Forex Trading Basics

The basics of Forex trading. Let’s start with the definition of the currency market, which is called Forex. Foreign Exchange Operations – currency exchange operations. Everyone is certainly familiar with this market, as he has repeatedly changed one currency for another or at least heard about currency exchange transactions.


The foreign exchange market exists since 1971. During the Bretton Woods system, currencies of different countries were strictly fixed by the government and tied to the dollar, which was tightly tied to gold. In 1971, this system ceased to exist, allowing many states to recover from the war.


    • Forex market participants


    • Trading Sessions


    • Currencies and Quotes


    • Margin Trading


    • Orders and their types



After the currencies became a floating rate, the natural continuation was Forex, where exchange rates are formed on the basis of demand and supply. However, it is difficult to talk about some stable course, because this value is floating. Now the value of the currency can be one, and after a few seconds another, and so around the clock. The dynamics of changes in rates can be different at different times of the day.


Basics of Forex Trading – Market Participants


In the Forex market, there are always changes in exchange rates. This is due to the fact that Forex is the only market that operates round the clock throughout the week except Saturday and Sunday. A large volume of transactions is one of the advantages of the foreign exchange market Forex. Every day, the market is rotating 1-3 trillion dollars. This is the most liquid market in the world, in the bidding of which several organizations participate: central and commercial banks, participants of currency exchanges, investment funds, brokerage houses, companies whose activities are related to foreign trade operations, private individuals.


The last participants are ordinary traders. Although, of course, individuals can not participate in the Forex market independently. They instructed to do this to their broker, giving orders for the purchase or sale of a currency. Therefore, the choice of a broker should be taken as the choice of a reliable ally. But it is very hard for one broker to work in the Forex market, so brokers, dilling centers, various funds are united in brokerage houses.


But not only brokerage houses can influence the currency market. There are also commercial banks that serve exporters and importers, investment institutions, insurance and pension funds, hedgers and private investors. Banks also can conduct transactions at the expense of personal funds. Moreover, commercial banks and brokerage houses not only buy and sell, but also offer their prices, what influences the pricing and the entire life of the currency market. 2/3 of the volume of transactions in the Forex market are made daily by commercial banks.


That is why brokerage houses and commercial banks began to be called Market-makers, i.e. “Making the market”. And ordinary individuals are forced to trade according to their rules and prices. But market makers can not always be confident in the profitability of their transactions. There are also such influential market participants as Central Banks. Central banks closely monitor the exchange rate of their currency. But their goal to participate in trading is not to make a profit, but to stabilize the exchange rate of the national currency to achieve certain economic indicators. Often such manipulations are conducted with the help of commercial banks.


Trading Sessions



It should be noted that the Forex market does not have a single site where transactions are made. All bidders are located in different parts of the globe and conduct trade through the Internet. In connection with this, several trading sessions have emerged, which depend on the place and time of the trade. Trading starts in Asia at 0.00 GMT and ends at 21.00 GMT in Chicago.



Currencies and Quotes


In this section we will go directly to the basics of Forex trading. Each of us has our favorites, that’s what the currency market also has. The most important currencies are: USD, EUR, JPY, CHF, GBP. They account for the bulk of all trading in the Forex market.


In the foreign exchange market, there are rules.


    • The product must be liquid.


    • The size of contracts should be standardized, i. must be a multiple of some value.


    • The basic law of any market – the price is determined by supply and demand.


    • The minimum unit of price measurement is 1 point.


    • Terms of the contract should be clear to all participants.



When the deal is concluded, the speculator purchases the currency “B” for the currency “K”. The currency “K” is a means of payment. And we can say that the currency “B” was bought for the currency “K”, but we can also say that the currency “K” was bought for the currency “B”. To ensure that there is always understanding between market participants, a single currency pair symbols (for example, GBP / USD, EUR / USD, USD / JPY, etc.) and such concepts for currency as “Basic and quoted” were introduced.


The base currency is a currency in a currency pair, the value of one unit of which is measured by the number of units of another (quoted) currency. In the numerator of the currency pair, the base currency is indicated.


A quoted currency is a currency in units of which the price of one unit of the base currency is measured. The denominator of a currency pair is the quoted currency.


For example, GBP / USD means that GBP is the base currency that is bought and sold for USD.


A direct quotation is a quote in which the base currency is the dollar. In the reverse quotation, the dollar is a quoted currency.


If the price chart moves down, it means that the base currency becomes cheaper, and the quoted currency becomes more expensive. And vice versa, if the price moves up.


Above it was said about such a concept as “Quotation”. Quotation is the price of a currency that reflects the value of one monetary unit in units of another.


A good example is currency exchange offices. There are always two prices, between which there is a difference. When trading in the foreign exchange market, too, there is such a difference, and its size depends on the terms of trade offered by the broker. For example, “EUR / USD 1.27000 / 1,2710” means that the broker can buy from the trader at the moment EUR against USD at a price of 1.2700, and sell him the euro at a price of 1.2710. The difference between the prices of buying and selling will be 10 points.


The first price in the quote is called the Bid price – this is the price of the trader’s selling of the currency, and the second price is called the Ask price. This is the price of the currency’s purchase by the trader. The difference between the price of Ask and Bid is called Spread.
As already mentioned above, in the currency market 1 Point (pip) is considered to be the minimum unit of price change. All currency pairs, except for the yen in the record after the comma, are left with four signs. For the yen, there is another quote entry – after the decimal place two signs are left. You can calculate the cost of 1 item using the following formula: Cost of 1 point = (lot x item) / currency quotation rate to USD.


Margin Trading


What is Margin Trading? This is the principle of the market, which is that the broker gives the trader an opportunity to make transactions with an amount greater than his deposit. That is, it gives him a Leverage. Leverage is a loan issued by a broker to a trader in order to increase the effectiveness of his trade.



How does this happen? The trader’s own funds are called a security deposit, which must be at least a certain percentage of the size of the proposed trade operation. When a trader decides to make a deal, the broker provides him with personal funds within the maximum leverage, and takes the pledge deposit as collateral, thus securing his own funds.



In the event that a trader commits a loss-making transaction and a part of the funds taken on credit is lost, losses are covered by the trader’s security deposit.


Thus, the broker does not lose anything, but at the same time, the deposit of the trader decreases. In the case of a profitable transaction, the broker’s funds are fully preserved and returned, no write-offs from the trader’s deposit will be made and all profits will be added to the trader’s account. The trader can withdraw the earned money or leave it, thereby increasing the security deposit and future profit. The leverage is selected using the lot.


Lot is the volume of the transaction. Typically, one lot is 100,000 base units. There are also mini lots – 0.01, which are equal to 1,000 base units. Lot is a quantity that is always a multiple of 1000.


Also worth considering is the concept of “Trading position”. Trading positions in the foreign exchange market are short and long. Short position is a trading position for the sale of the base currency, Long – for the purchase of the base currency.


Let’s consider a concrete example of granting a leverage . Let’s say that we have a security deposit of $ 1500. After conducting the market analysis, we perform a trading operation for the purchase of EUR by a lot of 0.01 at the rate of 1.2600, assuming that the price of EUR will increase. When the exchange rate changed to the side we were proposing and became 1.2700, our profit turned out to be $ 10 (1000 * 1.2700 – 1000 * 1.2600 = 1000 * 0.01 = $ 10). And if you use leverage, say 1: 100, you could increase the contract 100 times and earn $ 1000.


Basics of Forex Trading – Orders and their types


To make trades, traders use “Orders”. An order is an order given to a broker to buy or sell a currency at the price specified by the trader


Work with orders is disciplined by the trader, since before the order is placed, the trader must calculate the potential profit and losses. In order to maintain and exaggerate its capital trader uses warrants to limit losses and save profits. The order that closes the deal, if the price went not in our direction, is called “Stop Loss” – to stop losses, and the order that fixes the profit is called “Take Profit”, i.e. take profit.


Orders are immediate execution and turn-down orders.


Orders of immediate execution are orders that are triggered at the time of their issuance, as traders say, “entry from the market” is carried out. When opening such an order, the following parameters are set: currency pair, lot (transaction volume), price limiting profit, price limiting losses. The orders for immediate execution include orders “Buy” – buy, “Sell” – sell the base currency.


Orders are orders of a type with predefined parameters. Deferred orders are of the following types: Buy limit – to buy at a price below the price level, Sell limit – to sell at a price higher than the price level, Bai stop – to buy above the current price level, Sell stop – to sell below the current price level


Orders can also be Mutually canceled and On execution.


Mutually canceled orders are two such orders that are installed simultaneously and have the following property: when one of these orders is executed, the second one is automatically canceled. For example, warrants for limiting losses and fixing profits.


Orders “on performance” allows you to set a “opening” order for a particular currency pair, one or two orders that become active “on execution” of the opening. For example, you can open a position on the “opening” order and immediately activate the stop-loss order corresponding to it.


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