,000 demo account when you install it(We explain how to create a new demo account in the video above).
This 10k you see in the toolbox section is called вЂњBalanceвЂќ. it is the amount of money that you have.
The balance will change as you make trades. For example, if I made a trade and won $200. The balance will change from 10,000 to 10,200.
LetвЂ™s summarize everything we have covered and add some more in one example:
Balance = $10,000. This is the amount of money you have before the trade.
LetвЂ™s make a live demo trade and buy one standard lot of EURUSD at market price at 1.11387. This is how our account will look like the moment after we opened the trade.
Equity = This equals to the Balance + profit of current active trades.
10,000+(-5)= $9,995 and keeps changing.
ThatвЂ™s why itвЂ™s floating, it changes as profit changes. (the value of equity is always floating because the price keeps fluctuating).
I am already losing 5$. and the price hasnвЂ™t moved yet. How come? Remember the spread.
You already know that you close a buy order by a sell order. So even if the market hasвЂ™t moved, the buying price always differs from the selling price because of the spread. and this is a commission for the broker.
Buying price at the time we executed our order was 1.11387 and selling price 1.11382 . The difference is 5 pipettes (0.5 pips). We explained earlier that each pip equals $10 for every lot on currencies that have the U.S. dollar as a quote currency.
Margin = $1,113.87 (Required margin for your trade).
We also explained that this depends on the leverage you choose and the volume of your trade(in this case it is 1 lot of EURUSD) and our leverage is 100:1.
Required Margin = (Position size x Exchange rate) / leverage
Required Margin = (100,000x 1.11382) / 100
Free Margin : This is equal to the balance вЂ“ margin +/- profit/loss of current trade.
$10,000 вЂ“ $1,113.87 вЂ“ $5 = $8,881.13 .
The free margin is how much purchasing power you still have after this trade. You have $8,881.13 margin available for you to take additional trades.
Margin Level = 897.32%. It is how much equity you have compared to the margin.
(Equity/Margin) x 100.
($9,995 / $1,113.87) x 100 = 897.32%
If equity drops below the required margin, that mean your margin level is below 100 percent, your open positions will be closed starting from the larger losing position, until margin level reaches back above the 100 percent. This process is called Margin call.
Margin Level will only appear in the toolbox window of your MetaTrader if you have open orders.
Remember: Different Forex brokers have different margin calls rules. Minimum margin level can be 100%, 50%, 25% or even zero. You should ask the broker about their minimum margin level before opening an account.
Market Order: A market order is executed immediately at the current market price(Bid price for sell or Ask price for Buy).
Buy limit: It is an order that is pending. It is an order to buy at a price lower than the current price. The Buy limit order will be activated if the price reaches this preset price and the order becomes an active buy order.
Use Case: You use buy limit in case you think the price will eventually go higher, but you expect it to move lower before reversing higher.
Sell Limit: It is an order that is pending, it is an order to sell at a price higher than the current price. The Sell limit order will be activated if the price reaches your preset price and the order becomes an active sell order.
Use Case: You use a sell limit in case you think the price will eventually go lower, but you expect it to move higher before reversing lower.
Buy Stop: It is an order that is pending, it is an order to buy at a price higher than the current price. The buy stop order will be activated if the price reaches your preset price and the order becomes an active buy order.
Use Case: You use a buy stop in case you think the price will go high, but you need a confirmation by witnessing the price rise to your specified level first.
Sell Stop: It is an order that is pending, it is an order to sell at a price lower than the current price. The sell stop order will be activated if the price reaches your preset price and the order becomes an active sell order.
Use Case: just like the buy stop. You use a sell stop in case you think the price will go lower, but you need a confirmation by witnessing the price fall to your specified level first.
Take Profit Order: A take-profit order automatically closes an open order when the exchange rate reaches the specified price.
Stop Loss Order: A stop-loss order is a defensive mechanism. You can use it to protect gains, or limit losses. Like the take profit, it also closes an open order when the price reaches the specified level.
Trailing Stop Order: This is a type of stop loss order, but it is variable. It basically a stop loss that trails the price if the price move in the expected direction.
For example, if you buy Gold at 1300$/ounce and create a trailing stop order of 5$. Then if the price of gold reaches 1305, the platform will automatically place a stop loss order at 1300. If the price continues to move higher the stop will move with it. So if the price reached 1306, your stop will be at 1301 and so on.
Now if the price moves back reverses and move back lower towards 1301, your stop loss will be triggered and your trade will be closed at 1301.
Here is an illustration of how the trailing stop works.
Assuming we bought the EURUSD at 1.1280 and placed a trailing stop of 30 pips. The trailing stop will keep moving higher along with price, until the price reaches the highest at 1.1340. At that point stop loss will be at 1.1310. Then the price failed to continue higher and reversed to touch our stop loss at 1.1310 and close the position.
Note: Traders have invented new terminology for the words buy and sell. вЂњLongвЂќ means buy and вЂњShortвЂќ means sell. For example, going long gold means buying gold.
Rollover is a small percentage of interest that can be deducted or credited to your balance if you hold a position overnight. Depending on the currency pair you are holding.
Without going too much into details of what is a rollover, as it has no meaningful impact on a traderвЂ™s performance and maybe a confusing topic for newbies.
What you need to know is that when you make a trade in the Forex market, you are simultaneously buying one currency and selling another.
Therefore, you must pay interest on the currency you sold and you will earn interest on the currency you bought.
For example, if we assume that the interest rate in Australia is 2.00% and 0.1% in the U.S. and you have a buy position of 1 lot in AUDUSD at 0.7500 exchange rate. You will earn 2.00% per year on your Australian dollar and pay 0.1% per year on your USD.
So to calculate an approximate amount of what you will pay or gain on this trade we will do the following:
On what you bought:
Buying and holding 100,000 AUD will result in,
2,000 per year
Divide 2,000 by 365 to get the amount per day,
That equals to 5.48 AUD per day
On what you sold:
You sold USD in this case. So to get the amount you sold, simply multiply the position size by the exchange rate:
(100,000 AUD x 0.7500)= 75,000 USD
To get the interest you pay for the year,
0.1% x 75,000 = 75 USD per year
Now divide by 365 to get per day,
75/365 = $0.2 per day
To calculate the sum,
We subtract what we paid from what we gained. However, we have to convert the 5.48 AUD to USD first.
5.48*0.7500 = $4.11
Sum = $4.11 вЂ“ 0.2 = $3.91
Accordingly, the hypothetical amount that we should get on this trade as a rollover is $3.91 dollar per day. However, in real life, this is not the case. It will vary depending on your Forex brokerвЂ™s rollover rates. To have the precise rates you need to review your brokerвЂ™s rollover rates.
We calculated the rollover per day because, it is processed daily. Each day at 5 pm in New York.
In the Forex market, any positions that are open at or before 5 pm sharp are considered to be held overnight and are subject to rollover. A position opened at 5:01 pm is not subject to rollover until 5 pm the next day.
Who are the Participants in the Forex Market?
- Large Commercial and Investment Banks
UBS,JP Morgan,Citi , Barclays are just a few names of large banks that exchange currencies in the forex market.
Their purpose of participating varies from speculation(investment banks), to making the market to others. They provide most of the liquidity in the Interbank market.
- Central Banks
A Central bank participates in the Forex market directly, by intervening to buy or sell their currency according to its price target.
The price target that maintains the countryвЂ™s financial and economic stability. Central banks can intervene indirectly through monetary policy tools such as interest rates.
For example, if inflation is higher than the healthy levels, the central bank raises interest rates to shrink money supply in the economy and that would have a positive impact on their currency.
- Investment Funds
Such as hedge funds. They participate in the market for speculation and investment purposes.
- Large Corporations
Amazon like companies participate in the forex market for a few reasons.
A simple example is importing component for their new kindle tablet from china requires them to exchange U.S. Dollar for Chinese Yuan.
They can also participate for hedging purposes (hedging is buying or selling a currency at a certain price to protect the company from un-favorable change in the future).
For example, if Amazon is planning to start producing the new kindle one year from now. Production requires amazon to buy components from china worth 50 million yuans.
LetвЂ™s say every one U.S. dollar equals 7 Yuans at that date. So if the purchasing manager is to purchase right away, it will cost the company 7.14 million dollars.
What if Amazon decided to wait 12 month, and the exchange rate changed to 6 yuans for every dollar?
Amazon will have to pay 8.33 million dollars. That is an increase of around 16 percent in cost.
A good finance manager that expects the US dollar to fall against the Yuan, will advise to hedge this risk and purchase the components right away.
- Financial Forex Brokers and their retail clients (People like you and me).
Remember: Always keep an eye on announcements from central banks. As they create major fluctuations (up and down) in the underlying currency, for the first few minutes of announcement.
When you can trade Forex?
The Forex Market is open for trading 24-hours, 5 days a week. Because the market operates in multiple time zones, it can be accessed at almost any time. The market closes for retail trading on the weekend.
The Forex market opens on the first business day of the week in Australia and closes on Friday with the end of the business day in the U.S. And that translates to 5:00 pm Eastern Time Sunday through 5:00 pm ET on Friday (22.00 GMT on Sunday until 22.00 GMT on Friday).
A specific currency will usually be most active when that particular market is open. For example, the British pound pairs tend to be most active during the hours when the London market is open. The Japanese yen pairs will be more widely traded during the Tokyo business day.
The market hours for the major Forex markets are as follows:
- London Session вЂ“ 3 AM through 12 noon Eastern time (around 35% of total FX volume)
The Most active pairs during London session are the British pound and the European currencies like the Euro.
- New York Session вЂ“ 8 AM through 5 PM Eastern time (around 20% of total FX volume)
All USD pairs are active during this session.
- Sydney Session вЂ“ 5 PM through 2 AM Eastern time ( around 4% of total volume)
Asian currencies will be most active. Currencies such as the Australian Dollar and New Zealand Dollar.
Tokyo Session вЂ“ 7 PM through 4 AM Eastern time (
6% of total volume)
Japanese Yen and other Asian currencies are most active.
Remember: When there is an overlap between sessions, the market tend to be more active(higher trading volumes, hence major prices movement).
During the hours of 8 AM and 11 AM Eastern US time, the two largest markets (London and New York) overlap for about 3 hours. And that makes it the most active Forex trading hours of the day.
Also, Sydney and Tokyo sessions overlap between 7 PM and 2 AM Eastern time. And that makes it the most active session for pairs that include Asian currencies.
How to Choose a Forex Broker
First, lets explain the main forex broker types and how they might affect your trading.
Understanding Broker Types
Forex Market Makers (Dealing Desk Broker)
The Forex market maker is a company that is always ready to buy or sell a financial asset and sets both the sell and the buy prices for their clients. They make transactions at these prices with their customers. and that makes it a liquidity provider for its clients.
If you want to sell, the Forex market maker will be the buyer and if you want to buy it will be the seller. Market makers must take the opposite side of your trade.
Forex market makers are dealing desk broker, this simply means that they have a dealer sitting at the dealing desk in the firm. As you place an order the dealing desk agent receives it and deals with it.
Forex market makers are your counterparties. Therefore, many of them will then try protecting themselves by copying your order somewhere else typically their liquidity providers( a bigger broker or bank). So if you make a profit on the trade, they have themselves covered because they will also make the same profit.
The process of covering usually happens in sums. For example, if the brokers have a net of 234 units buy positions on the EURUSD, and 112 units of sell EURUSD then the net exposure is a 122 units buy EURUSD. If the market maker decides to cover, then it will buy the 122 units of EURUSD from banks.
There are also times in which market makers may decide not to cover if they see that the majority of positions are wrong.
In that case, if the broker didnвЂ™t cover the positions somewhere else, and the clients bets turned correct, the broker would lose money. As the must pay their clients the profits.
Given all the information above, the market makers have flexibility. Since they are making the market, they can execute your order at artificial prices thatвЂ™s not exactly the current real market price.
They can delay your order execution few seconds until the price has changed and then resend to you the new price asking you whether you want to execute your order at this new price.
They can also widen spreads, or even reject to execute your order.
Note: We donвЂ™t claim that these practices are done by all market makers. But they do strongly exist in the forex world.
ECN Forex Brokers
ECN Forex brokers provide access to the inter-bank market by using an electronic system to pass on prices from multiple market liquidity providers. Such as banks and market makers connected to the electronic communication network (ECN). The broker then displays the best bid/ask quotes on their trading platforms for traders.
This process is explained in the image below. The ECN broker aggregates multiple price quotes from different banks, for bid and ask and provide the trader the highest BID price and lowest ASK price.
ECN Forex brokers do not make the market for you under this type. Therefore, they are not your counterparties. And thus there is no conflict of interest. The broker profits only from the commission they receive on each trade.
ECN brokers do not have the flexibility market makers have. For example, if you place an order on your trading platform, and the live price changes before the order reaches the broker, the broker will not execute your order. It will automatically resend you a new quote with the new price asking you if you want to execute the order at the new price.
In terms of cost, ECN brokers have the tightest spread in the industry, but they charge extra commission(in addition to the spread) on each transaction made by clients. Thus, the net cost per trade will be very similar to a market maker.
Forex Trading Tutorial Hint: You can see that there are trade-offs with each type of brokers. Choosing the broker type depends on you and what suits your trading style. I personally prefer true ECN brokers as they represent the real conditions/environment of the Forex Market .
Only trade with a regulated Forex broker. Never open an account with an unregulated broker.
Regulation entities such as the NFA and CFTC in the U.S. or FSA in the U.K aim to provide a safer environment for investors and traders.
Regulators develop rules and services to protect the integrity of the Forex market, traders, and investors.
Other Regulatory Institutions:
- The Australian Securities and Investments Commission (ASIC)
- The Japanese Financial Services Agency (FSA)
- The Investment Industry Regulatory Organization of Canada (IIROC) (ASIC)
- The Cyprus Securities and Exchange Commission (CySEC)
Regulated brokers will abide by specific regulations to maintain its regulation by the regulator. Such as capital requirements, fund safety, and segregation (keep client funds in separate bank accounts in major banks).
There are always risks, however, choosing a regulated Forex broker is one of the major steps you should take to minimize chances of unpleasant events.
Forex Account specification that suits your trading style.
Leverage, margin requirements,rollover rates, Commissions and Spreads.
If you are a conservative trader, an account with lower leverage of 20:1 might suit you better.
Word of mouth.
Only listen to experienced traders you trust.
Deposit and withdrawal
Methods that suits you. And ask for any limitation of withdrawal amount specially on credit card withdrawals.
Forex Trading Tutorial Hint: Opening a demo account to try the broker is useless advice. This is because brokers put demo accounts on autopilot dealing, and do not monitor them. Thus, there is no human intervention at all. A better idea is to start with a small trial capital.
Here I conclude the first part of the Forex Trading Tutorial for beginners. I introduced the basic fundamentals of trading. I tried my best to simplify the concept and be clear.
I encourage you to practice in your demo account and experiment with the Metatrader 5 platform. Apply everything you learned, that would help grasp anything that you didnвЂ™t comprehend well.
If you have any feedback or having difficulty with any topic do not hesitate to ask your question in the comments section below. I will be waiting for your comments and will be happy to answer.
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