Having an understanding of the information below will assist you when you are learning about the two main areas, i.e. a forex strategy and the platform that you will be using.

 

What is the Forex Market?

The Forex Market also know as Foreign Exchange Market, FOREX or FX is just like any other market which involves buying and selling, but instead of the buying and selling of goods or services, this market is involved in the buying and selling of currencies.

The FOREX market is a decentralized or over the counter (OTC) market and is the largest market in the world by trading volume with an estimated trading per day exceeding $5trillion.

Unlike other markets, the FOREX market is open 24 hours per day apart from weekend. It opens 10pm GMT on Sundays and closes 10pm GMT on Fridays.

On a daily basis individuals or companies all over the world are trading with each other.  As a result they will need to convert their currency into the currency of the country they are buying from in order to pay for goods and services.

This will cause the demand for that currency to increase and will result in a movement in the price of that currency.

For example, if a company in Australia is buying goods from a company in the US, the Australia company will have to covert its currency into US dollars to pay for these goods.  This will cause an increase in the demand for US dollars and price for the US dollar will increase.

As a FOREX trader your aim is to benefit from this price movement!!!

Undoubtedly, you have a lot of players in the forex market all over the world such as central banks, investment banks, commercial banks, hedge funds, market makers, commercial companies, retail forex exchange traders to name a few. All these major players in the market will cause the price of a currency to fluctuate significantly.

 

What is a Bear Market and a Bull Market?

There are two ways of describing a financial market, they are a Bull Market and a Bear Market.

A Bull Markets is a financial market in which prices are rising higher and higher.  This market is also described as being bullish.

A Bear market on the other hand is a financial market in which prices are falling lower and lower. This market is also described as being bearish.

 

What is a Currency Pair?

A currency is a system of money in general use in a particular country as stated in the oxford dictionary.  As the forex market is involved with the buying and selling of currencies, this means that you will need to exchange one currency for another.

Therefore, a currency pair is a quotation of one currency in relation to another.

Below is a list of symbols used for the currency for different countries.

Country Currency Symbol
England Great British Pound/Cable GBP
Unites States of America US Dollar USD
New Zealand New Zealand Dollar NZD
Australia Australian Dollar AUD
European Union Member Euro EUR
Japan Japanese Yen JPY
South Africa South African Rand ZAR
Canada Canadian Dollar CAD

 

Let’s look at an example of a currency pair in which the rate of the GBP/USD is 1.3529.  The first currency in the currency pair (GBP) is called the base currency and the second currency (USD) in the currency pair is called the quote currency.

In other words, the price quoted in this example indicates how much of the second currency (USD) is needed to purchase one unit of the first currency (GBP).

Therefore it takes $1.3529 US dollar (USD) to purchase one Great British Pound (GBP).

 

Let’s look at another example in which the rate of the USD/JPY is 109.10.  This means, it will take 109.10 YEN to purchase one unit of US Dollar.

 

You can look at other currency pairs and interpret them for yourself based on the information above.

 

Strengthening and weakening of currency.

A currency will strengthen and weakens each day as its traded on the forex market based on the demand and supply of that currency. Using the GBP/USD example above which was at 1.3529.

Let say it now takes $1.3626 US dollar to purchase one unit of Great British Pound, then the Great British Pound is getting stronger as it takes more US dollar to purchase one unit of the Great British Pound (GBP).

On the other hand, if it now takes $1.3429 US Dollar to purchase one unit of Great British Pound, the Great British Pound is getting weaker meaning it takes less US Dollar to purchase one Great British Pound (GBP).

 

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What is Forex Pip?

As a forex trader your aim is to capture as many pips or points as possible during a day, week or month. A PIP stands for Price Interest Point.

It is the unit of measurement in a given currency pair.   Most currency pairs are normally quoted to 4 decimal places and it is calculated based on the change in these numbers in the currency pair. Currency pairs that are linked to the JPY are quoted to two decimal places.

For example if the GBP/USD moves within an hour from 1.3529 to 1.3579 then this currency pair has moved up by 50pips.

Let’s look at another example, if the USD/JPY moves within 5mins from 109.80 to 109.10, then this currency pair has move down by 70 pips.

Now that you know what a pip is you also need to know that the amount of money you will make from these moves will depend on the value of each pip for that currency pair.

  

PIP VALUE WHERE THE SECOND CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT

If your trading account is in US dollars and you are trading a currency pair in which the second currency is US dollars as well then the pip values below would apply based on the account type that you have.

  • If your account type is a standard lot account one pip would be US$10per pip
  • If your account type is a mini lot account one pip would be $US1 per pip
  • If your account type is a micro lot account one pip would be .10 cents per pip.

For ease of calculation we will assume that you have a mini lot accounts in which the value of one pip is USS1 per pip if the second currency in the currency pair is the same as the currency as your account.

 

Example 1

Let’s look at some examples using your USD mini lot account. What’s the pip value for GBP/USD, NZD/USD, EUR/USD.  Your answer should be US$1 per pip as the second currency in the currency pairs matches that of your account (US dollar mini account).

 

Example 2

If you trading account is not in US Dollar, let say your trading account is in GBP.  What would be the pip value for the following currency pair – EUR/GBP.  The answer would be £1 per pip.  Why? Because the second currency in the currency pair matches that of the mini lot account Great British Pound (GBP).

 

 

PIP VALUE WHERE THE FIRST CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT

Example 3

We are still using our US$ mini account.  What is the pip value for USD/JPY?  In this example, the second currency in the pair is not USD but the first currency is, in this situation you will have to calculate the pip value by dividing the fixed pip value amount US$1 for mini lot USD account by the rate for the USD/JPY.

Pip value = US$1 (fixed price for mini lot account)  /  rate of the currency pair

If the currency pair includes the JPY then you will have to multiply your result by 100 to get your pip value.

Let’s assume that the rate of the USD/JPY is 109.05.  The the pip value for the USD/JPY is using the formula above is-

Pip value  = US$1  /  109.05 multiply by 100

Pip value = .92 cents per pip

 

Example 4

Let look at another example, what’s the pip value for USD/CAD? Note the second currency in the currency pair is not USD but the first currency is, therefore you will divide the fixed price of US$1 for mini lot by the rate for the USD/CAD which is 1.2846.

Your answer would be .78cents per pip (US$1/1.2846)  In this example you do not need to multiply by 100 as the currency pair does not consist of JPY.

 

PIP VALUE WHERE NEITHER THE FIRST NOR THE SECOND CURRENCY IN THE CURRENCY PAIR MATCHES THE CURRENCY OF YOUR TRADING ACCOUNT

Example 5

Let say, you have mini lot account is in Australian Dollar (AU$) and you would like to find the pip value for the GBP/USD?

Please note – none of the currencies in the currency pair matches the currency of the account you are using – Australian Dollar (AU$).

First convert the first currency in the currency pair (GBP) to the currency of your mini lot account AUD and retain the second currency in the currency pair.

You will now have a new currency pair that is AUD/USD.

Second, find the rate for your new currency pair (AUD/USD)   Let’s assume the rate is .7500.

Finally, divide the fixed mini lot price AU$1 per pip by the new AUD/USD rate of .7500, therefore your answer would be AU$1.33 per pip (AU$1/.7500)

 

Example 6

Let’s look at another example using your Australina Dollar mini account.  What is the pip value for the EUR/JPY?

Please note – none of the currencies in the currency pair does not match the currency of the account.

First convert the first currency in the currency pair (EUR) to the currency of your mini lot account AUD.

You will now have a new currency pair that is AUD/JPY.

Second, find the rate for your new currency pair (AUD/JPY)   Let’s assume the rate is 82.19.

Finally, divide the fixed mini lot price AU$1 per pip by the new AUD/JPY rate of .82.19, therefore your answer would be .0122 (1AU$/82.19).

As this currency pair includes the JPY you will need to multiply your answer by 100 to get the pip value,   Therefore the pip value is AU$ 1.22 per pip (.0122*100)

 

Now take the plunge and do some further examples on your own for practice!!!!!

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What is a Bid and Ask Price?

Two prices are normally quoted in relation to a currency pair. The first price in the quote is called the Bid Price and the second price in the quote is called the Ask Price as shown in the diagram below.

Bid and Ask price 2An ask price or offer price is the minimum price a seller will accept for a given currency at a given point in time.  It’s clear from the table above what is the ask price for each currency pair.

As you will notice the ask price is the higher of the two prices in the quote.

A bid price is the maximum price a buyer will pay for a given currency at a given point in time. It’s clear from the table above what is the bid price for each currency pair.

As you will notice the bid price is the lower of the two prices in the quote.

 

What is a Spread?

A spread is the difference between the bid price and the ask price of a currency pair. The price of a currency pair is normally quoted to 4 decimal points, or 2 decimal points for currency pairs that includes the YEN (JPY).

From the table above the prices are quoted to 5 decimal places, the 5th place is called fractional pip. This make the pricing of the currency paid more precise.

Let’s calculate the spread for the AUD/CAD.  For ease of calculation we will only use 4 decimal places.  Therefore, the spread for the AUD/CAD is 3 pip (.9639-.9336).

This means that if you have an account in canadian dollars, for every trade you place you will have to pay the broker CAD$3 per pip.

 

Now you can take the plunge and calculate the spread for the other currency pairs in the table above.

 

A small spread indicates high liquidity for that currency pair and a wide spread indicates low liquidity for that currency pair.

As a forex trader, the spread is what you will pay each time you enter the market, therefore you would want to trade currency pairs with small/tight spread.

 

What is a Position Size?

Position sizing is VERY, VERY, VERY important when in comes on to risk management.  Position size is also called lot size.  It is the number of position/lots you are able to trade within your risk management guidelines. Professional traders risk 1% or less on any given trade.

In order to determine the position size there is some preliminary work that needs to be done.

Assume you have the set up conditions based on your strategy, you first need to establish how much is 1% or your account balance.

Let’s assume you have a $10,000 USD mini account.  Your 1% risk in $ is US$100

($10,000 multiply by 1%).

Now that you know your risk in US$ you need to establish where you will place your stop loss order (the point at which you want to get out of a trade if it goes against you).

Knowing where to put your stop loss order in advance is very important for calculating your position size.

You will also need to establish your entry price. The difference between your entry price and your stop loss order is your risk in pips/points.

When you have all of these information you will be able to calculate your position size using the following formula:

Risk in Dollars   divide    by risk in pips    divide  by pip value  =  POSITION SIZE

 

Example 1

Let take an example, you have a US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).

You get your set up condition on the GBP/USD.

You identify that you need to place your stop loss at 1.3500 and that your entry price is 1.3530.

From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 30(1.3530-1.3500*10,000)

 

You now need to establish the pip value for the GBP/USD currency pair. As the second currency in the currency pair matches that of the account you are trading then 1 pip in a mini lot account would be equal to $1 per pip.

Now that you have all three pieces of information you are now able to calculate your position size.

Position size =   Risk in dollars   divide by    risk in pip    divide by   pip value

Position size =       £100      divide by      30        divide by      1

Position size =  3.33

This means that for every 1pip movement your account will be increasing/decreasing by US$ 3.33 per pip.

The fact that you are only risking 1% of your account size means you will have 99% of your money left in your account for you to trade again if your trade goes against you.

 

PLEASE NOTE! BEFORE YOU PLACE A TRADE, CHECK YOU ACCOUNT BALANCE AND CALCULATE YOUR 1% RISK AS YOUR ACCOUNT BALANCE WILL KEEP ON CHANGING.

 

Example 2

Let take an example, you still have your US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).

You get your set up condition on the USD/CAD. You identify that you need to place your stop loss at 1.2845 and that your entry price is 1.2870.

From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 25 (1.2870-1.2845*10000).

You now need to establish the pip value for the USD/CAD currency pair.

As the second currency in the currency pair does not match that of the account you are trading but the first currency does then you will have to calculate the pip value by dividing the fixed amount for mini lot i.e $1 by the USD/CAD rate of 1.2870.

This will result in a pip value of .77 cents per pip. ($1/1.2870)

Now that you have all three pieces of information you are now able to calculate your position size.

 

Position size =   Risk in dollars   divide by    risk in pip    divide by   pip value

Position size =       £100      divide by       25       divide by     .78

Position size =  5.13

This means that for every 1pip movement your account will be increasing/decreasing by $5.13

per pip.

 

Example 3

Let take an example, you still have your US dollar account amounting to $10,000 and you only want to risk 1% of your account balance which is $100 ($10,000*1%).

You get your set up condition on the USD/JPY. You identify that you need to place your stop loss at 109.00 and that your entry price is 109.70.

From this information you are able to calculate your risk in pips/points. In this example your risk in pips is 70 (109.70-109.00*100).

You now need to establish the pip value for the USD/JPY currency pair.

As the second currency in the currency does not match that of the account you are trading but the first currency does then you will have to calculate the pip value by dividing the fixed amount for mini lot I.e $1 by the USD/JPY rate of 109.70 *100.

This will result in a pip value of .77cents per pip ($1/109.70*100)

Now that you have all three pieces of information you are now able to calculate your position size.

Position size =   Risk in dollars   divide by    risk in pip    divide by   pip value

Position size =       £100      divide by       70       divide by     .77

Position size =  1.86

This means that for every 1pip movement your account will be increasing/decreasing by $1.86

per pip.

 

Now you are ready to practice some examples on your own, so that you are able to do this quickly.   Keep referring to these examples if you have to.

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Fundamental vs Technical Analysis

There are two types of analysis that can be done on the financial markets. They are Fundamental or Technical analysis.

Fundamental analysis is one in which the direction of the market is analyses using financial and economical factors such as company financial statement and news about the economy along with other factors.

The analyst takes a long term view of the direction of the market.  This is normally done by investment banks, hedge funds, etc. Example of economic news that affects the forex markets, just to name a few, are as follows:

  • Interest rates decision
  • Employment rate
  • Non form payroll
  • Gross domestic product
  • Inflation rate

Most large financial institution based their trading using fundamental analysis.  Traders who uses this method of analysis are known as Fundamental Traders.

 

Technical analysis is one in which the market direction if being analyses based on price movement represented by candlestick on a chart, chart patterns and the use of technical indicators.

Traders who uses this method to analyse the market are know as Technical Traders and normally take a short term approach.

Information on this website is focusing on those who want to be a technical trader.

 

Types of Traders

There are four categories of traders.  There are the scalpers, day trader, swing trader and the position trader.

The Scalper

The scalper is trader whose aim is to capture a few pips/points in seconds to minutes through out the course of the day.

 

The Day Trader

This traders enter the market many times during the day but hold on to their trades for a longer period that the scalper.  They may hold a trade for a few minutes to a few hours throught the day.

 

The Swing Trader

This type of trader will hold a position for a few days

 

The Position Trader

This type of trader will hold a position for a few weeks or months.

 

What is a Candlestick Chart?

A candlestick is a chart that represent price movement over a given period of time.

Every candle stick will show the opening price, closing price, the low price and high price for that period of time which can either be 2mins, 5 mins, one hour, 2hours, a day, a week, a month etc.

The wide section of a candlestick is know as the body and the ends are known as wicks as show below.

Candlestick

If the closing price of a candlestick is above that of the opening price then this candlestick is called a bull candle.  This candlestick indicates that there are more buyers in the market that sellers and as a result the price is rising.

Note- the colour of the bull candle may be different from the one below based on the platform you  are using, therefore the key to identify a bull candle in where the closing price is located in relation the the opening price.

bull candlestick

 

If the closing price of a candlestick is below that of the opening price then this candlestick is called a bear candle.  This candlestick indicates that there are more sellers in the market than buyers and as a result the price is falling.

Note- the colour of the bear candle may be different from the one below based on the platform you  are using, therefore the key to identify a bull candle in where the closing price is located in relation the the opening price.

bear candlestick

 

If the closing price of a candlestick is the same as the opening price then this candle stick is called a neutral candlestick, it lacks direction. This candlestick indicates that there are equal amount of buyers and seller which results in the closing and opening price remaining the same.

Nuetral candlestick

Candlestick formations are VERY, VERY, VERY important for the technical trader.  It is these formations that dictates when to place your stop loss order, when to enter or exit a trade in the Forex market.

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Uptrends , Downtrends and Consolidations

The Forex Market can either move in one of three ways:-

  • Up –  Uptrend
  • Down – Downtrend
  • Sideways – consolidation

What is an Uptrend?

An uptrend is one which the Forex market is going up and keeps on going up by making higher highs and higher lows. The H in diagram represents “highs”  and the L represents “Lows.”

Try to visualize this using the diagram below you move your eyes from left to right.

 

uptrend chart

 

What is a Downtrend?

A downtrend is one is which the forex market is going down and keeps on going down by making lower lows and lower highs.

See examples below, again moving your every from left to right.  You can see that the highs (H) are getting lower and lower and the lows (L) are also getting lower and lower.

 

downtrend chart

 

 

What is Consolidation?

If your are not able to see a clear uptrend or downtrend then the forex market is in consolidation.  See what consolidation looks like below.

 

consolidation chart

 

 

Forex Trading Times UK

The Forex market opens 24 hours per day except on weekends.  It opens at 10pm GMT on Sundays and closes at 10pm GMT on Fridays during the summer months

As this is the most liquid market in the world, you will have more people trading when market times overlap.

These times are considered to be the best time to trade as there is a lot of volatility in the markets. This does not mean that you cannot trade outside of these overlap times, but liquidity is a traders best friend.

See diagram below that shows you when markets time overlap. That is the Sydney/Toyko session overlap 7am to 8am with London and the London New York session overlaps 12noon to 4pm as highlighted in blue.

Overlap trading times

 

FOREX NEWS

There an news about an economy that will affect the price of that currency and sometimes other currencies.

Most sites that gives news information will give you the option or show you which news item have an low, medium or high volatility on the forex market.

News that result in high volatility can sometimes move the price of a currency by 60-100 or more pips/points in a few seconds or minutes.

Your forex strategy will give you further information as to what you should do when a major news announcement is pending.

For now, as a new trader when major news are about to be announced, just sit back and watch what happen to prices after the announcements.

If the news that will be announced relates to the US, choose a currency pair that has USD in it and watch what happens when the announce is made.

Some of the news items that can have big impact on the price of a currency are:

  • Changes in interest rates
  • Employment rate
  • Non farm payroll data and many more.

You can click here for a list of forex.

Most forex platform will also have information relating to forex news.

 

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