Forex Trading
Access the world’s largest market and trade more than 60 currency pairs
Online Forex Trading:
All you Need to Know to Start Trading FX
So, you’re looking to learn the basics, perhaps even get a detailed understanding of Forex Trading. Well, you’ve come to the right place!
In this guide we’ll be addressing all of the important things that you need to know before you start forex trading in order to understand how to enter the markets safely, with an effective strategy in place.
Firstly, we’re going to explain what Forex Trading actually is and how it works. We’ll then be examining basic terminology so that you can become accustomed to the words and phrases used while trading foreign exchange. Following the basic terminology, we’re also going to examine the calculations that you’ll be using in your day-to-day life as a forex trader.
Our guide aims to fully equip you with the tools to further your knowledge and understand the details of fx trading before you enter the global markets. If you’ve had some experience with trading Forex before then feel free to skip ahead to the sections that you’d be interested in. Simply click on the menu titles below to be redirected to the relevant information for you.
- What Forex Trading is and How it Works
- Currency Markets and Currency Pairs
- What is a Pip?
- What is a Pipette?
- What is a Spread
- What is Leverage and Margin?
- Trade Currencies: Is Currency Trading the Same as Forex Trading?
- How to Trade Currencies in Forex
- Forex Brokers: What They Are and How They Work
- The Forex Market: Opening Times
- Forex as a form of investment
- Examples of Forex Strategies
CURRENCIES
| Instrument | Minimum Spread | Typical Spread | Long Position | Short Position |
| AUDUSD | 0.0 | 0.1 | -2.57 | 0.67 |
| EURGBP | 0 | 0.4 | -5.88 | 2.87 |
| EURJPY | 0 | 0.5 | 5.42 | -10.19 |
| EURUSD | 0 | 0.1 | -9.4 | 6.7 |
| GBPAUD | 0 | 2.5 | -2.61 | -5.66 |
| GBPJPY | 0 | 1 | 10.23 | -25.01 |
| GBPUSD | 0 | 0.3 | -3.7 | 0.6 |
| USDCAD | 0 | 0.2 | 4.2 | -9.4 |
| USDCHF | 0 | 0.4 | 6.6 | -11.2 |
| USDJPY | 0 | 0.1 | 10.59 | -18.3 |
What Forex Trading is and How it Works
Foreign exchange, or Forex for short, is a market where you’re able to exchange one currency for another. With a daily trade volume of $6.6 trillion dollars, the forex market itself is huge! It eclipses the likes of the New York Stock Exchange (NYSE) which, by comparison, has a trading volume of only $22.4 billion per day.
The Forex Market’s sheer size attracts a wide range of different participants, including Central Banks, Investment Managers, Hedge Funds, Corporations, Brokers and Retail Traders – with 90% of those market participants being currency speculators!
So, what exactly happens in the forex market, to make it so attractive to investors across the globe? Well, imagine that you’d like to exchange one currency for another. You’re effectively selling one currency while buying another, or 'exchanging' it.
Now, the exchange rate between those two currencies is what’s important when trading forex. The exchange rate is constantly fluctuating, and it’s these fluctuations that allow market speculators to earn from trading or potentially lose their investment. These fluctuations are driven by the supply and demand of each currency!
It’s also important to note at this point that, while you are trading, millions of other traders are also entering the forex market.
So, when you 'sell' a currency, there is a buyer for that currency somewhere else. The more people that are trading, the more money there is in the market, which is what we call the 'liquidity'. As we’ve mentioned, the forex market is huge with millions of traders across the globe Because of this the liquidity in the forex market is really high!
What is Forex?
There are around 13.9 million traders across the globe that are simultaneously buying and selling currencies. As we mentioned before, this means that the liquidity of the forex market is really high.
These high levels of liquidity mean that traders can enter and exit a trade, as there will normally be a buyer for the currency that you’re selling, or a seller for the currency that you’re buying!
High liquidity levels have other implications too. If the levels of liquidity are high, then there are a lot of market participants, so trading costs, like the spreads could potentially be lower. It also means that the market is way less susceptible to market manipulation! If someone opens a huge trade in a market with low liquidity, it’ll have a huge impact on price. This doesn’t happen in forex because there is such a large volume being traded!
Now, the forex market, as it encompasses all of the currencies in the world, is actually open 24 hours a day, from Monday until Friday. The trading that is done on these currencies is what we call over the counter or OTC for short. This means that there isn’t a physical exchange like there is for stocks. It’s actually a global network where there’s a network of financial institutions and banks that oversee the market rather than a central exchange like the New York Stock Exchange.
As an individual, you’re likely to be categorized as a 'retail trader'. However, the largest portion of forex trades are actually conducted by ‘institutional traders’ like banks, funds and large corporations. They’re not necessarily going to actually buy or sell the currencies but are speculating about price movement or hedging against upcoming changes in the exchange rate.
Let’s look at an example
A retail trader like yourself would sell the EURUSD if they believe that the price of the USD will appreciate in value against the EURO.
An American firm however, would be able to use the forex market to hedge should the EURO weaken, meaning that should the value of their income fall, they’ll still make profit on the depreciation of the USD.
Currency Markets and Currency Pairs
Currencies in the forex market are expressed as pairs. So, lets take a look at the EURUSD and look at what exactly makes up a currency pair.
The first thing to know, is that currency pairs are expressed in terms of the 'Base Currency' and the 'Counter Currency'. The base is always expressed first and the counter second – so in our example, the EUR is the base currency and the USD is the counter.
Once you’re ready to begin (we’ll get to that a little later in the guide) and are familiar with the platform and want to open your first trade, you’ll see two prices quoted for the EURUSD; the Sell or 'Bid' price, and the Buy or 'Ask' price, as shown below. It’s important to always remind yourself that when you click buy or sell, you’re buying or selling the first currency in the pair.
Question
As a savvy individual, you’ve also probably noticed that there is a difference between the ‘bid’ and ‘ask’ price. This difference is what we call the ‘spread’, and it is expressed in pips. In the example above, the bid price is 1.12005 and the ask is 1.12023.
So, what would the spread be?
0.18 pips
> 1.8 pips <
18 pips
What is a Pip?
You’ll need to become very familiar with the term 'Pip' if you’re going to indulge in online forex trading.
As an acronym for 'price in point' or 'percentage in point', a pip is the fourth decimal point used in pricing. It’s equivalent to 1% of one basis point. As most currency pairs are priced to 4 decimal points, it’s the smallest price move that an exchange rate can make (0.0001).
Now, it’s an important term to know for currency trading because the spread (we’ll get to that later) is actually quoted in pips. We’ll look at the spread a little later!
Let’s look at an example to make it a bit clearer:
You’d like to trade the EURUSD. The price of the EURUSD is 1.1060. Before you’re about the enter the trade, you see that the price changes to 1.1059. This means that there has been a fall in price by one pip, or 0.0001.
It’s important to remember that although most currencies are quoted to 4 decimal places, some currency pairs, like the Japanese Yen is actually quoted to two decimal places.
What is a Pipette?
Now that you’re familiar with a pip, it’s also important to know that the MT4 trading platform actually shows prices beyond the standard 4 or 2 decimal places.
A pipette is a fractional pip and can be up to 5 or 3 decimal places. It’s effectively 1/10th of a pip. Check out the image below so you can get a better idea of how pips should be read.
Comfortable with what a pip and pipette is?
Comfortable with what a pip and pipette is? Great! Now we’re going to move into working out the value of pip! Each currency’s value fluctuates, so for us to be able to trade, we’ll need to be able to calculate the value of a pip for the instrument that we want to trade. It can be done in two simple steps!
STEP 1
Divide 1 Pip (0.0001) by the current market value of your chosen pair.
STEP 2
Multiply that figure by your lot size.
Let’s check out an example
EURUSD’s price is currently at 1.5510 and your lot size is a mini lot or, 10,000. The value of the pip is: (0.0001/1.5510) X 10,000 = 0.6447
In this example, should the market move by one pip, you’ll earn or lose 0.6447 EUR.
It’s important to note that the pip value is defined by the quote currency. In our example above that is the EUR. However, when the quote currency is the USD the value of a pip is always the same! This means that should the lot size be 100,000, one pip will be equal to $1.
Your broker will actually be calculating the value of a pip for you, but it is something that every forex trader should know!
What is the Bid and Ask price?
As we discussed before, when you’re going to be trading forex you’ll need to understand how currencies are actually priced. We know that currencies are actually traded in pairs; with the value of one currency appreciating or depreciating in value against the other.
Now, when we buy and sell a currency pair, you’re actually simultaneously buying one currency while selling the other. So, the ‘Bid’ price is actually the price where you sell a currency pair. So, it’s the price of buying the base currency against the counter currency!
What is the Spread?
Another common term in the forex trading world is the spread. It’s a crucial concept that you’ll need to understand when working out the costs involved while online forex trading!
So, the spread effectively means the difference between two prices. It is the gap between the bid and ask price of your chosen currency price.
As you’ve already learnt, the ‘bid’ is the price at which you sell the base currency, and the ‘ask’ is the price at which you buy the base currency! Now, the spread is a cost that you incur for placing a trade and it can be affected by a variety of factors including:
- The instrument you’re trading.
- The volatility of the market.
- The market volatility.
- The broker you’re trading with.
It’ important to note that a good broker will have a lower spread to ensure that you aren’t priced out of trading. Although these spreads tend to widen in times of high market volatility, a broker like Tickmill will always offer you the lowest spreads available so you can trade effectively.
When the spread is widened it means that there is a larger difference between the two prices, which is a good indication of market volatility. This means that theoretically, there will be a smaller spread when the market is more liquid.
What is Leverage and Margin?
When you begin to become familiar with terms like pips and spreads, you’ll also hear the terms leverage and margin more frequently. They’re two terms that go hand in hand.
Leverage basically involves borrowing funds from your broker to enable you to control more funds when you’re trading. This is done through the use of a margin account and is partly responsible for the increase in forex trading popularity. It effectively allows retail traders to control a lot more money than they actually invest.
Lets’ look at an example in more detail
You’ve decided to trade with a leverage of 1:100.
You’ve deposited $1,000 with your broker.
However, you’re actually able to control $100,000 for trading!
This means that when you’re trading, the profit that you made on a trade is actually amplified because you’re using more money to trade that you have effectively borrowed from you broker. At this point you should be hugely aware that trading with leverage is a double-edge sword. Although your profits may be amplified, your losses are also amplified.
Now, to be able to access this type of leverage, your broker will need some for of insurance to enable you to do so. This is where the margin comes in! Think of your margin as a deposit that you give your broker to open and maintain a trade. The broker will effectively keep a portion of your balance to cover the potential loss of your trade.
The 'margin requirement' that you broker needs is normally expressed as a percentage of your overall trade and each trade that you open will have one. Remember that your margin requirement will vary depending on the asset that you trade and the broker that you work with.
Trade Currencies:
Is Currency Trading the Same as Forex Trading?
As you’ve been learning about trading forex, you’ve probably also come across the term currency trading. But, is currency trading the same as forex trading?
In short, it’s exactly the same thing!
The term simply doesn’t use the 'foreign exchange' abbreviation 'Forex' but defines it by the currency trade itself.
In order to trade currencies, what you’re actually doing is trading individual currencies in pairs, which it’s the essence of forex trading. Trading currency actually infers that you’re trading the value of one currency against another. For example, if you’re trading the EURUSD, you’re actually speculating about the change in value of the EURO against the USD.
How to Trade Currencies in Forex
It’s all about working out the value.
The value of each currency depends on the supply and demand for it, thus determining the 'exchange rate' between the two currencies. The exchange rate itself is basically the difference between the value of one currency against another. And, it’s this exchange rate that determines how much of one currency you get in exchange for another, e.g. how many Pounds you get for your Euros.
At this point, it’s important to remember that the exchange rate is continually fluctuating.
Now, investors involved in currency trading look at many different factors that could potentially affect the value of each currency, and they speculate how these factors will affect the value of those currencies. If a trader thinks that the currency’s value will increase, they’ll buy that currency. Conversely, if they think the value of a currency will decrease, they’ll sell it instead.
Now, when you’re trading forex, you’ll be trading currency pairs. So, two different currencies will be involved, and you’ll be speculating about their value in relation to each other.
For example, an investor may believe that the value of the Euro will depreciate against the value of the British Pound, because of an imminent data release. So, the investor would sell the Euro, believing its value will fall, and buy the British Pound simultaneously, believing its value will rise. If the investor is correct, then he or she will make a profit!
It sounds pretty straightforward right? Well, bear in mind that to speculate effectively you’ll need a good understanding of the market, and knowledge about how to analyse the market movement.
Forex Brokers:
What They Are and How They Work
Every day there’s trillions of dollars traded on the Forex Market, making it the largest financial market in terms of sheer volume traded. However, this used to only be available to the likes of big banks, financial institutions, huge corporations, and hedge funds. As technology has developed though, smaller investors like individual traders can now access the market and become retail traders! This has all been made possible by the existence of Forex Brokers.
As we’ve already explored, a forex trade is effectively selling one currency while simultaneously buying another. What a forex broker does is basically connect a trader with a buyer for the currency they’re selling and vice-versa. So, what makes your trade possible is the broker matching your trade with their other traders or transferring it to the interbank market where a match can be found!
Without your forex broker being there, you’d never be able to get access to the interbank market as you need a really big capital requirement to do so. Your forex broker actually has this capital requirement and so can place the trade on your behalf.
Thanks to leverage, where you control more funds that you have actually invested, it allows you to make bigger trades. It’s the forex broker that offers you this leverage so, they use their own capital to open the trade, meaning you can participate in the forex market!
The Forex Market: Opening Times
When you begin to start trading you’ll probably first ask yourself ‘when is the forex market open?’ Well, there are 4 separate trading sessions in the forex market: Sydney, Tokyo, London and New York. These individual sessions and mean that the forex market opens on a Monday morning and closes on Friday night!
Check out the image below to see how the FX market timing works out.
GMT TIME
Note: Trading hours are subject to change without prior notice. Liquidity Providers may adjust trading schedule as necessary, depending on market conditions.
You’ve probably identified that there are overlaps between the sessions, for example; at 7am (GMT) both the Tokyo and London sessions are open. This is what ensures that the forex market provides traders with 24-hour access to trade for 5 days a week (the markets close over the weekend).
Forex as a form of investment
The investors of today have access to an extensive set of financial instruments to diversify their trading portfolio. Spanning blue chip company stocks and shares to investment in forex, the opportunities are endless. However, how do you go about deciding if you want to make a forex investment or invest elsewhere?
Well, some key factors to consider are your risk tolerance and trading style. For example, traders that are looking to make long-term investments over a period of years would be more suited to stocks. While those who are more interested in shorter-term investments with higher risks involved may be more suited to forex investing.
Examples of Forex Strategies
When you’re getting down to the nitty gritty of choosing a Forex trading strategy, its crucial to understand the best ways to choose one. There’s three main parts you should consider:
Time Frame
Choosing a time-frame according to your style is really important. For example, the difference between a 15-minute chart and a weekly chart to a trader is huge! If you’re more suited to being a scalper, a trader who benefits from tiny movements in the market, then you should be looking at time frames between 1 and 15 minutes. In comparison, day traders or swing traders will be more likely to use a longer time frame, like the 4-hour chart. So, to make this decision, you’ll need to ask yourself: “how long do I want to keep my trades open?”
Trading Opportunity Frequency
The next question you should be asking yourself is "how many times do I want to be opening and closing trades?" If you’re looking to be opening a larger number of trades, then you would likely be more suited to scalping where you’ll be opening a higher frequency of small trades.
Some traders however will be spending a huge deal of time on their analysis of economic data and macroeconomic reports. This will be enriching their fundamental analysis approach; however, they’ll likely spend less time analysing the charts. If you’re going to take this approach, then perhaps a trading strategy using longer time frames and larger positions would be more suited to you.
Position Size
The last, and debatably the most important question you’ll be asking yourself is "how big do I want my trades to be?"
At this point of deciding what strategy to use, you’ll need to have an understanding of the risk that you would like to take while trading. Larger trades tend to lead to bigger risks and possibly bigger losses. To make sure that you’re able to manage your risk effectively you’ll need to work out how much risk you want for each trade. Some traders tend to have a 1% risk limit on each trade, meaning that they are only willing to risk up to 1% of their account on a single trade.
For example, you’ve got $10,000 in your account. Should you set yourself a risk limit of 1%, then you’re only going to be opening trades of $100 each time. By general rule of thumb, if you’re going to be opening fewer trades, then the position size should be larger and vice-versa.
Now you’re caught up with how to decide what trading strategy you’d like to use, let’s go through some of the common strategies used.
Day Trading
As the name implies, forex day trading is strictly conducted within the same trading day. This means that all the positions you open will be closed before the market does at the end of that day. The timeframes that traders tend to use will range from really short term (within minutes) or over the course of a few hours.
The types of traders that conduct forex day trading generally tend to focus on news related events. For example, they’ll keep an eye out for economic releases like interest rates, GDP releases, upcoming elections and other events that are likely to have a big impact on the market.
As a general rule of thumb, those that choose to use the forex day trading strategy will look to open positions when the price breaks through the 8 period EMA in the same direction as the trend. Their exit is usually decided upon by using a 1:1 risk/reward ratio.
- You’ll find a significant number of opportunities available.
- Median risk to reward ratio.
- You’ll need to invest more time into this strategy.
- You’ll need to hone your technical analysis skills.
Hedging Forex Strategy
This strategy is usually used in conjunction with other assets. So, basically a trader would use forex to hedge against other positions in other asset classes or for other forex positions. There’s 2 ways you can do this.
1. A forex trader effectively creates a 'hedge' where they protect a position they already have from an undesired move in the market. What they will do is hold both a 'long' and 'short' position at the same time using the same currency pair. Also known as the 'perfect hedge' this method effectively eliminates all risk from the position while the hedge is active. So, when the market starts to move in one direction and the trade is sure that it’ll continue along that path, they’ll close the trade in the opposite direction.
2. In this method of hedging forex positions, the trader will create a hedge that partially protects them from undesirable movements in the market. Also known as an 'imperfect hedge', this method requires the trader who is already 'long' in a currency pair trade to buy put option contracts on the same instrument. This means that they’ll eliminate some of the risk using this hedging forex technique.
Scalping
Commonly used to explain the process of getting small profits from a high frequency of small trades, scalping is a strategy conducted over very short time frames. This can be done either manually or using an algorithmic program like an expert advisor to do it automatically.
Generally scalpers operate on time frames between 1 and 3 minutes. They’ll first aim to identify the market trend using an indicator like the moving average. This will be done on a longer time frame so that they’re more confident of the market direction. Then the scalper will create support and resistance bands and then scalp within than specific band.
Finally, the trader will then place stops a mere few pips away to make sure they can protect themselves against large movements in the market. They’ll then do this many times so that the small profits accumulated from each trade will build up over the day.
The process we’ve examined above can also be fully automated using an expert advisor which will not only remove the emotional aspect of trading but will also likely be done at a much higher speed. Enabling the scalper to acquire more profits over a short period of time.
- You’ll have a huge number of trading opportunities available.
- You’ll need to work a lot with technical analysis and hone those skills.
- You’ll need to invest a lot of time into this strategy if you do it manually.
- You’ll have a much lower risk:reward ratio.
- A lot of the process can be automated which means you’ll have more time for your analysis.
Now, we’ve gone into a couple of strategies however, with all of the different instruments available to trade, different time frames and different styles, you’ll see that there are many different types of trading strategy available. In the graph below you can see some of the ones available and get more understanding of each individual method on our blog.
