Forex exchange for dummies

Therefore day traders refrain from other risks which may occur due to taking positions overnight. Swing Trading This trading strategy involves buying low and selling high; swing or momentum trading involves getting into and out of the market whenever you are signaled by technical momentum indicators such as the RSI.

Swing traders usually take overnight positions. Trend Trading This trading strategy is a long-term strategy and involves estimating intrinsic value and predicting future trends. These traders wait for their profits until the end of the trends. Forex Market Analysis Experienced traders have known how the market trends are rapidly changing and how to make better trading decisions.

Each of them has a market trading analysis that guides them. Some of the strategies are listed below. Technical Analysis Technical analysis is a form of listed market examination used by traders to forecast future market trends and find the best trading opportunities depending on charts and computer graphs. This form of analysis is very important in determining the short-term market moves.

Fundamental Analysis Fundamental analysis is a way of giving value to an asset by trying to determine its intrinsic value. Fundamental analysts usually examine important financial and economic factors, as well as other quantitative and qualitative information. Fundamental traders usually depend on economic calendars to guide them.

He trains banks and trading institutions and makes six figures a trade on his own. We asked him to brief us on how to trade Forex and what you need to do to be a successful Forex trader. Ezekiel Chew is also the founder and chief trainer at the widely popular Asia Forex Mentor.

According to Ezekiel, there are three things you should do to become a successful trader: 1. Familiarize yourself with how to read the charts Price action is the best way you can learn how to read the charts; most professional traders have applied this and have become successful. Knowing how to read charts will enable you to understand how and why the market is changing and which factors are contributing.

Therefore, you will understand which strategy to apply at which particular point. Use a proven Forex trading strategy or other valid trading strategies Some strategies have been comprehensively tested and have been proven to work consistently. This strategy is the only way to gain the confidence to apply the strategy during the lull periods.

You should have a solid trading system Not only is a trading system that is defined by the business behind trading but also by the technical aspects. A well-structured trade that is in line with the trading plan has been proven to work. Most traders think that successful trading is about strategies, but the system itself greatly impacts becoming a successful trader.

This strategy reminds you that you should have a mathematical probability behind each trade. It would be best if you worked to ensure that you win big and lose small. In the long run, you would have won the trade. To learn more about how Ezekiel trades, you can join his free 5 part training series here where it shows you how to beat the market with mathematical probability. So, make an effort to build a Forex trading plan with a tested and approved trading strategy which is easy to apply.

Risks assessment techniques and money management is very important part of your trade plan. It would be best to carry out your trades according to the amount of money you have in your account. This strategy can favorably affect your trading performance and help manage your risk. Determined traders should take losses positively to avoid losing hope and feel motivated and as a lesson to work harder and achieve.

They should therefore ignore such hopes and react to the far more rational fear of getting greater losses if they fail to take action. To control the number of losses you incur, either a stop-loss order should be in place, or you should make a point of cutting down losses by watching it closely.

Creating a trading plan might be a tiresome task. Instead, you can decide to join a social trading platform and copy the transactions of another client who has an established and profitable track record. However, trading currencies successfully requires considerably more than that. You are required to have reasonable market knowledge, the discipline to stay to your strategy, and the ability to cope with emotional terms of losing trades and a viable trading strategy within an overall trade plan.

Currency trading is a hour market that is only closed from Friday evening to Sunday evening, but the hour trading sessions are misleading. There are three sessions that include the European, Asian, and United States trading sessions. Although there is some overlap in the sessions, the main currencies in each market are traded mostly during those market hours.

This means that certain currency pairs will have more volume during certain sessions. Traders who stay with pairs based on the dollar will find the most volume in the U. Unlike the stock market , where you can buy or sell a single stock, you have to buy one currency and sell another currency in the forex market.

Next, nearly all currencies are priced out to the fourth decimal point. A pip or percentage in point is the smallest increment of trade. Currency is traded in various sized lots. The micro-lot is 1, units of a currency. If your account is funded in U.

A mini lot is 10, units of your base currency and a standard lot is , units. A pip percentage in point is the smallest increment of trade. Most currencies are priced out to the fourth or fifth decimal point. These pairs typically price out to two or three decimal places, with a pip being represented by the second decimal place. Retail or beginning traders often trade currency in micro lots, because one pip in a micro lot represents only a cent move in the price.

This makes losses easier to manage if a trade doesn't produce the intended results. Some currencies move as much as pips or more in a single trading session making the potential losses to the small investor much more manageable by trading in micro or mini lots. Far Fewer Products The majority of the volume in currency trading is confined to only 18 currency pairs compared to the thousands of stocks that are available in the global equity markets.

Although there are other traded pairs outside of the 18, the eight major currencies most often traded are the U. Although nobody would say that currency trading is easy, having far fewer trading options makes trade and portfolio management an easier task.

What Moves Currencies? An increasing amount of stock traders are taking interest in the currency markets because many of the forces that move the stock market also move the currency market. One of the largest is supply and demand. When the world needs more dollars, the value of the dollar increases, and when there are too many circulating the price drops. Other factors like interest rates , new economic data from the largest countries, and geopolitical tensions are just a few of the events that may affect currency prices.

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Whenever you learn a new concept, make it a habit to research it to as much of a degree as possible. This way, you will be well on your way to success! A closer look at currency trading for dummies Alright, so we now know the basic details about currency trading in Forex, and what are some of its most important components that make up the whole process.

In general, the most common form of Forex trading is considered to be spot trading. Spot trading is a form of trading where you trade on the actual physical assets, rather than simply their difference, as is the case during CFDs Contracts For Difference. In terms of spot trading in the context of currency trading, you would sell your actual, physical currency, and buy the other currency that you want. This is generally considered to be a more profitable trading method, but of course, it has larger costs and risks associated with it too.

As for the CFDs, which also happen to be quite a popular way of trading, things are quite a bit different. You would be going into an agreement with a second party for a set time, and be waiting for the asset going up or down. Depending on the outcome, you will be paid — or you will be paid — accordingly. If the price goes down and your CFD deprecates, then you will be the one paying. There are many other different forms of trading that resemble the way CFDs work.

In case you make the correct call, you would be paid a set amount, as opposed to being paid the difference, as is the case with CFDs. While CFDs indeed have the potential to bring you a lot of profits, they are quite risky, which is a discouraging factor for many. For people like this, index trading may be an excellent solution.

Another popular method of trading are forwards. Of course, this is an oversimplified way of putting it, but the general idea is there. Spicing things up — leverage and margin Forex manual for beginners The preceding info, as you may have noticed, was of quite an entry-level natured.

It was merely information that should be known by pretty much all the beginner traders and is not something that would be often discussed by high-level traders that have experience. With that being said, we believe, that there are a couple of important concepts that need to be discussed before one can be considered ready for Forex trading. One such concept is leverage, which, in many cases, is a matter of great interest for the traders that are interested in making large sums of profit, especially with smaller capital to start with.

One thing that many people commonly complain about is the fact that making a huge amount of profit is not possible in Forex without investing huge amounts of capital in the first place. If you are of this opinion, then leverage and margin in Forex trading may be of great interest to you. Leverage can essentially be looked at as a loan, for lack of better word. This would give you the ability to be in charge of a position that is five times greater in value, thus giving you access to a huge amount of profit.

As an example, for the usage of leverage, one has to comply with the relevant margin rules. Risks of using leverage in Forex for new beginners, and the limitations placed on it Additionally, the most important fact to underline here is that using leverage poses some serious risk. Just like it increases the possible profits that you can make, so does it increase possible losses. This means, that you stand a legitimate risk of losing all the money you possess in your account.

In the past, many people would be going bankrupt, and would actually be indebted to the brokers. This was such a huge issue, that governments and regulators decided to come up with a specific rule that would prevent this from happening. This rule was the negative balance protection rule, which needs to be followed by all the brokers that are regulated by established and respected regulators such as FCA and CySEC.

The rule states that the trader can not lose more money than they actually have in their own account. While it is beloved by thousands upon thousands of traders around the world due to the number of profits that it opens the doors to, it is hated by equally as many people, who, in their beginning stages, may have lost a large amount of money.

Due to this danger, many governments and regulators have now imposed some restrictions on the usage of leverage, and sometimes these restrictions are quite severe and serious. This, of course, will vary heavily depending on the country, as in some areas, there is leverage as high as or even more, while in some countries like Japan, leverage can be as low as Leverage ranges in specific countries will also vary depending on the assets themselves.

Usually, these limits of , , , etc, are the upper limits, reserved only for the least-volatile assets such as major currencies. As the volatility of the asset increases, so does the intensity and strength of the restrictions.

For cryptocurrencies, leverage can go down as low as , which is understandable, considering how volatile they are. Time is money — the importance of timing in Forex trading explained One of the main appeals of Forex is its uninterrupted accessibility.

Additionally, Many people love Forex precisely because of the fact that they can trade pretty much at any time. Indeed, Forex is open 24 hours a day, and its only downtime is during the weekends, on Saturday and Sunday. The hours of the trading day are then split in different time windows, all based on their respective region. Additionally, some specifics of timing provide certain benefits to certain markets. Day trading and carry trading Timing, in general, is one of the most important things to consider for any Forex trader.

The reason for this is the dynamic nature of Forex itself. Here, each and every second does have the potential to matter quite a lot. Additionally, the different things and events, as they happen, can have a huge impact on the market. Sometimes, even seemingly-insignificant things can have a very dramatic effect.

This is exactly why some people are obsessing over each and every small economic event, and trying to use it to their advantage. However, there is definitely more to it than just the Forex market hours. One of the most important Forex trading terms to understand is the day trading and carry trading. There are some definite differences between the two, and understanding them is a very important part of defining your trading experience.

Day trading, essentially, is a form of trading where you would open a position on a certain day, and close it on that very day before the next trading day begins. This is more of a short-term approach, and as such, obviously depends and reacts heavily to the volatilities and fluctuations of the market.

As for the carry trading, it is a form of trading where it would last longer than a day. A swap is, essentially, an interest rate that is accrued to the overnight trades. Generally, every currency on the Forex market has its own, certain interest rate, which is set and controlled by the central bank of the country from which the currency hails. Naturally, the interest rates of the currencies are different in the context of different currency pairs.

This, of course, can have a definite effect on the actual profits you can make. It all depends on what, in particular, you are looking to get out of your trading endeavors. Summing up all the Forex trading lessons for beginners from this guide If you have never researched any information about Forex before, then it may so seem that there was too much to take in from this guide.

However, rest assured that this was simply very basic information; something that any trade needs to be aware of as a bare minimum. After the Bretton Woods accord began to collapse in , more currencies were allowed to float freely against one another. The values of individual currencies vary based on demand and circulation and are monitored by foreign exchange trading services. Commercial and investment banks conduct most of the trading in forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors.

There are two distinct features of currencies as an asset class : You can earn the interest rate differential between two currencies. You can profit from changes in the exchange rate. An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate.

Prior to the financial crisis, it was very common to short the Japanese yen JPY and buy British pounds GBP because the interest rate differential was very large. This strategy is sometimes referred to as a carry trade. Currency trading was very difficult for individual investors prior to the Internet. Most currency traders were large multinational corporations , hedge funds , or high-net-worth individuals HNWIs because forex trading required a lot of capital.

With help from the Internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets through either the banks themselves or brokers making a secondary market. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.

It is the only truly continuous and nonstop trading market in the world. In the past, the forex market was dominated by institutional firms and large banks, which acted on behalf of clients. But it has become more retail-oriented in recent years, and traders and investors of many holding sizes have begun participating in it. An interesting aspect of world forex markets is that there are no physical buildings that function as trading venues for the markets.

Instead, it is a series of connections made through trading terminals and computer networks. Participants in this market are institutions, investment banks, commercial banks, and retail investors. The foreign exchange market is considered more opaque than other financial markets. Currencies are traded in OTC markets, where disclosures are not mandatory. Large liquidity pools from institutional firms are a prevalent feature of the market. A survey found that the motives of large financial institutions played the most important role in determining currency prices.

Forex is traded primarily via three venues: spot markets, forwards markets, and futures markets. When people refer to the forex market, they are thus usually referring to the spot market. The forwards and futures markets tend to be more popular with companies or financial firms that need to hedge their foreign exchange risks out to a specific date in the future. Spot Market Forex trading in the spot market has always been the largest because it trades in the biggest underlying real asset for the forwards and futures markets.

Previously, volumes in the forwards and futures markets surpassed those of the spot markets. However, the trading volumes for forex spot markets received a boost with the advent of electronic trading and the proliferation of forex brokers. The spot market is where currencies are bought and sold based on their trading price.

That price is determined by supply and demand and is calculated based on several factors, including current interest rates, economic performance, sentiment toward ongoing political situations both locally and internationally , and the perception of the future performance of one currency against another. A finalized deal is known as a spot deal.

It is a bilateral transaction in which one party delivers an agreed-upon currency amount to the counterparty and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash.

Although the spot market is commonly known as one that deals with transactions in the present rather than in the future , these trades actually take two days for settlement. Forwards and Futures Markets A forward contract is a private agreement between two parties to buy a currency at a future date and at a predetermined price in the OTC markets. A futures contract is a standardized agreement between two parties to take delivery of a currency at a future date and at a predetermined price.

Futures trade on exchanges and not OTC. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves. In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange CME.

Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized. The exchange acts as a counterparty to the trader, providing clearance and settlement services. Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire.

The currency forwards and futures markets can offer protection against risk when trading currencies. Usually, big international corporations use these markets to hedge against future exchange rate fluctuations, but speculators take part in these markets as well. In addition to forwards and futures, options contracts are also traded on certain currency pairs.

Forex options give holders the right, but not the obligation, to enter into a forex trade at a future date and for a pre-set exchange rate, before the option expires. Unlike the spot market, the forwards, futures, and options markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement.

This is why they are known as derivatives markets. Uses of the Forex Markets Forex for Hedging Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market. Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed. To accomplish this, a trader can buy or sell currencies in the forward or swap markets in advance, which locks in an exchange rate.

For example, imagine that a company plans to sell U. Unfortunately, the U. A stronger dollar resulted in a much smaller profit than expected. The blender company could have reduced this risk by short selling the euro and buying the U. That way, if the U.

If the U. Hedging of this kind can be done in the currency futures market. The advantage for the trader is that futures contracts are standardized and cleared by a central authority. However, currency futures may be less liquid than the forwards markets, which are decentralized and exist within the interbank system throughout the world.

Forex for Speculation Factors like interest rates , trade flows, tourism, economic strength, and geopolitical risk affect the supply and demand for currencies, creating daily volatility in the forex markets. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs. The trader believes higher U. How to Start Trading Forex Trading forex is similar to equity trading. Here are some steps to get yourself started on the forex trading journey.

Learn about forex: While it is not complicated, forex trading is a project of its own and requires specialized knowledge. For example, the leverage ratio for forex trades is higher than for equities, and the drivers for currency price movement are different from those for equity markets. There are several online courses available for beginners that teach the ins and outs of forex trading.

Set up a brokerage account: You will need a forex trading account at a brokerage to get started with forex trading. Forex brokers do not charge commissions. Instead, they make money through spreads also known as pips between the buying and selling prices. For beginner traders, it is a good idea to set up a micro forex trading account with low capital requirements.

Such accounts have variable trading limits and allow brokers to limit their trades to amounts as low as 1, units of a currency. For context, a standard account lot is equal to , currency units. A micro forex account will help you become more comfortable with forex trading and determine your trading style. Develop a trading strategy: While it is not always possible to predict and time market movement, having a trading strategy will help you set broad guidelines and a road map for trading.

A good trading strategy is based on the reality of your situation and finances. It takes into account the amount of cash that you are willing to put up for trading and, correspondingly, the amount of risk that you can tolerate without getting burned out of your position.

Remember, forex trading is mostly a high-leverage environment. But it also offers more rewards to those who are willing to take the risk. Always be on top of your numbers: Once you begin trading, always check your positions at the end of the day. Most trading software already provides a daily accounting of trades. Make sure that you do not have any pending positions to be filled out and that you have sufficient cash in your account to make future trades.

Cultivate emotional equilibrium: Beginner forex trading is fraught with emotional roller coasters and unanswered questions. Should you have held onto your position a bit longer for more profits? How did you miss that report about low gross domestic product GDP numbers that led to a decline in overall value of your portfolio?

Obsessing over such unanswered questions can lead you down a path of confusion. That is why it is important to not get carried away by your trading positions and cultivate emotional equilibrium across profits and losses. Be disciplined about closing out your positions when necessary.

Forex Terminology The best way to get started on the forex journey is to learn its language. Here are a few terms to get you started: Forex account: A forex account is used to make currency trades. Remember that the trading limit for each lot includes margin money used for leverage. This means that the broker can provide you with capital in a predetermined ratio. Ask: An ask or offer is the lowest price at which you are willing to buy a currency.

The ask price is generally greater than the bid price. Bid: A bid is the price at which you are willing to sell a currency. A market maker in a given currency is responsible for continuously putting out bids in response to buyer queries.

While they are generally lower than ask prices, in instances when demand is great, bid prices can be higher than ask prices. Bear market: A bear market is one in which prices decline among currencies. Bear markets signify a market downtrend and are the result of depressing economic fundamentals or catastrophic events, such as a financial crisis or a natural disaster.

Bull market: A bull market is one in which prices increase for all currencies. Bull markets signify a market uptrend and are the result of optimistic news about the global economy. Contract for difference: A contract for difference CFD is a derivative that enables traders to speculate on price movements for currencies without actually owning the underlying asset. A trader betting that the price of a currency pair will increase will buy CFDs for that pair, while those who believe its price will decline will sell CFDs relating to that currency pair.

The use of leverage in forex trading means that a CFD trade gone awry can lead to heavy losses. Leverage: Leverage is the use of borrowed capital to multiply returns. The forex market is characterized by high leverages, and traders often use these leverages to boost their positions. Since they have used very little of their own capital, the trader stands to make significant profits if the trade goes in the correct direction.

The flipside to a high-leverage environment is that downside risks are enhanced and can result in significant losses. Lot size: Currencies are traded in standard sizes known as lots. There are four common lot sizes: standard , mini , micro , and nano.

Standard lot sizes consist of , units of the currency. Mini lot sizes consist of 10, units, and micro lot sizes consist of 1, units of the currency. Some brokers also offer nano lot sizes of currencies, worth units of the currency, to traders. The bigger the lot size, the higher the profits or losses , and vice versa.

Margin: Margin is the money set aside in an account for a currency trade. Margin money helps assure the broker that the trader will remain solvent and be able to meet monetary obligations, even if the trade does not go their way. The amount of margin depends on the trader and customer balance over a period of time. Margin is used in tandem with leverage defined above for trades in forex markets. One pip is equal to 0. The pip value can change depending on the standard lot size offered by a broker.