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Having problems understanding: What is Forex trading? Looking for actionable information that tells you how to get started? The truth is: Forex trading is easy to understand. Making profits consistently is the tricky part.
Is it like gambling? Do I need “luck” to make money?
Long-term success depends on talent, hard work, experience, and knowledge. Actually, think of trading as a performance sport. Becoming better depends on:
- Practicing by making lots of trades;
- Studying the rules of the game;
- Making informed trades and moves;
- Mastering strategies;
- Developing a game plan;
- Learning from your mistakes.
Our currency for trading dummies guide breaks down everything in simple terms, and it’s very easy to follow along so, let’s get started. If you’re interested in Forex investing, this simple guide covers the basic things you need to know.
Chapter 1: Who is an FX Broker?
The Forex broker is the institution that connects you to the online currency exchange. They work with liquidity providers like large banks that are considered FX dealers.
Online Forex Trading is Relatively New
Nowadays, you can create an account with a Forex broker, deposit money into your account, and start buying or selling currency pairs like the EUR/USD in mere minutes.
But this was not the case in the past years. Only banks, large companies, and financial institutions could buy and sell currencies for trade purposes.
The reason you can participate in the Forex market is thanks to the emergence of online Forex brokers.
Trade-In.Forex primarily reviews different brokers. Doing so, we help clients choose the best platforms. One of the many brokers we have reviewed is Olymp Trade. We will use their trading platform to illustrate points in this article.
Getting Started With an FX broker
To get started with a platform such as Olymp Trade, you’ll first visit their website.
- You’re asked to create a personal account.
- You can deposit money if you want to trade right away.
- We recommend starting with a demo account.
Here is our demo account:
OlympTrade uses its proprietary trading platform. Get a bonus code on your first deposit here.
MetaTrader Trading platform
Many brokers tend to run the MetaTrader electronic platform. It was developed back in 2005 by MetaQuotes and is now licensed to many companies. It looks like this:
Note that a trading platform is just a software you use to make trades. But prioritize choosing the best broker platform.
Chapter 2: What is Forex Trading?
It is the buying and selling of currencies. The type of currency trading retail traders engage in is called “speculative trading.”
You are in essence speculating on whether the exchange rate between two currencies is going to rise or fall. Correct predictions make profits, and the vice-versa is true.
Spot market vs Futures Market
Retail traders mostly engage in the spot market. That basically means that transactions take place on the spot or within a relatively short period of time.
The currency market also has other derivative markets like the futures market. It’s mostly used by large companies that want to hedge currencies from future losses.
In the futures market, the company enters into a deal with another party to trade currencies at a future date based on foreign currency exchange rates they agree on now.
Price Movements of Currencies
“Demand and supply” are what influence the value of currencies. For instance, if the British Pound rises in demand compared to the US dollar, then you’ll need more dollars to purchase British Pounds.
So, what influences the demand and supply of given currencies, the exchange rate?
- Inflation rates.
- Interest rates: Better interest rates on savings accounts in the US for instance leads to a demand for dollars from investors wanting to make money.
- Market sentiments: If many investors feel that interest rates are likely to increase in a few months, the demand for the currency may increase.
- Economic performance: The demand for a particular currency may change during recessions as central banks cut rates.
- Country’s account deficits: For instance, if the UK requires more in foreign currency since the value of its exports is lower than its imports, then its currency may decline.
What is Forex? It stands for for-eign ex-change.
- What is trading? Exchanging currencies through buying and selling.
There are other factors that influence the exchange rates between currencies. Read more on macroeconomic indicators.
Chapter 3: Types of Сharts in FX Trading
We are now back into the trading environment, where you’ll spend most of your time as a speculative trader. Right away, let’s look at several representations of the EUR/USD 5 min chart.
- Line Chart
You’re looking at the online chart. Its horizontal-axis denotes the passage of time. The vertical axis represents the price movement. Now, this chart is easy to read since it’s visually simple.
Prices change in real-time. And this change reflects the market sentiment, which might be the behavior of millions of traders at a given time.
- Japanese Candlestick chart
Next, we have the Japanese Candlestick chart. Each bar shows how the price changed within a given time. It’s an information-rich chart.
For instance, green candlesticks show that the closing price was higher than the opening price. Red candlesticks show that the closing price was lower than the opening price.
Red or black candlesticks are called bearish while green or white candlesticks are regarded as bullish.
Bar charts are similar to Japanese candlesticks in terms of the details they offer. You can find out the highest and the lowest prices at a snapshot. If the prices are changing rapidly, the bars are larger. Smaller bars result from little price movement. Here is a screenshot of such a chart in Olymp Trade:
The candlestick chart is the most loved by seasoned traders. That’s because it visually represents information better. You can also see how the price movement occurred during a specific period whether it’s five minutes, one day, one hour, etc. It also provides patterns that can inform your next trade such as the bearish engulfing pattern which signals a reversal and that a downtrend may be forming. So take time and become an expert on Japanese candlestick patterns.
Chapter 4: How Do I Start Trading Forex: The Two Types of Trades Explained.
Speculating on the price movement of a currency pair generally involves saying whether its exchange rate will increase or decrease. So, how do I start trading Forex? There are only two types of trades you can make:
a. Going Long (Long Trade)
It’s also called buying a currency pair. Once you purchase the asset, your expectation is that its value is going to rise. When you close this position, you are effectively selling the currency pair at a higher price. You, therefore, make a profit. Now let’s see this in action using Olymp Trade.
1: Here we have a 1-minute chart for the currency pair EUR/USD. We are going to go long because the current market sentiment is that the buyers are rejecting the low prices, which has been indicated by the formation of the first bullish candlestick followed by two other bullish candles.
So we are entering a trade with the hopes that the exchange rate will increase thanks to more buyers purchasing the pair, which increases its price.
2: In the diagram, you can see the formation of a fourth bullish candlestick.
3: Olymp Trade lets users make time-specific trades. Once the time is done, the position will close on its own.
4: The fourth arrow in the chart indicates that an upward trend formed but it was later reversed by the formation of a bearish candlestick. So, what is happening in the market? Buyers who entered the trade at a lower price level are taking their profits. The increased supply leads to a reduction in the exchange rate.
5: Here you can see that our trade was successful.
6: And we actually made a profit of 820 dollars in the demo account.
B. Going Short, Shorting, or Selling (Short Trade)
It basically entails executing a sell order for the pair. You’d want to do this if you anticipate that the exchange rate for EUR/USD is going to fall. And why does this happen? What does it mean?
We’re going to talk about it next.
Chapter 5: The Currency Pair Explained
Up until now, we have been talking about the Euro/USD, but there are more currency combinations. The possible number of pairs just depends on the number of currencies in the world but not all make it to the FX market to be traded by individual traders like yourself.
Base Currency and Quote Currency
Base: It comes first. You base your decision on whether to sell or buy based on it. For instance, if you reason that the recent decision by the Reserve Bank of Australia to reduce interest rates is going to lead to more demand for the US dollar, you would execute a sell AUD/USD order in the expectation that the Aussie dollar will continue to weaken. Less US dollars are required to buy Aussie dollars and in the chart, this is going to be expressed by a downward trend.
Quote: Traders also call it the counter currency. It quotes the value of the base. For instance, the current exchange rate for EUR/USD is 1.0966. So, how many euros are in $10,000. Divide the amount by the exchange rate, and we get 9119.09 euros.
Major Currency Pairs
In our currency trading for dummies guide, we will also go over types of currency pairs. Let’s begin with the majors. They represent currencies from the top world economies. The US dollar is featured as a quote or base.
Minor Currency Pairs
You can also call them crosses. They are currencies from the top economies but in this case they are not paired with the US dollar but with each other. For instance, you will encounter euro crosses, where the Euro is paired with the yen, the Canadian dollar, the Aussie dollar, etc. These currencies are regarded to be less liquid than the major currency pairs but they’re still widely traded. They are relatively stable thanks to the economic stability enjoyed in their respective countries.
Exotic Currency Pairs
They represent currencies from the top developing economies such as Turkey, Mexico, Singapore, Hong Kong, and more. You will find them paired to the US dollar or with currencies from other major economies.
Chapter 6: Online Currency Exchange Lingo: Pips, Spreads, Lots
There are basic terms you should know when engaging in currency trading. Here are some of them:
If you have been keen, you might have noticed that you wrote the exchange rate for the EUR/USD currency pair in four decimal places (1.0966). Any increase or decrease in price will be to the last decimal point, for instance, the rate can rise to 1.0967 or decrease to 1.0965. The smallest price movement is what’s called a pip.
Before retail trading was a norm, large players like big banks would trade currencies in large volumes. The standard lot of a given currency that could be traded was 100,000 units. Nowadays, you’ll also find the micro-lot size of 10,000 units of currency, and the macro lot equal to 1,000 units of currency. Sometimes a lot size is called the volume especially in MetaTrader. You’ll find that a lot size of 1 is equal to the standard lot. Whereas a volume of 0.1 represents a micro lot.
Before we can understand what the spread is, let’s look at the Meta Trader platform. you will see two prices quoted for the currency pair. The first is the bid price and the second is the ask price.
Now if you want to buy this currency pair, the asking price for it is 0.9155/3. It’s in five decimal places but the last digit is not a full pip but a fractional pip that’s one-tenth of a full pip. If you want to sell the AUD/CAD, you will receive 0.9151/6 for it.
The Spread, therefore, is the difference between the ask price and the bid price. In our case, it is 0.0003/7. For you to make a profit on this trade, the price movement must be above the spread and that’s because the spread represents the cost of entering into this transaction.
Not all platforms rely on the spread to calculate the commission they charge. On the Olymp Trade platform, the commissions are stated as follows:
Here is an amazing fact: when you’re fx trading with the broker, you are using their own money to enter into trades. For instance, you may be only required to deposit $100 but you can enter into trades worth up to $100,000. You get this benefit thanks to Leverage, and you can think of it as a multiplier. If the broker is offering a leverage of 400, it just means that they will multiply your margin 400times.
Chapter 7: Your Game Trade in Value: How to Predict With Success
As we embark on the chapter of the game trade in value, you’ve seen an example of an fx trading corp and that is Olymp Trade. You can also check more reviews of brokers. Next, we’re going to talk about the tools, strategies, and trading styles that will help you remove the guesswork from your forex trading.
Overview of Trading Styles
Trading styles revolve around the time you’re willing to hold positions open. Here is a quick table to illustrate which style you may be using:
|Type of behavior||I am a (type) Forex trader|
|I plan on holding positions for a few seconds. My priority is on small but frequent profits.||Scalper|
|I can hold positions open for several hours but I don’t keep positions open overnight.||Day Trader|
|I am patient to wait for the most favorable conditions to enter into a trade. I have no qualms about leaving a position open overnight.||Swing Trader|
|I can even hold positions open for more than one year. I’m very patient and looking to make the maximum profit,||Position Trader|
Fundamental Analysis and Technical Analysis
Fundamental analysis involves determining how news items affect the price movements of currencies. You’ll be focusing on a country’s political, economic, and social status. For instance, a country that is experiencing political turmoil will likely see its currency weaken.
Now technical analysis, on the other hand, involves looking at price charts with the aim of identifying patterns. For instance, you can examine a price chart and determine that the market is bullish (trending upwards). Once you identify this pattern, you enter into a long trade since the prices are generally rising.
Technical analysis is a broad field, and there are many pattern recognition systems in place. For instance, there are technical indicators that are in essence mathematical formulas and chart tools developed by traders to predict the market movements from past data.
Some popular technical indicators include:
- Bollinger bands,
- Relative strength indicator,
- Parabolic SAR,
When looking at price charts, you’ll also see the formation of some patterns. Some of the common chart patterns include the reversal, continuation pattern, and the bilateral pattern that tells us that the market is choppy.
Take the Next Step
In this article, you’ve seen what is Forex trading. In the last chapter, we have introduced fundamental analysis and technical analysis. Expert traders never stop learning and continuously develop their skills.
It’s almost impossible to cover everything FX can provide you with as there is so much to learn. We recommend dedicating some time to practice different trades in a demo environment. Most brokers offer demo accounts that you can use before moving on to live accounts.
This post is also available in: Indonesia