Forex Trading Guide And Education For Beginners
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.
WHAT IS A LOT?
A lot is an order of a certain number of units. Historically, spot Forex trading was only available in specific amounts of base currency called lots. A standard size of a lot equals to 100,000 units of a base currency. Later on, when Forex market opened for traders with smaller capital, a mini and even a micro lot became available.
Number of Units
You may see that the smallest lot is a micro lot (1,000 units of a base currency, it is often referred to as 1K). You can trade 1 000, 2 000, 3 000 or 124 000 units so long as it can be multiplied by 1K. Each 1K is referred to as a lot.
You don’t have to spend your own money on Forex right away. Most brokers offer practice demo accounts, which will let you test out the Forex market with virtual money using real market data. Using a demo account is a good way to learn how to trade. You will be able to practice by pressing the buttons and grasp everything much faster.
In addition, pay attention to the fact that the minimum real deposit at FBS starts from just $1. This means that you can start trading with small amounts of money and thus limit your risks, while still having a chance to reap profits!
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. FBS is providing high-quality services to its clients since 2009 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. FBS 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. FBS 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!
MACD (MOVING AVERAGE CONVERGENCE/DIVERGENCE)
MACD (MOVING AVERAGE CONVERGENCE/DIVERGENCE)
This oscillator is one of the most potent technical tools in the arsenal of many traders. The indicator is used to check strength and direction of a trend as well as to define reversal points.
The MACD histogram plots the difference between the 12-period and 26-period exponential MAs. If prices are going upward, 12-period MA will increase faster than 26-period EMA. The reversal will occur, if prices begin to fall. MACD has no bounds, but it has a zero mean, around which it tends to oscillate. The main trading principle is to sell when the MACD value reaches the positive area and buy when it turns to the negative area.
The MACD also contains the trigger line – 9-period exponential MA. It generates buy/sell signals when the MACD line crosses it from the upside or downside. The main flaw of the indicator is that MACD gives us these signals later than the price action itself. However, these signals are more trustworthy than the crossovers signal of the common MAs.
In addition, pay attention to convergence/divergence between the indicator and the price. Bearish convergence is formed, when the price sets lower lows, while the minimums of the MACD histogram get higher (buy signal). Bullish divergence is formed, when the price renews highs, while MACD maximums become lower (sell signal).
A trend is the general direction of the price of an asset on the market. You can see from any chart that prices never move in straight lines, they are constituted of series of highs and lows. There are three types of trends:
Uptrend (bullish trend) consists of series of higher highs and higher lows (prices are moving up). One may speak about an uptrend if there is a clear support line, connecting at least two lows and limiting the downside. A break below this line signals trend’s weakness or reversal.
Downtrend (bearish trend) is classified as a series of lower lows and lower highs (prices are moving down). A downtrend can be defined if there is a clear resistance line, connecting at least two highs and limiting the upside. A break below this line signals trend’s weakness or reversal.
Sideways (flat, horizontal) trend – there is no well-defined trend in either direction.
In terms of length, trends can be classified as:
Long-term (6 months – 2.5 years) – major trend which can be traced on a weekly or monthly charts. It is composed of several medium-term and short-term trends, which often move against the direction of the major trend.
Medium-term (1 week – a couple of months) is better seen on the daily and H4 charts.
Short-term (less than a week) is better seen on hourly and minute charts.
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.
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
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.
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 Loss order. 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.
Fundamental factors are not an abstract concept. Traders face them daily in a form of economic news, published in the economic calendar.
Let’s have a look at the economic calendar. For each date, you can see a list of scheduled economic releases corresponding one of the major Forex currencies. Pay attention to the release time: make sure that you have made adjustments for your time zone. You can see that all events have different impact: the higher this impact is, the stronger move of the market is expected, so you can focus on the most important events. Most news in the calendar represent economic indicators and have numerical values. The previous reading is available in advance. The forecast is the medium forecast of 20-240 economists surveyed by big agencies like Bloomberg, Reuters, etc. The actual reading is the reading published by the official source (the nation’s statistics agency or an analytical center). For most indicators, if the actual reading is higher than the forecast one, it’s positive for the currency in question. Unemployment indicators are the exception: for them the lower the reading, the better for the currency.
By the way, there are different ways to use the economic calendar. Some market players trade “the news”. It means that they open positions in accordance with their expectations for a change in economic indicators (for example, eurozone GDP is expected to improve – we buy the euro). Others, on the contrary, avoid the news as trading them is associated with risks of too rapid price movements. Such traders prefer to wait until the market “digests” the news and enter the already shaped trend. No matter what strategy you choose, we strongly recommend you following the news in order to be aware of the market moving impulses. Some data releases increase volatility and cause sudden moves on the market. The best example is the US nonfarm payrolls (NFP). The release of this indicator may lead to an unexpected closure of your position under a stop-loss order.
HOW MUCH MONEY CAN ONE 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.
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.
Approximate time of trading sessions (GMT)
Summer (aprox. April – October)
Winter (aprox. October – April)
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.
CALCULATING 1 PIP VALUE FOR DIFFERENT CURRENCY PAIRS
So, if you as in last example open a long trade with one standard lot on EUR/USD, you will be buying 100,000 units. In this case your profit will be not 0.00009478 USD for 1 pip the price goes in your favor, but 0.00009478 USD *(multiplied) 100,000 which is approximately 9.4787 USD. You may also open trade with mini (10,000), or even micro (1,000) lots. In this case, your profits will be something like 0.94786 USD and 0.09478 USD per 1 pip accordingly.
You should remember that the US Dollar is a quote currency in many pairs (EUR/USD, GBP/USD etc.). It means that the exchange rate of the quote currency to USD equals to 1. For such pairs one pip will always cost $10 when we trade a 100 000-unit contract (1 standard lot):
100 000 * 0.0001 / 1 = $10 (pip value for EUR/USD)
For the pairs where the US Dollar is a base currency (USD/CHF, USD/CAD), pip value depends on the exchange rate:
100 000 * 0.0001 / 1.0195 = $9.8 (pip value for USD/CHF)
For the pairs that include the Japanese yen the pip value is calculated as follows:
100 000 * 0.01 / 120.65 = $8,28 (pip value for USD/JPY)
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.
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 1 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.