Forex 101

Forex 101, a very basic forex tutorial for beginners.

With this Forex 101 guide we will go through the basics about forex trading.

Forex 101: What is Forex?

  • Forex is short for Foreign Currency Exchange
  • It is a global market where people trade money among the major financial centers
  • Forex is a worldwide market anyone can participate
  • It is the largest, most liquid cash market with $1.9 trillion per day traded (roughly 80 times the level of trading of the New York Stock Exchange).

The bigger the market, the more liquidity and better execution. One of the advantage is that being so big the forex market is hardly manipulated by single individuals, another advantage its  24 hours a day continuous operation (except weekends).

Forex 101: Terms
in the Forex world there are several terms you must know

  • pip
  • lot
  • take profit
  • stop loss
  • leverage
  • currency pair
  • bid price
  • ask price
  • spread

Forex 101: What is a pip?

  • a pip is the smallest price change for a currency exchange rate

Most changes can happen in 4 decimal places, some happen in 2,3 or 5 demical places (1 basis point).
Your forex broker should let you know how many decimal places for each currency pair.

An example would be the USDCAD based on 4 decimal places (0.0001)

  • If the USDCAD moved from 1.0000 to 1.0001, it has moved 1 pip.
  • If the USDCAD moved from 1.0001 to 1.0004, it has moved 3 pips.

Forex 101: what is a lot?

  • a lot is a minimum unit to trade. In currency trading the standard lot size is 100000 units.
  • what is a mini-lot? 1/10 (10%) of the standard lot size (10000 units).
  • what is a micro-lot? 1/100 (1%) of the standard lot size (1000 units).
  • one pip of a currency pair based on USD is 10$ when trading a standard-lot, $1 when trading a mini-lot and 0.1$ when trading a micro-lot.

Forex 101: what is a currency pair?

  • GBPUSD – a currency pair is a quote and price structure for currency traded in the forex market. The first pair is the base currrency while the second pair is the quote currency.

A currency pair is how much quote currency is needed to buy 1 unit of the base currency.

  • For example:

quoted USDGBP = 1.5

purchase the pair, for every 1.5 british pounds that you sell, you purchase (receive) US $1
sold the currency pair, you would receive 1.5 british pounds for every US $1 you sell.

  • Another example:

quoted EURUSD = 1.3

purchase the pair, for every 1.3 dollars that you sell, you purchase (receive) 1 euro.

Forex 101: what is bid price?

  • the price a buyer is willing to pay for a currency pair
bid price

bid price

Forex 101: what is ask price?

the price a seller is willing to accept for a currency pair, also known as the offer price

ask price

ask price

Forex 101: what is spread?
The spread is the difference in pips between the buy (bid) price, and the sell (ask) price of currency pairs. This is the commission you will pay to the broker for each trade position opened.

Forex 101: what is leverage?
Leverage allows you to open trades that are larger than the capital in your account.
Trading on margin can both positively and negatively affect your trading experience as both profits and losses can be dramatically amplified.
Forex brokers generally offer leverage from 1:20 up to 1:500

Forex 101: what is take profit (T/P)?
the number of pips or price from the current price point where to close out their current position for a profit

Forex 101: what is stop loss (S/L)?
Sell a security when it reaches a certain price
Used to limit an investor’s loss.

T/P and S/L when you BUY?

buy order

buy order

T/P and S/L when you sell?

sell order

sell order

Forex 101: what is a trading strategy?
A trading strategy helps you determine when to get into (enter) and get out of (exit) a trade.

There two forex trading strategies:

  • fundamental
  • technical

A fundamental trading strategy uses financial news to predict the movement in a currency pair

forex economic calendar

forex economic calendar

A technical trading strategy focuses on statistical and propabilistic indexes to predict the future trend of a currency pair.
An example is a moving average shown on this chart

moving average system

moving average system

Forex 101: what is a trading platform?
A trading platform is a software provided by a broker to execute the trades and managing your account.
The most widely used forex platform is metatrader

metatrader

metatrader

Forex 101: what is an indicator?
For technical analysis an indicator is a mathematical calculation based on a currency price and/or volume.
The result is used to predict future prices.
For fundamental analysis an indicator could be a measure which can be used to predict the future economic trends.
Common general economic indicators are the unemployment rate, new housing starts, the consumer price index (CPI) and the gross domestic product (GDP).

Indicator can be grouped into four main categories.

  • trend
  • momentum
  • volume
  • volatility

Trend indicators
By looking into the movement of the trends, you can decide on the level at which you can strat trading.
Moving average, parabolic SAR and MACD are just some of those that make up this group.

moving average

moving average

Momentum indicators
These are considered to be the oscillating indicators and are most clear-cut in pinpointing the overbought as well as the oversold positions.
Similarly, they show the signals for any new trend.
Stochastics, RSI, CCI are just some of those momentum trend indicators.

stochastic

stochastic

Volume indicators
Price movement is very much dependent on the volumes of the trades.
Generally, the price movement which is rooted from a high volume, gathers a fairly stronger signal compared to one which is inspired by the low volume.
Example of which include the force index, money flow index, ease of movement, chaikin money flow and many others.

money flow index

money flow index

Volatility indicators
They normally look into the ranges that define the volume that lies beneath the movements and the price behaviour.
The common examples include the average true range, bollinger bands, and the envelopes

average true range

average true range

Forex 101: what is an expert advisor?
An expert advisor is a trading software (used in a trading platform) to help the currency trader with forex trading analysis and the execution of trades.

expert advisor universal MA cross

expert advisor universal MA cross