What is forex
FOREX stands for foreign exchange this is when you use one currency to buy another. FOREX trading is one of lucrative ways of making money, and it is un centralized, it is a 5 trillion dollar per day business, and this means that it is one of the most traded in the world, but it is not a get rich quick scheme, therefore you should not invest the money you cannot afford to lose, like any business FOREX requires patience.
FOREX is in simple terms like purchasing a property while it is cheap and selling it when it gains value, so is FOREX, you buy low and sell high. Another simple example is when you use your ZAR to buy USD while the price of the USD is low, and then you hold on your dollars. Later on when the price of the dollar has gained value, you exchange it back to your Rand, and you make profit. Or when a person travels from a strong currency country to a poor currency country, that person will be able to afford things far more than a person in that poor currency country, because their currency is strong, this is FOREX trading you are exchanging your currency, for the value of the other and make profit or get more value from your strong currency when you buy things.
FOREX market is not different from a vegetable market, the vegetable market brings buyers and sellers together, but the vegetable market sells vegetables, and the FOREX market sell currencies. In olden days, it was difficult to trade FOREX, this market was traded only by huge institutions like banks, brokers and insurance companies, and thanks to technology now anybody can trade FOREX from the comfort of their own home. The broker bring both buyer and sellers together, a broker is like a merchant that is selling currencies on the market called FOREX market, using a platform called MT4, this platform has updated currency prices in milliseconds, the MT4 is fetching the currency prices from the central bank and place them on market so that they can be bought or sold.
The most important thing in FOREX trading is that before you trade, you must know what you are trading, why you are trading, and when to trading? The risk comes from not knowing what you are doing.
Those are very important questions that will help you to win your trades, most people are trading just for the sake of trading, and that is why they lose money. Have a trading plan. The most important thing is you can't be in the market all the time. There are times to trade, and there are times to walk away, If the market is gone let it go, there will always be tomorrow, if you try to place a trade on a market that is already passed an entry point, you must wait for it to go back to a better point to enter, otherwise never try to catch a falling knife, I repeat there will always be tomorrow. One of the FOREX trading advantages is twenty four hours a day, five days a week trading. You can start trading Sunday afternoon and continue till the Friday afternoon seems to be perfect to operate, isn't it? But in order to get profits while trading you should choose the proper time to trade though it may seem not to be so important at the beginning, which is one of the things one should know to become a successful FOREX trader and that is a professional trader’s secret. Never try to predict the market, even greatest traders of all times, never predict the market, nobody knows what the market will do, the best thing you can do is analyze it. There is no such a thing as a holy grail in FOREX and no system is hundred percent correct, even famous FOREX traders do get losing trades. You must think in terms of probabilities in that way, you will have an edge over the market. Trust your own strategy and your own intuition when you are trading FOREX do not go with popular opinion, know exactly why you are entering a trade, don’t just trade for the sake of trading. This is important, I cannot emphasize it enough. If you want to succeed in life you must be willing to do things that other people aren’t willing to do, so that you can get the results that other people will never get. FOREX trading needs sacrifice, if you put less effort in it, you will get fewer results. Let the market do its thing as long as your system is consistent, do not interrupt the market, if the market is gone, let it go do not try to catch the falling knife, there will always be tomorrow.
Be patient remember a crocodile will never eat anything in front of it eyes, it will wait for the best meal. Avoid using too many indicators at the same time, remember that simplicity is always the best and successful traders use the most simple strategies and indicators. Let money work for you and never work for your money, if in your life you have too much month at the end of the money then you have a problem, you must use your money to make time and never use your time to make money. In FOREX you must let money work for you and never work for your money.
There are many benefits and advantages of trading FOREX. Here are just a few reasons why so many people are choosing this market:
This market moves faster than stocks, I mean it is very volatile than stock.
No commissions
No clearing fees, no exchange fees, no government fees, no brokerage fees. Most retail brokers are compensated for their services through something called the “bit/ask spread“.
No middlemen
Spot currency trading eliminates the middlemen and allows you to trade directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size
In the futures markets, lot or contract sizes are determined by the exchanges. A standard-size contract for silver futures is 5,000 ounces. In spot FOREX, you determine your own lot, or position size. This allows traders to participate with accounts as small as $25 (although we’ll explain later why a $25 account is a bad idea). What is a Lot?
A Lot is the size of the trade you are willing to open, in simple terms it is the amount of money you are willing to risk to open a trade. Example:
3 types of lots that tradable
Micro Lot is 0.01 and can control $1000
Mini Lot is 0.1 and can control $10 000
Standard Lot is 1 and can control $100 000
100 000 (tradable amount) x 0.78502 (entry price) = $78502
Working with 1:400 leverage
78502 divide by 400 = $196.255 (this is the amount one must have as balance to trade 1 standard lot) so the more the Lot size, the more the risk and the lesser the Lot size the lesser the risk. Also remember that the lesser the leverage the more money you will need in your balance to be able to trade 1 standard Lot. When trading, money management is very important, Take a calculated risk, do not gamble, and do not invest an amount that you are not willing to lose and never invest more than 3% of your capital. You must avoid a drawdown of more than 30% Manage your risk before you think of profit.
Low transaction costs
The retail transaction cost (the bid/ask spread) is typically less than 0.1% under normal market conditions. At larger dealers, the spread could be as low as 0.07%. Of course this depends on your leverage and all will be explained later.
A 24-hour market
There is no waiting for the opening bell. From the Monday morning opening in Australia to the afternoon close in New York, the FOREX market never sleeps. This is awesome for those who want to trade on a part-time basis, because you can choose when you want to trade: morning, noon, night, during breakfast, or in your sleep.
No one can corner the market
The foreign exchange market is so huge and has so many participants that no single entity (not even a central bank or the mighty Chuck Norris himself) can control the market price for an extended period of time.
Leverage
In FOREX trading, a small deposit can control a much larger total contract value. Leverage gives the trader the ability to make nice profits, and at the same time keep risk capital to a minimum.
For example, a FOREX broker may offer 50-to-1 leverage, which means that a $50 dollar margin deposit would enable a trader to buy or sell $2,500 worth of currencies. Similarly, with $500 dollars, one could trade with $25,000 dollars and so on. While this is all gravy, let’s remember that leverage is a double-edged sword. Without proper risk management, this high degree of leverage can lead to large losses as well as gains.
What is leverage in simple terms?
This is the allowance that your broker gives you, to be able to buy or sell the underlying asserts, the higher the leverage the more allowance you get, example if a broker gives you 1:100 leverage you are going to have less allowance than a person with 1:300 leverage. In other words, leverage is a boost that your broker gives you, this boost will give you more buying power with less deposit, example with 1:300 leverage your $10 deposit will be multiplied 300 times this way, you will be able to control $3000 market with your $10.
It has high liquidity
Because the FOREX market is so enormous, it is also extremely liquid. This is an advantage because it means that under normal market conditions, with a click of a mouse you can instantaneously buy and sell at will as there will usually be someone in the market willing to take the other side of your trade. You are never “stuck” in a trade. You can even set your online trading platform to automatically close your position once your desired profit level (a limit order) has been reached, and/or close a trade if a trade is going against you (a stop loss order).
What is a margin?
This is an amount that you must have in order to be able to place a trade on a certain assert, or in simple terms, it is an amount that you will need to buy a currency versus the other, every pair has a different margin, example EUR/USD has more margin than CAD/CHF
What is a spread?
A spread is a broker’s profit, you will notice that when you open a trade, your profit/loss will start at minus value this means that your broker makes profit before you, and then as your trade goes to the correct direction, then you will start making profit for yourself.
What are Pips?
This is simply the profit that you make and it is calculated in Pips (price in points), it is a count of the last number at the end of the currency price or quote. The more pips you make, the more profit you make.
How to calculate pips?
On 0.01 is 10 cents per Pip.
On 0.1 is 1 dollar per Pip
On 1 lot 1pip is 10 dollars per Pip
How much is a Pip in monetary value?
If you are trading 1 standard Lot, and you make 20 Pips in one day, this means that you have made about $200 in one day.
Imagine if you go for 50 to 100 Pips per day or more, you can make a killing.
What is a stop loss?
This is a trade loss protection, when you place a trade, you must be willing to risk some money in case the trade doesn’t go your way. If you place a buy trade you put stop loss beneath so that if the market reverses for some reason, your account will not be whipped out, you will still have some money to trade, the same goes for a sell trade, you place a stop loss above you trade because you expect a trade to go down and a stop loss will close your losing trade.
What is a Take profit?
This is a point where when reached by your trade, your trade will be closed automatically, and your profit will be added on your balance.
What is an entry point?
An entry point is a point where you enter the market example buy or sell.
What is a spread?
A spread is a difference between the buy and sell, this is in simple terms a broker’s profit, your trade will begin with a negative amount, this means that a broker makes profit before you so your profit will be realized when the market goes your way then you will start seeing a positive amount.
What is Trail stop?
This is when you place a trade, then you place a stop loss, when the market moves your way, you change your stop loss into a take profit, as the market moves your way, you follow it with a trail stop, as soon as the market reverses and hits your trail stop, your trade will close in profit. This means that you follow the market that goes your way, if the market reverses your trade will close and it will be profitable, so you are trailing your trade.
All this terms will be explained later in details on practical examples.
FOREX trading explained in numbers:
The object of FOREX trading is to exchange one currency for another in the expectation that the price will change, so that the currency you bought will increase in value compared to the one you sold.
Example:
|
Trader’s Action |
EUR |
USD |
|
You purchase 10,000 Euros at the EUR/USD exchange rate of 1.1800 |
+10,000 |
-11,800 |
|
Two weeks later, you exchange your 10,000 Euros back into U.S. dollar at the exchange rate of 1.2500 |
-10,000 |
+12,500 |
|
You earn a profit of $700 |
0 |
+700 |
EUR 10,000 x 1.18 = US $11,800
EUR 10,000 x 1.25 = US $12,500
To make things simple
Another property of FOREX market that makes it an excellent trading instrument is use of Leverage. Many beginning traders don’t fully understand the concept of leverage. Basically, if you have a startup capital of $5,000 and if you trade on a 1:50 margin you can effectively control a capital of $250,000. However, a two percent move against you and your capital is completely wiped out. If you are a beginning trader you should not use more than 1:20 margin until you get comfortable and profitable and then and only then you can attempt to use higher margins. What does 1:20 margin mean? It means that with your $5,000 you will control a capital of $100,000. Let’s say you are trading EUR/USD and by using our entry strategy you have decided to enter the trade on a long side. That means that you are betting that USD will depreciate against Euro. Let’s say current
EUR/USD rate is 1.305. Again, if your trading capital is $5,000 and you are using 1:20 leverage you will effectively be exchanging $100,000 to Euros. If the current rate is 1.305 you will receive 100,000/1.305 = 76,628 Euros. If the trade goes in your direction the margin will work in your favor and 1% decline in USD will mean 20% increase in your startup capital. So if EUR/USD rate moves from 1.305 to 1.318 you will be able to exchange your 76,628 Euros back to $101,000 for a profit of $1,000. Since your startup capital was $5,000 it is effectively a 20% increase in your account. However, if the trade went against you and USD appreciated 1% vs. Euro your account would be reduced to $4,000. That would not have happened as our strategy has built in hard stops to prevent such outcome. And the third and equally important property of FOREX market is the fact that trends in
FOREX market last longer and are more clearly defined than in any other trading instrument
What is bullish market?
This is when the trend is going up, we say the market is bullish, when this happens you place a buy trade.
What is bearish?
This is when the market is going down, we often say that the bears are in control, when you know that the market will go bearish, you place a sell trade. To be able to make money in FOREX always follow the trend, as they always say, the trend is your friend.
An exchange rate is simply the ratio of one currency valued against another currency. For example, the USD/CHF exchange rate indicates how many U.S. dollars can purchase one Swiss franc, or how many Swiss francs you need to buy one U.S. dollar.
An example of currencies symbols on FOREX market.
EUR is Euro
USD is US dollar
CHF is Swiss franc
CAD is Canadian dollar
JPY is Japanese Yen
GBP is Great British pound
These currencies may be bought or sold as pairs, example:
EUR/USD this means you are using your US dollar to purchase EUR
GBP/USD this means you are using you US dollar to purchase Great British pound
And so on, in this way you are using one currency to buy another as we have mentioned earlier on.
So, what is the best time for FOREX trading?
The best time to trade is when the market has great number of traders that actively trades the market providing you with the possibility to make profits while calm slow market is just wasting your time and efforts!
Best time to trade FOREX is during the power hours, like I explained earlier, the power hour is one of the volatile time in FOREX market, because it is an overlap of New York open, the worst time for FOREX trading is poor hours of trading and many other factors affecting FOREX trading, these factors will be discussed later.
Another good time to trade is during London market open, 98% of currencies are trending during this time and the majority of directional FOREX transactions take place during the European session. When the Euro session opens the banks begin to process bulk transactions which cause a push in the market creating the Active Zone.
What time to trade?
Summer (approx. April – October)
|
Time Zone |
EDT |
GMT |
|
Sydney Open Sydney Close |
6:00 PM 3:00 AM |
10:00 PM 7:00 AM |
|
Tokyo Open Tokyo Close |
7:00 PM 4:00 AM |
11:00 PM 8:00 AM |
|
London Open London Close |
3:00 AM 12:00 PM |
7:00 AM 4:00 PM |
|
New York Open New York Close |
8:00 AM 5:00 PM |
12:00 PM 9:00 PM |
Winter (approx. October – April)
|
Time Zone |
EST |
GMT |
|
Sydney Open Sydney Close |
4:00 PM 1:00 AM |
9:00 PM 6:00 AM |
|
Tokyo Open Tokyo Close |
6:00 PM 3:00 AM |
11:00 PM 8:00 AM |
|
London Open London Close |
3:00 AM 12:00 PM |
8:00 AM 5:00 PM |
|
New York Open New York Close |
8:00 AM 5:00 PM |
1:00 PM 10:00 PM |
Add two to green witch meridian GMT time to get South African time.
As you can see from the above illustration, that the market moves from Sydney it moves to Tokyo, then moves to London and it ends in New York. Trading times are not the same, in winter from April to October the market opens an hour earlier than October to April. Example from April to October London market opens at 07:00 GMT and you add 2 hour to it, this means that between this time you start trading London from 07:00 GMT which is 09:00 South African time. From October to April London market opens at 08:00 GMT you add 2 hours to get 10:00 South African time.
The most important time to trade FOREX is at 09:00 am or 10:00 am South African time depending on what time the London market opens, this time is important because it is when the London market open at this time most currency pairs are trending and the market has good volatility, volatility is like a sea when the sea is rough it is not easy to surf but when it is smooth but moving it is a good time to surf, so we do need volatility in trading. During the London open, 99% of currency pairs are trending and this session can give you good profit.
The power hour
With a centralized market like stocks and commodities everyone knows exactly what time the opening bell will ring. Traders also know that the first 15-20 minutes following the bell are critical for the entire day. But what happens with a 24-hour market like FOREX? Believe it or not FOREX has a critical power hour too . . . but it may not be the one you would have guessed.
What is the power hour? This is also the best time to trade it is called the power hour because most traders are trading at this hour because all the markets are open and overlapping, and other markets are about to close. The power hour is from 14:00 to 16:00 depending on day saving scenario.
The most important thing in FOREX is profit you must make sure that you make profit you must make sure that you get more wins than losses. Do not over trade, avoid greed being greedy may lead to your account to losses and you may not recover from this.
Avoid emotions, a loss is a loss, the most important thing is, how do you deal with that loss, don’t get attached to your trade, open a trade place your long or short trade, place a take profit, place your stop loss and take a walk, let the market do what it does, because if you stare at your trade, you may close a winning trade thinking that it is losing. A small win is better than no win at all, remember what they say
“One bird in your hand, is better that two in the bush”
If a trade is gone, let it go, there will always be tomorrow, the market is 24 hours 5 days a week so there are plenty opportunities to come.
Read lot of trading materials, this can help you with your trading career, knowledge is power. Rich people have a tendency of investing in themselves, so the more trading tools you read the more information you will get and you will become a great trader.
Treat FOREX trading as a business, practice patience and be ready to make money but also note that there will be some losses too, so a good money management is needed.