Forex Learning For Beginners to Earn Unlimited Money
Learn the Basics of Forex Trading
Introduction:
The Forex Market is tough. The majority
of people who start trading
on the Forex Market accrue losses on
their accounts during the
first year - it is a competitive
and volatile world.
But… we have some encouraging news.
For experienced traders, it has
been a path to achieving
financial freedom
by
securing profitable trades
in the long term.
Nowadays, there
are thousands
of
independent traders living from the
Forex Market. Others,
are
making enough money
to
pay off their bills, or to pay for
an incredible vacation.
But for those of you who are beginners, or for those of you who are struggling to get off the ground,
these kinds of images seem very far
away. The most important thing now is to find out what YOU can do to get
the knowledge to succeed
in the Forex Market.
Starting to trade
successfully on the Forex Market
relies on one
thing only: LEARN TO READ THE MARKET.
Reading the market will help you to win transactions, manage risk and anticipate losses, which are the key aspects to any successful
trading career.
The knowledge explained here is all free for you to implement
- all you need is to dedicate a few hours of your time.
Forex stands
for Foreign Exchange.
Investopedia defines it as the exchange of one currency
for another, or the conversion of one currency into another currency. Foreign Exchange also refers to the global market where currencies are traded
virtually around-the-clock. The following image illustrates how you are participating in the Forex Market
when you take a vacation from USA to Europe and you use
your dollars to buy some euros.
Talking about participants…Who plays on the
Forex Market?
Now that you know how you can become a participant in the Forex Market,
let’s take a look at who else
is
playing with you.
1. Governments: they
use the Forex Market to meet certain economic
goals.
2. Central Banks: they represent
the financial arm of the government; they use the Forex Market to adjust
monetary policy.
3. Normal Banks:
they trade on the Forex Market to find the correct amount of currencies that they need to develop
their activities.
4. Other Financial Institutions: for example,
pension funds that invests
in the Forex Market to obtain
returns in exchange.
5. Multinational Companies:
they
operate on the
Forex Market
in
order
to do
transactions between different locations
where they are established.
6. Hedge Funds: organizations that are designed to speculate in the Forex Market and obtain a high amount of returns for their investors,
in exchange
of commissions.
7. Retail Traders:
traders such as YOU and I; people who speculate
on the Forex Market to make a profit.
This is where the concept of a Broker comes into play, a person such as you and me will go to a broker.
Their role is to work with other individuals as well, to aggregate
all the transactions and send them to the bank, which has direct access to the Forex Market.
By this scaling-up process shown in the graph below,
a Retail Trader can benefit from the opportunities
located in the Forex Market.
In summary, all these participants mentioned above create
a massive volume of money. To be more precise;
the volume of the Forex Market
is:
5 TRILLION DOLLARS PER DAY!
(Equivalent to 26% of NYSE Market
Capitalization)
That number is VERY interesting, isn’t it? This high volume represents a vast
world of opportunities. You may now be wondering
… How can I start?
Well… first we need to read and
understand all the topics related
to
the Forex Market,
and in
particular,
Charts and Quotes.
The very basic representation of the market at any point in time is a simple bar and a bar is no more than prices being mapped in a graphical
way. A bar always includes
what we call O-H-L-C,
which stands for
Open, High, Low and Close Price.
As you can see in the next graph, the Open price represents the first price of the period with a dash on the left, the High price
represents the top of the
bar, the Low
price represents the bottom of the
bar
and the Close price is represented
with the dash to the right.
When
you assemble a number of
these bars, you get
a Bar Chart:
The colors Red and Green help the traders
to identify which bars are going up (bullish bars) and which are going down (bearish bars). Don’t worry, we will talk about
bullish and bearish
bars in one of the next chapters.
The next type of Forex Chart that is
very popular among traders is the candle chart. In essence, it carries
the same information, but represented differently.
Each of these candles, has a
body and two shadows.
As in the bars, the
Top and Bottom of
the shadows represent
the High and Low prices.
On the other side, the Top
and Bottom of the
Body represent the Open and Close
prices of the period.
Now that we have a basic understanding of how charts work, let’s take a look at how to read currency pairs in a EURUSD chart. In this case, the base currency is the EUR (Euro) and the quoted currency
is the USD (US Dollar). This price means that for every Euro you would get 1.2524 US Dollars.
Conversely, to buy 1 Euro you need 1.2524 US Dollars. This chart simply expresses the value of the base currency
(on the left), quoted
in terms of the quoted
currency (on the right).
There are over 180 currencies in the world
and you can combine them tin different
ways o give you a currency
pair. Most traders
identify 2 groups of
currency pairs,
shown in the following graph:
However, there
remains an important question to consider. Am I a Bull or a Bear?
Bulls and bears, are the two animals that dominate the Forex Market. The bulls stand for forex traders that invest in the growth of a currency pair, in this example,
the bulls are active buying the pair GBPUSD in order to profit from the
growth in the price. On the opposing
side, bears are traders that invest in the decline
of a currency
pair, in this example bears would profit from a downward
trend in the EURUSD by selling
this currency pair. It is important to mention that YOU, as trader,
will act sometimes as a bear and other times
as a
bull, depending on the market
conditions and your
strategy.
Let’s take look at how a bull can benefit from buying on the Forex Market. The next graph illustrates an upward trend. Let’s assume a bull trader bought at 1.4400 price (1.4400 USD per 1 GBP) expecting the price to rise.
In effect, the market rose,
the trader waited for some time and then closed the transaction at 1.5950.
So
this bull trader made
money from the
forex market by buying at a low price and
selling at a higher price.
The mechanics of the transaction are explained
by the following graph, assuming the trader invested
initially an amount of $1,000 USD, buying 694 GBP at 1.4400 price. When the price rises at 1.5950, the trader exchanges the 694 GBP for $1,107
USD, obtaining a $107 profit.
At this point you may be wondering… OK I understand the mechanics, so when I can trade? Is the Forex Market open 24/7?
A
closer look at the Forex Market
Hours
The following global map illustrates the main Forex Sessions
and the correct way to read it is from right to left. There are 4 main Forex Sessions,
first we have the Sydney session,
2 hours later we have the Tokyo session,
then the London
session and finally the
New
York session.
When should you trade? It depends on the currency pair and the
strategy that you have. From the map,
you can see that when New York opens, the European session is only half-way
through. This is represented by a large amount of money in the market (or liquidity). Most major pairs are traded in the combination of this sessions,
which means that a lot of opportunities for traders can emerge
in that period
of time.
The link
below is a little
gift from us so that you may download
the Forex Hours Map adapted
to your own time zone:
Now that we have reviewed
the basic concepts
of the Forex Market, it is time to
learn the Forex Language.
First of all, let’s get
clear with prices: Bid and Ask…
When you go on vacation out of the country, you usually need to exchange
your home currency
for the currency of the country you are visiting.
Then when you return, you need to exchange
back the excess currency
from the country
you visited. This is done at an exchange booth where you are quoted a price depending
on your transaction.
The same
principle applies to the Forex Market,
where you have an Ask
price and a Bid price. If you want
to buy a currency pair, then you will be quoted at the Ask price, which is always higher than the Bid price. This is the price
that you will be
quoted in case you want to
sell the currency pair.
Let’s clarify this with the following example with the pair GBPAUD. if you want to buy GBP you will be using the Ask price and you have to pay 1.8873 AUD. However, if you want to sell GBP you will get 1.8866 AUD
in exchange at the Bid
price.
But what is that space between the Ask and the Bid? … That, my friend, is called the Spread or the cost of doing business in the Forex Market.
Spread is simply defined as what you pay for carrying out a transaction. For the example above, let’s
take a look at how can we calculate the spread.
Hmmm interesting… but you may be wondering about those decimals. This complexity can be simplified by understanding Pips and Points.
Let’s consider first
the 4-digit quotation system:
Any currency pair has 4 digits
after the decimal point (except for Japanese based currency pairs).
The last digit is called the minimum change,
so
the minimum change a currency pair can experience
is 0.0001 units of quoted currency.
This minimum change receives the name of 1 Point and the value (0.0001) receives the
name of 1 Pip. Therefore, in this case 1 point
is equal
to 1 Pip.
Now let’s talk about 5-digit quotations (which are more precise).
Now, the minimum
change that this currency pair can experience is 0.00001.
The minimum change is still called 1 point, but the value on the right
is labeled now with name Pipette. In this case, 1
point is equal to 1 Pipette.
Now that all the definitions regarding
quotations are clear, let’s talk a little bit about volume, or in
other words the
quantity of measure used
on the Forex Market. This
point is where the concept of Lots and Leverage becomes relevant.
The graph below illustrates the different
measures of volume through
which we can operate
on the Forex Market:
Let’s take a transaction with EURUSD as a reference. Suppose we want to buy EURUSD because we saw an opportunity in an upward trend. We want to conduct this transaction with the volume of 1 lot, that means we will be buying 100,000 Euros. The Ask price currently given by the Broker is 1.23228, this means we will need 123,228
US dollars in our account.
Wait! That is a lot of
money!
How can we still trade on the
Forex Market?
Relax, my friend, here comes
Leverage to the rescue.
As we can see in the example above, the requirements to buy EURUSD are still very high. This is when Leverage comes into play. The concept of Leverage has a very bad reputation and I want to clarify
that Leverage is not a bad thing, if it is used properly.
In simple terms, Leverage allows your Broker to lend you the money for you to conduct transactions on the Forex Market.
Let’s make this clearer
with the next example:
You have 500USD in your account
and you want to conduct a transaction with the volume of 0.1 Lot, so in theory you would require 12,322USD to conduct the transaction. With Leverage
(1:100 in this example),
the broker will
lend you 99% of the amount required
to do the transaction, while the remaining 1% will be invested
from your balance, which
represents 123 USD, (which is
way more affordable).
At this stage, you might
be
wondering if you can win or lose it all in
the market, which is
understandable. Let me go through
the concept of StopLoss and TakeProfit, which can help us in the Forex Market when Stopping Losses or Taking Profits.
The example below illustrates when you have a rebound in the market and you expect it to go all the way up and you decide to open a Buy position. A Take Profit is an additional order which you can aggregate
to your initial
order, specifying that if the price reaches a certain
level, then you want your Buy order to be automatically closed so you can secure a profit.
If the price passes the Take Profit level,
your order will
therefore be closed automatically.
The opposite situation is shown in the example
below. In this case, you expect a downward trend and therefore
you want to open a Sell position.
You can also embed a Take Profit to automatically close your position when the price passes the
pre-defined level.
But you might be wondering what happens
if something goes wrong and the price turns unexpectedly in
the opposite position….
Well,
that is why you must use a StopLoss.
Similar to the Take Profit, the Stop Loss is also an embed order that you can attach to your Buy or Sell order with the goal of limiting the losses
in case the price goes in the opposite direction. If the price passes the Stop Loss level, the order should automatically be closed, bringing you a loss BUT preventing
you from substantial losses. If you don’t put a Stop Loss, your losses can be much greater and drain all the funds from your account.
However, in the Forex Market there is always an inherent risk and most brokers do not provide
a guaranteed stop loss. In addition, Stoploss may
not be able to protect investors if there is a black swan
event.
So far, we have seen the most important structural aspects of the Forex Market, the notions of reading
the charts and the basic requirements of Forex Trading. The next point that we will cover is the Forex Analysis, which will provide a general
idea of how to take advantage
of the Forex Market.
The three types of Forex
Analysis are represented in
the graph above. The most important
aspects and related
tools are explained
below.
Fundamental Analysis:
This type of analysis
is based on the belief that somewhere, out there in the world, there is information or knowledge
that is not yet reflected in the market price.
Traders that practice
this kind of analysis
think they can take advantage of the market by entering
into the right position
whether it be
Buy
or Sell.
Fundamental Analysis includes reading and understanding news surrounding certain currencies, understanding the global economic
climate and what happening
in the world to affect the performance of a particular currency. It also involves understanding the current
situation of resources
(such as oil) because
certain currencies correlate with the
prices and supply/demand of resources.
A convenient way of doing this kind of analysis is through
an economic calendar,
which summarizes what is happening
in the world. However, it is also advisable that you do your own research.
Please take a
look at my webinar on the Economic Calendar to expand
your knowledge on
Technical Analysis:
This type of analysis
is based purely on the belief that all available
information in the world is already contained in the price. Therefore, all you need to do is analyze the charts with no need to analyze
news or interest
rates of the countries, etc. Traders
who believe in technical analysis think that prices move in trends and that historical patterns tend to repeat.
This is how they proceed
to take advantage
of the market by opening
a position.
Here we will take a look at the main technical analysis tools used by traders:
Trends and Flats:
One of the most common things in the Forex Market is a trend, so let’s try to understand what a trend is:
The above graph illustrates the action of a price (green line) and you can see that we can draw a blue line beneath
the price. The blue line is called the support line and it indicates an upward trend and it means the price is bouncing upwards and it is continuing in an upward movement. You can therefore
expect that the price will come back again, hit the support line and bounce off and keep moving
upwards. A technical
trader can take advantage
of this by setting a Buy position, expecting the price to continue going
up.
The above graph illustrates the opposite
example, where the price is going down and if we draw a red line above the price, this one seems to be forced to go down. The red line is called the resistance line and you can expect the price to continue
to go down if it approaches the resistance line, bouncing
off downwards. Therefore, a technical
trader can take advantage
of this by setting
a Sell position
in the Market.
The third type of market is a flat market. In this case we cannot draw a support
or resistance line because the market is moving
sideways.
Channels:
We can complement a support
line by drawing a channel
(graph below), by copying the line and putting
it above the price (green line). As you can see here, the price seems to be bouncing
off downwards against
the top blue. The price seems to be going through
a channel or corridor.
We can anticipate that if the price is going up, then it may be bouncing
down again (dotted-line) and when it reaches the support line it may be a good time to set up a Buy order. There is a high probability that it will bounce
against the top line again and the price level marked with the X might be a good point to close the position or set up a
take profit.
In the case of a downward trend (graph below),
we can do the same process by copying the resistance line and putting it below the price.
In this case we would expect the price to come up and hit the resistance line again. We can then open a Sell order to close our position
or set up a take profit in price level
marked with the X.
Triangle Pattern:
The triangle pattern is a very powerful but at the same time a simple formation
on the Forex Market. If we take a look at the following example we can see how if we draw 2 lines (yellow
lines), above and below the price line, the price seems to move in a triangle
formation. The price movement decreases in its movement range and reaches a point where it cannot move anymore
inside the triangle, which is exactly when the price shoots up (it can shoot down as well). This
shooting represents an opportunity to set
up
a Buy position and profit from the
upward movement in the market.
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