Forex trading involves the buying & selling of global currencies in the forex market with the objective of making a profit on the fluctuations in the exchange rate.
To open a trade, a trader must choose a currency pair, and the direction they expect the exchange rate to move
Simply put, you buy a currency when you believe its value is going to appreciate (go up) against the other currency or you sell a currency when you believe its value is going to decrease (go down) against the other currency.
When you exit the trade, the difference between the trade's entry & exit price determines your profit or loss.
Exchange rates are always changing and fluctuating, and this happens because of different factors. Due to these fluctuations, it becomes possible to make a profit from speculative trades.
Foreign Exchange is the World’s largest and most active market. It operates every day except the weekends, and its volume reaches up to US$5 trillion a day. This volume is larger than all the other markets combined!!
For example, in 2013 the average daily trade volume on wall street was a paltry US$169 billion. The forex market is very liquid, one can buy and sell currencies instantly i.e. there are always buyers and sellers at any given time when the markets are open.
What is the difference between Forex trading and stock trading?
Stock trading is the buying and selling of shares from individual companies. Forex trading is the simultaneous buying and selling of currencies to profit from the change in the exchange rate.
Other differences between forex and stock trading are:
The Forex market is a global, decentralised, over-the-counter exchange and all transactions and participants are confidential. Stock markets are based at a single location and public records are kept of buyers and sellers.
Forex trading has a low cost of entry. To make serious profits, stock traders use large amounts of money, which is not an option for traders with limited incomes.
Forex trading is not investing. Forex traders never take ownership of the asset being transacted.
With Forex trading, the trader is speculating on the future value of a currency pair and to call it an investment would be incorrect.
Chapter Two: Understanding Currency Pairs
Currencies are always traded in pairs—the value of one unit of currency doesn’t change unless it’s compared to another currency. Forex transactions involve two currencies, which form a so-called currency pair. One currency is bought, while the other is sold.
Consider the USD/ZAR currency pair. If you buy this pair, you will be buying dollars and selling rands.
If you sell this pair, you will be selling dollars and buying rands (ZAR is the international currency symbol of the South African Rand).
Which are the most traded currency pairs?
Most currency traders stick to these pairs because they generally have high volatility.
The higher the volatility, the higher the chances of finding profitable trade setups.
We would suggest that you start out with these pairs too and expand as you gain more knowledge.
Majors, Minors & Exotic Currency Pairs
1) Major Currency Pairs: The major pairs are the most highly traded currency pairs in terms of global trading volume, and they account for a volume of around 70%.
The are 7 major currency pairs, and these are generally the currencies of the most stable and well-developed economies. The major currency pairs include EUR/USD (Euro Dollar against the US Dollar), USD/JPY (US Dollar against the Japanese Yen), GBP/USD (Great Britain Pound against the US Dollar), USD/CHF (US Dollar against the Swiss Franc), AUD/USD (Australian Dollar against the US Dollar), USD/CAD (US Dollar against the Canadian Dollar), NZD/USD (New Zealand Dollar against the US Dollar).
2) Minor Currency Pairs/Cross Pairs: Cross currency pairs are the crosses of currencies in the majors but don't include USD. They are typically less liquid and more volatile than the Major pairs.
The minor/cross-currency pairs account for almost 15% of global forex trading volume. The important cross pairs are EUR/GBP (Euro against the Great Britain Pound), EUR/JPY (Euro against the Japanese Yen), GBP/JPY (Great Britain Pound against the Japanese Yen), NZD/JPY (New Zealand Dollar against the Japanese Yen), CAD/CHF (Canadian Dollar against the Swiss Franc), AUD/JPY (Australian Dollar against the Japanese Yen).
3. Exotic Pairs: Exotics are generally major paired against a currency of an emerging economy. The examples include USD/ZAR – (US Dollar against the South African Rand), GBP/NOK (Great Britain Pound against the Norwegian Krone) etc.
How to read a Forex quote
What Is A Currency Quote?
Currencies are always quoted in pairs. Reading a forex quote is one of the basic things you should do as a trader.
Let’s take for example the USD/EUR is the U.S. dollar/euro. Using this quotation, the value of a currency is determined by its comparison to another currency.
Let's suppose the quote of EUR/USD=1.32105
What does it mean? It simply means that 1 Euro=1.32105 US Dollar. You will notice that in Forex we have more than the usual 2 decimal places after the comma. In other words, we go beyond the cents.
The base currency is the one that is quoted first in a currency pair.
Using EURUSD as an example, the Euro would be the base currency. Similarly, the base currency of GBPUSD is the British pound (GBP).
By process of elimination, you know that the quote currency is the one that comes second in a pairing.
For both the EURUSD and the GBPUSD, the US dollar is the quote currency.
You Can't Make Money if They Don't Move
There are essentially two ways in which any currency pair can move higher or lower.
The base currency can strengthen or weaken
The quote currency can strengthen or weaken
Because the Forex market never sleeps and thus currency values are always changing, both the base currency and quote currency are in a constant state of flux.
In our example, if the Euro (base currency) were to strengthen while the US dollar remained static, the EURUSD would rise. Conversely, if the Euro weakened the pair would fall, all things being equal.
If on the other hand, the US dollar (quote currency) were to strengthen, the EURUSD would fall. And if the USD weakened, the currency pair would rally as the Euro would gain relative strength against its US dollar pairing.
here the USD was weakening and the pair was rising
All of the hypotheticals above assume that nothing else has changed for the pair.
The Dynamics of Buying and Selling Currencies
One area that often confuses traders is the idea of buying and selling currencies.
In the stock market, you can either buy (and sometimes sell) shares of stock. There are no pairings, and the value of one stock is not dependent on that of another.
However, in the Forex market, all currencies are paired together. So when you’re ready to place a trade, are you buying or selling?
The answer is both.
For example, if you sell the EURUSD (also referred to as going “short”), you are simultaneously selling the Euro and buying the US dollar.
Conversely, if you buy the EURUSD (also referred to as going “long”), you are buying the Euro and selling the US dollar.
If not, feel free to review this section as many times as necessary.
To clarify, this does not mean you have to place two orders if you want to buy or sell a currency pair.
As a retail trader, all you need to know is whether you want to go long or short. Your broker handles everything else behind the scenes.
There’s also only one price for each pair. Remember that a currency’s value depends on the currency sitting next to it.
At this point, you should have a firm understanding of what a currency pair is as well as the dynamics of buying and selling.
Chapter Three: Advantages Of Online Forex Trading
1.) The forex market is open 24hrs/day, five days a week. From the Monday morning opening in Australia to the afternoon close in New York the forex market never sleeps.
This is awesome for those who want to trade on a part-time basis (even if you are employed full-time) because you can choose when you want to trade.
2.) You can use leverage in forex trading. In forex trading, a small deposit can control a much larger total contract value.
Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
For example, a forex broker may offer 500-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $25 000 worth of currencies.
Similarly, with $500 dollars, one could trade with $250 000 dollars and so on. While this all presents a chance for increasing profit, you should be warned that leverage is a double-edged sword.
Without proper risk management, this high degree of leverage can lead to large losses. We will discuss this later.
3.) There is high liquidity in the forex market. Because the forex market is so enormous, it is also extremely liquid.
This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade.You are never “stuck” in a trade.
You can even set your online trading platform to automatically close your position once your desired profit level (take profit order) has been reached, and/or close a trade if a trade is going against you (a stop-loss order).
4.) There are low barriers to entry in forex trading. Getting started as a currency trader does not require lots of money.
Online forex brokers offer “mini” and “micro” trading accounts, some with a minimum account deposit just of $5 or less(We will look at different brokers in later sections).
This makes forex trading much more accessible to the average individual who doesn’t have a lot of start-up trading capital.
It also means you can start without risking significant amounts of capital and you can scale up as needed.
6.) You can practice online forex trading using virtual money.
Most online forex brokers offer “demo” accounts that allow you to practice your trading and build your skills, along with real-time forex news and charting services.
The demo accounts are free and you can open one at any time without any obligation.
Demo accounts are very valuable resources for those who are “financially hampered” and would like to hone their trading skills with “play money” before opening a live trading account and risking real money.
Demo accounts allow you to get a feel of the trading process without using your real money. Every trader should start trading with a demo account before risking real money.
We will show you how to open a demo account in the following sections. You can even enter demo contests and stand a chance of winning real money! Learn more about that here.
7.) You can trade forex from anywhere in the world. With forex trading, you can trade from anywhere in the world as long as you have a device with an internet connection.
This means that with forex trading you choose to settle in any part of the world and still continue your trades. You can still trade even when there is a level 5 lockdown in your country.
You can trade at home in your pyjamas, report to no boss and not have to keep up with those nosy and irritating co-workers.
Forex trading can offer one a possibility of being their own boss and if done well it can pay handsomely.
8.) Some brokers give bonuses that can be traded on your live account. These bonuses are given even when you do not make a deposit. However, these should be used with caution.
The first step to start trading forex is to choose a reputed & regulated forex broker, and then open an account with it.
For trading forex, you have to signup with a regulated Forex broker to place your real trades in the market. There are over 1000 forex brokers worldwide. Beginner traders may end up getting confused as to which broker to choose as some of the brokers are scammers.
We have over 10 years of forex trading experience and we have extensively tested and reviewed a lot of forex brokers. Below is a list of the trustworthy brokers that we recommend.
You can read the reviews for the individual brokers to learn more.
You will also need some capital to deposit into your account. We recommend you start with a minimum of $50 capital.
$500 would be even more ideal for a start as it will allow you to ride out any short-term reversals that may go against you.
Chapter Five: Forex Trading Strategies
Successful forex traders follow a sound trading strategy. Most forex day traders rely on 2 types of strategies which are broadly divided into ‘Technical analysis' & the ‘fundamental analysis.
With technical analysis trading, you are basically relying on the price chart, and trading based on the chart patterns, and technical tools like candlesticks, moving averages etc.
On the other hand, fundamental trading involves trading long term based on macroeconomic factors of a country like their employment data, Retail Sales, Central bank's interest rates etc. There are simple and advanced trading strategies that cater for traders with different abilities.
We will give you brief idea of these 2 trading strategies in this chapter.
Fundamental analysis mainly involved trading based on news releases.
Fundamental Analysts believe that analysing a country’s economic indicators such as inflation, economic growth rates, interest rates and monetary policy & unemployment etc. would determine the price of currency and base the decisions of currency movement by analysing these factors.
There are plenty of online Forex news calendars available for free if you want to make it your sole trading strategy.
Also, you can get an idea of how a particular information may affect the market movement upward or downward.
Technical analysis is the most popular trading strategy & it basically involves trading off the charts.
Learning this strategy is important for both short-term day traders & long-term swing traders. A technical trader focuses on the historical price of the asset to make his/her decision on the future market movement.
Risk 1 – Volatility: The Forex market is extremely volatile at times. While this volatility presents opportunities for making a profit, it also can mean that the market can go against you in a very short space of time and you can make a big loss
Risk 2 – Unpredictability: The Forex market is not something you can predict with 100% accuracy. There are just too many factors and actors on the market for it to be fully predictable. Even the most profitable traders have losing trades time and again.
Traders need to set a win-loss target ratio where they account for some losses and use a strategy to minimise them and be profitable in the long run
Risk 3 – Leverage: CFD trading requires using leverage. Leverage is a tool used in trading to amplify your profits, but it also amplifies your losses which are automatically deducted from your trading account. Your account balance can be wiped out with a single bad trade.
Risk 4 – Interest: In some cases, interest will be charged on your trades. For example, interest can be charged when you carry trades overnight and your broker will take funds from your account to pay this fee.
Risk 5- Emotions & Psychology: Trading with real money comes with a whole range of emotions that can mess up your thinking and lead you to bad decisions which cost you.
Risk 6- Rushing to trade live funds: Most beginner traders think that it is easy to make money in the forex markets and they rush to trade real funds before understanding how the markets work. This leads them to losses that could have been avoided if they had taken the time needed to learn
Risk 7- Forex Scams: There are a lot of scammers out there who are ready to pounce on naive people in the name of forex.
Chapter Seven: How Do You Make Money In Forex Trading
The main goal of trading forex is to make money right? So how do you make money in forex trading?
As discussed on the part on reading a Forex quote, trading currency in the Forex market centers around the basic concepts of buying and selling.
Let's take the idea of buying first. If you bought something (e.g a house) and it went up in value and you sold it at that point, you would have made a profit…the difference between what you paid originally and the greater value that the item is worth now. Buying in currency trading is the same way.
Let's use an illustration below.
To understand the 100 pip profit in monetary terms, you would need to know the lot size used in the trade. You can read about lot sizes in the glossary section but for the purposes of this lesson, I will just put a table showing the potential profit from different lot sizes.
As you can see, the 100 pip profit would vary from $10 to $1000 depending on the lot size.
Now let's take a look at how a trader can make a profit by selling a currency pair. This concept is a little trickier to understand than buying. It is based on the idea of selling something that you borrowed as opposed to selling something that you own.
In the case of currency trading, when taking a sell position, you would borrow the currency in the pair that you were selling from your broker (this all takes place seamlessly within the trading station when the trade is executed) and if the price went down, you would then sell it back to the broker at the lower price.
The difference between the price at which you borrowed it (the higher price) and the price at which you sold it back to them (the lower price) would be your profit. For example, let’s say a trader believes that the USD will go down relative to the JPY.
In this case, the trader would want to sell the USDJPY pair. They would be selling the USD and buying the JPY at the same time. The trader would be borrowing the USD from their broker when they execute the trade. If the trade moved in their favour, the JPY would increase in value and the USD would decrease.
At the point where they closed out the trade, their profits from the JPY increasing in value would be used to pay back the broker for the borrowed USD at the now lower price. After paying back the broker, the remainder would be their profit on the trade.
For example, let’s say the trader sold the USDJPY pair at 122.761. If the pair did, in fact, move down and the trader closed/exited the position at 121.401, the profit on the trade would be 136 pips.
By now you should have an understanding of how profits are made in Forex. Losses are made when the pair moves in the opposite direction to your position. For example, if you sell a pair and it rises, you make a loss equal to the pips that the pair would have moved. In monetary terms, the loss will also be related to the lot size.
In short, if you buy a pair and it rises, you make money. If you sell a pair and it falls, you also make a profit. Losses are made when you sell a pair and it rises and when you buy a pair and it falls in price.
There a lot of forex scams to be wary of. Forex trading is not a scam but there are some people who use Forex to scam you. Some of the common methods used by scammers are below.
This is where someone invites you to ‘invest' your money with them so that they can trade on your behalf and you share profits. They can promise you profits of up to 300% in 30 days.
They usually ask you to transfer the money using money transfer methods like mobile money and there will not be any physical encounters between you and the trader.
When you begin by investing smaller amounts they usually pay you as a way of enticing you to invest larger amounts. If you invest larger amounts they will then vanish with your money and change phone numbers.
Never invest in these account management schemes as you will lose your money. You should learn to trade on your own or copy the trades of verified professional traders.
Sale of Indicators
This involves the scammer selling you an ‘indicator' that does analysis for you. This is meant to make trading easy for you as the indicator will tell you when to buy or sell currencies.
The problem is that the indicator will be ineffective i.e it will give wrong signals and you will have bought a useless thing. Indicators can be sold for anything from $50- $300 so you will have lost a lot of money.
To avoid this scam, you should learn to read price action on your own. It's a long route to profitability but its worth it if you become a profitable trader. I have also provided some free forex indicators for you on this site.
Another scam method is when the scammer charges you for providing trading signals. This is supposed to make it easy for you so that you will not do analysis on your own but you will be told what to buy or sell.
The problem is that their signals may be ineffective and you will lose money using them. So you will have paid for a useless service.
Rather, we would suggest that you sign up for a forex copytrading service. This will allow you to copy the trades of successful traders in real time and make profits. You will be able to verify the historical perfomance of these traders before engaging them.