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FOREX INTRODUCTION

BUILD YOUR KNOWLEDGE AND MASTER THE SKILLS

FOREX IS THE LARGEST FINANCIAL MARKET IN WORLD AND YOU CAN TRADE FOREX ON ANY DEVICE FROM ANYWHERE IN THE WORLD. 

WHAT IS FOREX AND HOW TO START FOREX TRADING AS A BEGINNER?

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WHAT IS FOREX?

The Foreign Exchange Market or FX market is the largest financial market in the world in terms of liquidity and trading volume. It’s estimated that more than $5 trillion is traded daily.  The market is decentralized because there is no one physical location where investors buy and sell currencies. Forex traders can use the internet to check the quotes of currencies from various dealers worldwide.

 

Getting started in the forex market is very easy and affordable. Developing a strategy and mastering the skill can make you earn high profits on your capital over time. Leverage plays a big role in traders’ ability to gain success if used wisely. Once your skill is sharpened, you may be able to trade forex full time.

 

UNDERSTANDING THE STRUCTURE OF THE MARKET

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As shown above, the head of the forex market is the central bank. The central bank has the power to regulate and control the foreign exchange market. Followed by brokers, commercial banks, exporters and importers, immigrants, tourists, and investors. The actual buyers and sellers of currency in the market are at the bottom of the pyramid. 

 

 

HOW TO GET STARTED?

If you have decided to trade forex, the first thing that you need to do is choose a licensed online Broker. A forex broker provides traders access to the financial market so that buyers and sellers can meet. Some forex brokers do provide everything from spot trading to futures and CFDs. A forex broker may also be known as a retail forex broker or a currency trading broker.

 

Choosing a broker is important to do your due diligence and choose the right broker for yourself. Make sure that the broker is licensed, backed by regulatory agencies, and credible financial institutions. Forex brokers should be regulated by the Commodity Futures Trading Commission (CFTC) and registered with the Futures Commission Merchant (FCM). You can find this and other financial information on its website, the parent company’s website, or through the Financial Industry Regulatory Authority’s BrokerCheck website. 

 

Look for brokers with low spreads and fees. This will make you save money. A spread is calculated in “pips.” A pip is a difference between what a currency can be purchased and sold at any given point in time. Because forex brokers don’t charge a commission, this is how they get paid or make money.

 

Leverage is significant when it comes on to trading forex because this is how you will make money on your capital size. Leverage is an amount that the broker lends you. It is expressed as a ratio between total capital available to actual capital. The standard leverage offered by most brokers is 1:50, and it can go as high as 1:500. Using a 1:50 leverage means that your broker would lend you $50 for every $1 of actual capital. For example, if you invest $1,000 with a broker that provides you with 1:50 leverage, your total buying power is $50,000 (50 x $1,000).

 

So, choose a broker with a wide variety of leverage options. This is important, especially if you have limited capital working with.

 

Make sure you get access to the necessary tools that you need to succeed in trading. Forex brokers offer many different trading platforms (popular platforms mt4 and mt5) for their users. These trading platforms often feature real-time charts, technical analysis tools, real-time news and data, and even support for trading systems. Brokers usually also provide technical and fundamental information, economic calendars, and other research.

 

Once you’ve decided on the forex broker, sign up for an account with them, preferably a demo account for beginners to practice. Once you have signed up, you can fund your account to start trading. 

 


HOW TO TRADE FOREX FOR BEGINNERS?

 

The basic foundation of forex trading is understanding how currencies are quoted and what the exchange rates represent. All currencies in forex are quoted in pairs. This is why trading involves simultaneous buying one currency in exchange for selling the other. 

 

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Above is an example of how a pair is listed. Understanding the relationship is very simple once you get how it works. Remember, in forex trading, you always buy one currency and sell the other in a transaction. A “pair” has two parts, the currency listed first and the currency listed second. The Currency listed first is Called the BASE CURRENCY, as displayed above, and the currency listed second is Called the QUOTE CURRENCY.

 

The action you take, whether buying (going “long”) or selling (going “short”), is done Directly to the Base Currency and Inversely to the Quote Currency. 

 

The next thing to understand is that currency pairs always have two prices: the Bid price and the Ask price. This is the two-way quote system used for buying and selling currencies. In simple terms, the Bid price is the price you can sell, while the Ask price is the price you can buy. 

HOW TO CALCULATE “PIP” 

A pip is the price move in a given exchange rate. In other words, it is a unit that is used to count your profits and losses. Typically, Forex pairs are quoted to four decimal places (0.0001). The ‘1’, four spaces after the 0, is referred to as a pip. For example, EUR/USD for 1.1367. The number ‘7’ shows the decimal unit of a pip for the EUR/USD. 

 

If a trader opens a buy position on EUR/USD for 1.07260 and then closes his position at 1.07270, the difference would be +0.00010 or 1 pip. Another calculation is USD/CHF for 1.00450 minus 1.00400 equal to 0.0005, resulting in 5 pips. 

 

The exception to this rule is the pairs that involve the Japanese Yen, which are only quoted to two decimal places. In this case, the second spot after the 0 is referred to as a pip. For example, EUR/JPY 1.1250 – 1.1270 = 0.002 = 2 Pip. 

 

 

HOW TO USE FOREX ORDERS 

 

A Forex Order is a command that is given to your broker to execute. A Forex Order can be used to do two things:

 

1. Buy (Long) – If you expect the currency pair to rise, you would use a buy order executed at the Ask price and closed at the Bid price.

2. Sell (Short) – If you expect the currency pair to fall, you would use a sell order executed at the Bid price and closed at the Ask price.

There are five common order types that traders can use to enter and exit a position in the Forex market:

 

1.  Market order is a buy or sell order designed to open a trade immediately at the best available market price. This type of order guarantees that the trade will be executed but does not guarantee the execution price. This is because, in a volatile market, prices tend to change quickly.  

 

2. Limit Order is designed to buy or sell trade at a specific price and an expiration date. This order only guarantees that your trade will be executed at the desired price. For longs, the trigger price needs to be below the market price. For shorts, the trigger price needs to be above the market price.

 

3. Stop Order is designed to buy when the trigger price is above the current market price and sell when the trigger price is below the current market price.

 

4. Take a profit order is to close a profitable trade and lock in the profits.

 

5. Stop-loss order is designed to limit your losses and avert potentially losing all your investment or capital. If you’re buying and the exchange rate starts to go down, the stop-loss order will automatically liquidate your position and minimize the loss.

 

Once you understand to how to trade the forex market, you’ll gain the skills needed to trade in any financial market using these orders. 

 

WHAT DRIVES A FIAT CURRENCY MARKET RATE

 

The value of the currency pair can be driven by several factors, including:

  • Government Debt 
  • Economic growth or recession 
  • Speculation 
  • Inflation 
  • Interest rates 
  • Supply and Demand.

 

These are a few of the factors that can influence the value of a currency.

 

FOREX TRADING TIME

The Forex market is open 24 hours a day in different parts of the world. The market is broken up into four major trading sessions: the Sydney session, the Tokyo session, the London session, and the New York session.

 

However, the forex market has three peak trading sessions, and traders often focus on one of the three trading periods rather than attempt to trade the markets 24 hours per day. This is known as the “forex 3-session system“.

 

These sessions consist of AsianEuropean, and North American sessions, also called TokyoLondon, and New York.

 

In between each forex trading session, there is a period of time where two sessions are open simultaneously. For example, during the summer, from 3:00-4:00 AM ET, the Tokyo session and London session overlap. During summer and winter from 8:00 AM-12:00 PM ET, the London session and the New York session overlap. These are the busiest times during the trading day because there is more volume or money is transferring when two markets are open at the same time.

 

The international scope of currency trading means there are always traders across the globe who are making and meeting demands for a particular currency. Currency is also needed around the world for international trade by central banks and global businesses. 



CREATING A TRADING STRATEGY

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There are two commonly used strategies in the forex market: technical analysis, which deals with reading the charts, and fundamental analysis, which deals with reading the news.  Some traders used both to analyze the market, and some preferred one. However, the most used strategy is Technical analysis.

 
FUNDAMENTAL ANALYSIS

This type of strategy analyzes the economy of a country. Fundamental analysis focuses on a country’s current and future outlook to determine whether the country’s currency may strengthen or weaken. 


Fundamental analysis in the forex market is often used to predict long-term trends; however, short-term traders strictly use it on news releases. There are many fundamental indicators of currency values released at many different times, such as:

 

1.   Non-farm payroll (NFP) figure is a key economic indicator for the United States economy. It measures the number of workers in the U.S., excluding farm employees, government employees, private household employees, and employees of nonprofit organizations. Non-Farm Payrolls (NFP) releases create volatility in the forex market. It measures net changes in employment jobs, and forex traders often use an economic calendar to prepare for NFP releases. Non-farm payroll data is normally released on the first Friday of every month at 8:30 AM ET. 

 

2. Purchasing Manager Index (PMI) is an important indicator of the financial markets as it is the best indicator of factory production. The index is popular for detecting inflationary pressure and manufacturing economic activity of a country.  About 500 purchasing managers are asked to grade the relative level of business conditions regarding employment, inventory level and new orders, state of production, and supplier deliveries. A reading above 50 indicates growth in the sector. Conversely, a reading below 50 points to a contraction. This data is released one day after the month. Traders normally set their calendar for this report. 

 

3. Consumer Price Index (CPI) is a critical indicator that has a major influence on forex trading. This indicator leads to changes in monetary policy by the central bank that will either strengthen or weaken the currency against rivals in the markets. Forex traders are advised to keep track of the CPI of most major trading nations like the US, EU, Japan, and Australia.

 

4. Retail Sales: This is an important factor when it comes to forex trading. It provides insight into an economy’s health and has far-reaching repercussions that shape the economic climate. An increasingly positive retail sales climate may prompt increased interest in the currency, while a deteriorating retail sales climate may push away potential investors. By monitoring the developments of the retail sales data, you can gain invaluable insights into your forex trading plans.

 

5. Durable Goods are new or used items generally with a normal life expectancy of three years or more. It is a key indicator of future manufacturing activity. This government index measures the dollar volume of orders, shipments, and unfilled orders of durable goods. When the index increases, it suggests demand is strengthening, which will probably result in rising production and employment. A falling index suggests the opposite.

 

Reports are important indicators. However, watching the Federal Open Market Committee and Humphrey Hawkins Hearings meetings keep traders high or a low with a country’s currency. 

 

To master this strategy, simply reading the reports, watching and examining a country’s economy can help forex fundamental analysts better understand long-term market trends and allow short-term traders to profit from extraordinary events. If you choose to follow a fundamental strategy, keep an economic calendar at hand to know when these reports are released. Your broker should provide you with real-time access to this type of information too.

 

 
TECHNICAL ANALYSIS 

Most traders use this strategy to analyze price trends. In forex, the commonly used technical analysis indicators are: 

 

Fibonacci Studies is an indicator that pinpoints and identifies key support and resistant levels in price movement. It helps indicate where to place orders for market entry, taking profits, and stop-loss orders.  Fibonacci levels are commonly calculated after a market has made a large move, either up or down, and seems to have flattened out at a certain price level.

 

The Elliot Waves is a wave principle that was discovered by Ralph Nelson Elliott back in 1934. He discovered that the stock market moves in a particular pattern, forming repetitive cycles. These cycles were reflecting the predominant emotions of investors and traders in upward and downward swings. These movements were divided into what he called “waves.

 

He believes that if you can correctly identify the repeating patterns in prices, you can predict where the price will go (or not go) next. This is what makes Elliott waves so appealing to traders.

 

Parabolic SAR is a technical indicator that helps to determine the direction of price action. It is sometimes called the stop and reversal system. When there is a move against the trend, the indicator gives an exit signal when a price reversal could occur. A small dot is placed below the price when the asset’s trend is upward, while a dot is placed above the price when the trend is downward.

 

A pivot point is a technical analysis indicator used to determine the overall trend of the market over different time frames. This indicator is designed to calculate the potential turning point of a bullish or bearish market. Currency traders see pivot points as markers of support and resistance.

 

Many traders combine these studies to make more accurate predictions of the market. The most common combination practice, though, is the Fibonacci studies with Elliott Waves. 

 

THE BOTTOM LINE

Building your knowledge and getting as much practice will help you improve your trading skills quickly. As a beginner, focus on creating a strategy that you can implement to win trades. Test the strategy using a demo account until you feel confident to test it on a live account. You don’t need to learn everything all at once; over time, continuous reading, learning, and practicing will build your confidence to trade successfully.  

 

Start with a demo account.

READ FOREX BOOKS TO BUILD YOUR KNOWLEDGE AND SKILL
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HOW TO BECOME A SUCCESSFUL FOREX TRADER
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ONLINE FOREX TRADING COURSES
NUMEROUS COURSES TO TEACH HOW TO TRADE
GO HERE
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HOW TO OPEN A DEMO FOREX ACCOUNT? PRACTICE HOW TO TRADE FOREX

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4 Responses

  1. Thank you for providing this article! Just the other day I got a message from a forex scammer! They are so obvious. This post is genuine and teaches me what I need to know! I will direct everyone to this post from now on! Thank you for providing such valuable information to me!

  2. This pandemic has served as a way to catalyze many of the projects I had been keeping in the back of my head for years. And one of them was opening my own business. It’s small but I now have time to go online and read a lot. So I have been reading how to get into investing in FOREX. Thank you very much for writing this post in a way it’s beginner friendly. Very interesting article.

    1. Hey Abel,

      I am happy to share information that can help individuals build in this pandemic, and FOREX is a great way to understand the financial markets. All the best in your business venture. Thanks.

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