JUMP START your Forex trading now in the shortest possible time. This first part of the crash course teaches the Forex basics, and only the essentials, to give you a quick and safe start in Forex trading.
Forex is short for Foreign Exchange which is sometimes even shorter abbreviated to FX. Forex is the currency market and trading Forex is trading currencies in order to make money. Forex can be traded 24 hours a day and 5 days a week.
Unlike stocks, Forex is not traded at a physical location or a central exchange like the New York Stock Exchange, but it is done ‘Over the Counter’ (OTO). This means that the Forex market is a decentralized market, with no (governmental) regulation.
It is not possible to have direct access to the Forex Markets. You can only trade Forex through a middleman: a broker. There are 1000’s of brokers that operate worldwide, so it won’t be difficult to get one.
For trading you need to have special trading software, or a ‘trading platform‘ installed on your computer or laptop.
The most popular trading platform to date is the free Metatrader 4 (MT4). There are MT4 versions for Windows and Mac. And there is an App version.
Pairs & prices
If you are trading Forex then you are always trading currency pairs. For example, If you are trading Euro for Dollar then you are trading the Euro-Dollar pair, or EUR/USD.
The first part of this currency pair is called the base currency (EUR), the last part is called the quote currency (USD).
The quote prices are the prices you see displayed in the banks and money exchange offices. It is the amount in quote currency you will get in exchange for 1 unit in base currency.
Pips & lots
Like distances are measured in units of meters, miles or inches, there are also units of measure in Forex trading. One of these units is the lot, which is a measure for the quantity of money.
1 lot = 100,000 units of money. This means:
- 1 lot in dollars = $100,000
- 1 lot in euros = €100,000
There are also minilots and microlots.
- 1 minilot = 0.1 lot = $10,000
- 1 microlot = 0.01 lot = $1,000
Another unit in Forex trading is the pip. The pip is short for ‘point in percentage’ and it is a measure for change of the currency price. For most currency pairs 1 pip is a 0.001 change in price.
Spreads & commissions
A broker is a business, so it has to make money to stay in the market. Brokers make money with spreads and commissions.
Trading is done with 2 prices, a bid price and an ask price. A trader sells at the bid price and buys at the ask price. Spread is the difference between these prices. Some brokers maintain fixed spreads, others variable spreads.
A commission is a small fee a trader pays to the broker for executing the order.
Some brokers don’t charge commissions for placing orders, but they maintain a relatively big spread. Other brokers do charge commissions, but they maintain low spreads, sometimes even zero! It is up to the broker business model how it makes money. In this blog post I will cover more about brokers.
Difference Equity & account balance
Your money in your trading account is sometimes called account balance, and sometimes it is called account equity.
- Balance is all your trading money, excluding the profit/loss of currently running trades.
- Equity is your trading money, including all profit/loss of currently running trades.
All profit/loss of currently running trades is also called unrealized profit.
So if your balance is $1,000 and your unrealized profit is currently minus -$50, then your equity is $950.
How does leverage work?
The money in your trading account is – of course – your own money, but the money you are trading with is borrowed money. You borrow this money from your broker each time you place a trade.
For borrowing the money a small amount money is hold on your account’s equity, as long as your are still in the trade. This is called margin or margin deposit and it is a kind of collateral.
The height if the margin depends on your account’s leverage. The higher the leverage, the lower the margin. So with a higher leverage, you are allowed to trade with more borrowed money, and so you can trade more ‘lots’.
You can win more money on a higher leveraged account, but you can lose more as well.
The table below gives an indication about how much you can win on a 50 and a 500 leveraged account, for equity sizes of $100, $1,000 and $10,000.
The ‘margin call’
If you are losing and your equity goes down, then it will eventually reach a critical level: the margin call level. Your broker will then give you a margin call. Most brokers don’t allow you to place new trades.
If your equity continues to go down and it reaches the stop out level, then your broker starts closing out all your positions one by one at a loss (liquidation). This liquidation is an automatic process and continues until your equity is above the stop out level again.
Charting & trading
Pending orders & market orders
Buying and selling currencies is done by placing orders. There are 2 different orders: market orders and pending orders. A market order is buying or selling now. A pending order is buying or selling later when the price reaches a predetermined level.
There are two different pending orders, the limit order and the stop order. There is no difference between them, besides the positions they are placed at with respect to the currency price.
Sell limit orders and buy stop orders are placed above the price. Sell stop orders and buy limit orders are be placed below it (as shown in below image). The reasons why is beyond the scope of this crash course.
Candle charts & timeframes
These days the most popular price charts are the candle stick charts. Candles sticks originate from the Japanese Rice market centuries ago. They are called candle sticks because their shape looks like a candle, with a body and a wick.
Steve Nison introduced the Japanese candle in the west and popularized their use in stock trading in the 90’s. These days, it has become the most popular charting form in trading.
A candle (stick) is a representation of the price action during a fixed time interval or timeframe. It is made up from 4 prices:
- candle open: the price at the start of the time period.
- candle close: the price at the end of the period.
- candle high: the highest price in the period.
- candle low: the lowest price in the period.
The wide part of the candle is called the candle body, the lines on the top and the bottom are called wicks.
The color of the candle indicates if the price has moved down or up during the period. A white candle means that the price has gone up, a black candle means that the price has gone down.
Standard timeframes are the 1 minute, 5 minute, 15 minute, 30 minute, hourly, 4 hourly, daily, weekly and monthly timeframes. Other time frames like for example 2 minutes, 6 minutes or 6 hours are generally not used.
Open a demo-account and practice with fake money
Before traders trade with real money, they firstly practice trading with fake money. This is done on a demo account.
Demo accounts are used by both beginners and professionals. Newbies use them to master the trading software, and the professionals use them to develop and test new strategies.
Continue with part 2 of this crash course, where I will show you how to open a demo-account and make some (fake) money with it.