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Easy to follow guide on Forex Trading
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Ready, Steady, Forex The key features every FX trader needs to know
Trust Through Transparency
What is Forex trading?
The Basics of Forex Quotes
Majors, Crosses and Exotics
Foundation Concepts
Forex Speculation: Bulls vs BearsThe Benefits
of Forex Trading
What is Forex trading?
Foreign exchange trading, often
referred to as Forex or FX trading,
is used to describe the exchange of
different currencies between one
party and another. The most well-
known form of FX transaction is
when you visit an exchange bureau
to transfer your domestic money
into foreign currency.
The size of the global FX market is huge!
FOREX FACT: Estimates suggest that the overall size of the average daily trading volume in the forex market can range between $3.0 trillion to $5.0 trillion
The retail trading size is somewhere between $1.0trillion and $1.5 trillion
In case you were wondering, that is as much as $5,000,000,000,000
In doing so, you have
indirectly taken part in
a forex transaction.
While your intentions of buying the foreign currency might have been to allow you to sample the local sushi in Tokyo, you have inadvertently weakened your native currency by increasing its supply in the market, albeit by an insignificant amount.
Besides providing a service for your holiday fund, currency exchanges are required to help keep the global economy turning. As business becomes increasingly globalised, the need to transact with organisations across the world means a growing reliance on the forex markets.
For instance, if a car manufacturer based in the United States outsources some of its parts production to China, it will need to convert its dollars into renminbi to pay the supplier. Having built the car using parts from around the globe, the manufacturer then sells the finished car in mainland Europe, where it earns euros for the transaction. It will then need to convert its revenue in euros back into dollars.
All these organisations make thousands of currency conversions every day. However, it might surprise you to hear that conversion transactions only make up 5% of the forex market. So, what makes up the other 95%?
Speculators dominate
FOREX FACT:
Speculators are estimated
to account for more than 90% of forex
transactionsThe answer is, Forex trading.
90%
The major participants in foreign exchange
FOREX FACT:
The FX market is an over-the-counter globally decentralised, self-regulated market formed by international participants. These participants can be recognised in two distinct groups:
• Central banks (ECB and the Fed for example) regulate money supply and control FX reserves
• Commercial banks conduct the bulk of daily volume and provide liquidity to the markets
• Other Financial institutions namely investment funds and money managers
• Hedge funds are a major contributor to the dynamism of FX market by acting as speculators using leverage
• Brokers act as intermediaries between participants
• Investors trading their own capital to speculate on developments in the markets
The Interbank market The Retail market
The basics of forex quotes
In some respects, the end goal in forex
is the same as for stocks. Buy low and
sell high. However, when investing
in stocks, the price movement is
absolute. In general, the price change
in one stock is independent to that of
another stock.
Currency movements don’t work quite the same way. A currency’s strength or weakness is determined by its supply and demand much like a stock. However its value is not independent. The movement in a currency is a function of its value relative to other currencies. Unless compared to another currency, the value of one unit would be meaningless.
Breaking down the currency code, the first two letters represent the country, with the third letter representing the unit of currency.
USD is the United States Dollar
GBP is Great Britain Pound
JPY is the Japanese Yen
HUF is the Hungarian Forint
Three letter currency codes
FOREX FACT:
Currencies are always quoted in pairs such as below:
GBP/USD = $1.6550
EUR/USD = $1.3552
EUR/GBP = £0.8188
Out of the two currencies the first one is known as the base currency while the second currency is known as the counter currency or the quote currency.
The base currency is always worth one unit, so in the examples above 1 pound is worth 1.6542 dollars, while 1 euro is worth 1.3547 dollars. This would suggest that the pound is stronger than the euro and sure enough, 1 euro would only buy you 81.88 pence.
Generally, you will find that the stronger currency is the first quoted in the pair.
You might sometimes hear traders
use the term “cable” when they
are referring to Sterling/Dollar.
The term originates from a time
prior to the age of global satellites
and fibre optic technology, when
the London Stock Exchange and
the New York Stock Exchange were
connected by using a giant steel
cable that spanned the Atlantic.
As a currency is valued by its relationship with another currency, when the value of one goes up, the relative value of the other must go down. This is where the opportunity to trade currencies arises.
The aim for a trader is to buy the currency they think is going to get relatively stronger and sell the currency they think is going to get relatively weaker. It’s your basic trading mantra, ‘buy low, sell high’.
When entering into a trade, whether you are buying or selling, the direction will always relate to the first currency in the pair, known as the base currency. You will then be trading the inverse for the quote currency.
Trading “Cable”
FOREX FACT:
For example, if you buy GBP/USD, you will be buying GBP and selling USD.
In this case your expectation is that GBP will become stronger relative to the USD.
Example on a specific day
Pair Latest Price % Change Net Change (Last Close) Movement
GBP/USD $1.6550 +0.46% +$0.0075 $1.6475Strong Sterling or weak Dollar
EUR/USD $1.3552 -0.05% -$0.0007 $1.3559
A very slightly weaker Euro or slightly stronger
Dollar
EUR/GBP £0.8188 -0.47% -£0.0039 £0.8227Euro weakness
or Sterling strength
USD/JPY 104.33 yen +0.03% +0.03 yen 104.30 yen
Slight Dollar strength or a slightly
weaker Yen
The table above shows how currencies move and movement can either be through the strength
of one side of the pair or the weakness of the other side of the pair.
Note that Euro/Dollar is trading only slightly lower, Sterling/Dollar is strongly higher and Euro/
Sterling is strongly lower. This would suggest that today, sterling is by far the strongest of the
three, with the dollar slightly stronger than the euro.
The big boys dominate
FOREX FACT:
Ten financial institutions account for
nearly 73% of the total trading in the
forex market, whether it is trading for
themselves or their clients.
The most active include:
Deu
tsch
e B
ank
(17.
0%)
UB
S (1
2.5%
)
Cit
igro
up
(7.
5%)
HSB
C (
6.4%
)
Bar
clay
s (5
.9%
)
Majors, Crosses and Exotics
There are 8 major economies that the global
forex market is most concerned with. The US dollar is king
FOREX FACT:
They are:
USA
Eurozone
Japan
UK
Switzerland
Canada
Australia
New Zealand
The US Dollar comprises one
side of 84.9% of ALL daily
forex transactions
The Euro is involved in 39.1%,
the Yen in 19.0% and Sterling
in 12.9%
Majors
The currencies of the 8 major
economies: US dollar, Euro, Yen,
Sterling, Swiss Franc, Canadian Dollar,
Aussie Dollar and New Zealand Dollar
are also known as the Majors. The
Majors are currency pairs that are
based around the US dollar, paired with
the other major currencies. There are
subsequently 7 major currency pairs.
The most widely traded Major pairs are:
EUR/USD - Euro/Dollar (accounts for around 27% of all global forex transactions)
USD/JPY - Dollar/Yen (c. 13%)
GBP/USD - Sterling/Dollar (c. 12%)
AUD/USD - Aussie/Dollar (c. 6%)
USD/CHF - Dollar/Swiss Franc (c. 5%)
USD/CAD - Dollar/Canadian Dollar (c. 4%)
Crosses
(also known as Minors)
These are the forex pairs of the major
economies that do not include the US
dollar. The most popular cross currency
pairs are:
EUR/JPY - Euro/Yen
EUR/GBP - Euro/Sterling
EUR/CHF - Euro/Swiss Franc
GBP/JPY - Sterling/Yen
GBP/CHF - Sterling/Swiss Franc
Exotics
Currency pairs that consist of one of the
major currencies paired with a currency
of one of the emerging or smaller
economies are commonly known as
exotic currency pairs. Countries in
the exotics include: Latin American
countries such as Brazil, Argentina
and Chile; Central & Eastern European
countries such as Poland, Hungary and
Turkey; the Scandinavian countries; and
Asian countries such as Hong Kong,
Thailand, India and Singapore; and
South Africa. The more popular exotic
pairs are:
USD/TRY - Dollar/Turkish Lira
EUR/TRY - Euro/Turkish Lira
USD/ZAR - Dollar/South African Rand
USD/MXN - Dollar/Mexican Peso
USD/SGD - Dollar/Singapore Dollar
As you now know, you
can buy (also known as
going “long”) or sell (also
known as going “short”)
any currency pair. It is
very common to describe
someone who is speculating
the price will go up as an
fx bull while those who
speculate the price will go
down are called fx bears.
Forex Speculation: Bulls vs Bears
Debate rages over the origins of the two terms. Ironically,
we can only speculate as to the point of origin for the terms.
Popular folklore suggests that the term
bear originated first. Derived from a
group known as bear skin jobbers back
during the American fur-trading industry,
who would sell their bear skins before
even shooting the unsuspecting bears,
these speculators were coined as ‘bears’.
Speculating share prices would fall, they
would sell shares they didn’t actually own
in order to buy them back at a lower
price later on. Immoral some might say,
but clever nonetheless. As a result, a bear
market has come to mean a market that
is in a downward trend, and a bear to
be someone who believes that prices are
falling, so is inclined to sell.
The term bull is believed to have followed
shortly after, widely thought to be a link
from bull-and-bear baiting. In contrast
with a bear market, a bull market refers
to a market that is in an upward trend. A
bull therefore, is someone who believes
prices are rising and is inclined to buy.
Bulls and bears lock horns and paws
(sincere apologies for the pun) every day.
As we now know when one currency rises,
another must fall. This leads us nicely
onto the benefits of trading forex.
A Forex strategy in practise:
After devising your strategy and doing your analysis, a trading opportunity has been identified on USD/
CAD. You speculate that the US dollar will fall against the Canadian dollar, so decide to sell USD and buy
CAD. However, you don’t have any US dollars to sell, so you borrow them from the market. You can borrow
any currency at any time and this gives you the opportunity to trade any instrument available on the Hantec
Markets MT4 platform as long as you have sufficient free margin in your account.
The same CAD$900 when converted back to USD is now worth US$1,058.82. You return the US$1000 you
borrowed leaving you with a $58.82 profit. No need to worry about the calculations and conversions as
they are done automatically by the MT4 platform. It will even convert your profit back into your account
currency if this is different to the currency you earned the profit in. (Furthermore, with the use of leverage
(to be explained later), this small profit could have been significantly higher).
One month later, the exchange rate has fallen to C$0.8500. After you sold, the US dollar has weakened
against the Canadian dollar. You are now sitting on a profit from the trade. You decide to close the trade
by selling your CAD and buying back USD.
C$900 ÷ 0.8500 = US$1,058.82
You borrow US$1000, and then sell them to the market, buying CAD in the process. The exchange rate at
the time for USD/CAD is C$0.9000. You now own C$900 in the hope they will grow in strength against the
US dollar.
So we have looked at some of the specifics of forex, but now
it is time to look at some of the benefits of forex trading.The Benefits of Forex Trading
Trade in any direction
One of the key advantages of trading in the forex market
as opposed to many other financial markets is the ability
to buy, but more importantly sell. With FX there is no
restriction on going short (selling). This allows you to take
advantage of both bullish and bearish trends.
Round the clock trading
As the sequel to Oliver Stone’s Wall Street suggests, ‘money
never sleeps’ and neither does the FX market. Open 24
hours a day, the forex market truly is global. With the
3 major sessions – Asia, European and North American
– overlapping, the market is open from 22:00GMT on a
Sunday evening through to 22:00GMT on Friday evening.
Asia
Europe North America
The UK generates just over a
third (34.1%) of global forex
transactions.
With the United States
generating 16.6%, that
means that over half of
global forex transaction
come from just two countries.
There are NO market hours in foreign exchange.
You can trade foreign exchange 24 hours a day.
The market is open across six days in the week - from Monday morning in Asia through to Friday evening in New York.
This means you can trade whenever suits you, although it is important to remember that currencies will be more liquid when their domestic markets are open and also during market overlaps when more players are active in the markets.
The UK is the dominant FX trading centre
FOREX FACT:
Trading is open 24 hours a day
FOREX FACT:
34.1%16.6%6.1%6.0%6.0%4.2%4.1%3.0%2.5%2.2%
Trading forex comes with minimal costs which
makes forex as an investment even more accessible.
The MT4 platform does not cost anything to setup
or run, so the main cost of trading is the spread - the
difference between the buy price and the sell price.
You will always be able to see the spread on your
trading system and with no other hidden charges,
the cost of trading is extremely transparent.
To check out Hantec Markets’ spreads:
Minimal transaction costs
CLiCK HERE
Access to leverage and unrivalled liquidity
Trading in the most liquid market in the world
is without a doubt a benefit as it makes entering
and exiting trades much easier, especially when it
comes to the major currencies (see earlier) which are
also the most liquid.
As a direct consequence of the vast liquidity, you can
magnify the size of the positions you can hold up to 200:1
using leverage available from Hantec. This means that an
account with just $1,000 can have the buying power of up to
$200,000 in the market.
No conflict of interest
At Hantec Markets, unlike many brokers who operate
a market maker model, there is no conflict of interest
between us and our clients. Hantec Markets is not
licensed to run a dealing desk and as a true No
Dealing Desk (NDD), Straight Through Processing
(STP) broker, your orders are streamed straight
to our liquidity providers via our bridge
software and are executed completely
anonymously in the market. There is no
dealing desk that knows of your ‘stop-
loss’ and ‘take profit’ levels. This
removes dealer intervention and
the risk of price manipulation.
It is important to remember though that leverage is a double-edged sword. Make sure you read our
guide to the most common mistakes made by forex traders to learn more.
Hantec Markets’ culture is one of Trust Through Transparency, and we are committed to building
long standing client relationships.
Having now covered the
basics of forex, it is now
time to learn some of the
foundation concepts that
every trader must know
before getting started.
Pips
Price interest point or percentage in point - are the smallest price
change an exchange rate can move. For most pairs (excluding those
that include the Japanese Yen) this is the equivalent to 1/100 of one
per cent, or one basis point.
This is illustrated in the table below.
Foundation concepts
Pair 1 Pip is equal to Price Last close Net Change Number of Pips
GBP/USD 0.0001 $1.6550 $1.6625 +$0.0075 Up 75 pips
EUR/USD 0.0001 $1.3552 $1.3559 -$0.0007 Down 7 pips
EUR/GBP 0.0001 £0.8188 £1.8227 -£0.0039 Down 39 pips
USD/JPY 0.01 104.33 yen 104.30 yen +0.03 yen Up 3 pips
N.B.: Yen pairs are all quoted to 3 decimal places, therefore one pip is represented by the 2nd decimal place. This is due to the relative value of the yen against other currencies as it has historically been valued in double and triple digits. As movements are much larger, it makes sense not to quote it in too many decimals.
Spread
You will notice on the trading platform, that each currency pair appears with two prices that are slightly different
from each other. One is the bid (sell) price, the other is the offer, or ask (buy), price. The difference between the bid
and offer prices is known as the spread. The spread is the cost to you for trading. Hantec Markets is an STP broker
and the spread is our sole source of income.
The price at which you enter the trade will depend on the direction of your trade. If you are buying the pair
(remember this means buying the base and selling the quote currency) you will enter the trade at the offer price.
If you are selling the currency pair, you will enter at the bid price.
You hold US dollars and want to buy $1 which will cost you $1.3636.
However once you have bought your $1, you change your mind and decide
that you want to change it back to dollars again. The price and spread happen
to be exactly the same, but when you sell your $1 you only get back $1.3634.
You have not incurred the cost of any commission fees, but through the
course of the round trade you have lost $0.0002. This 2 pip loss is due to the
spread.The impact of
the spread
Forex Trading in practise
The bid and offer prices shown on the platform are the best
available prices at any given moment. Due to the underlying
features of the forex markets, the spread is variable, but will
typically remain within a range of a few pips (see below)
The spread is the difference between the rate that you can buy
and the rate you can sell. You buy the asking price and you
sell the bid price. In the previous example for Euro/Dollar the
spread is $1.38044 to $1.38062, which is a 1.8 pip spread.
At Hantec we quote to the 5th decimal place. This last decimal
place is known as a fractional pip (or sometimes known as a
pipette) allowing you to see an even more precise price for the
pair.
Taking the EUR/USD in the example above, you buy at the asking
price of $1.36926. You then sit back and watch the position.
Half an hour later the price of EUR/USD has risen to a bid/ask of
$1.36999/$1.37016.
You decide to take the profit that has built up, so you sell
the position. The price you get is the bid price which is now
$1.36999. You have therefore made a profit of:
$1.36999 - $1.36926 = 7.3 pips
These movements may sound small, and they are, but when you
start using leverage, moves become magnified creating trading
opportunities from the smallest of currency movements.
The fractional pip is shown on the MT4 Platform spread
quote below.
Source: MT4 Hantec Markets platform
Calculating the Pip value
You may find that many explanations to determine pip values are unnecessarily
complicated. The easiest way to calculate their value is:
Contract size / Pip size = Pip value for quote currency (second currency in the pair)
If this currency differs to your account’s currency, simply find
the exchange rate between your account’s currency and the quote
currency of the traded pair.
You open a 1 lot position in USD/CHF and your account is denominated in GBP.
100,000 (1 lot) / 0.0001 = CHF10
As your account is denominated in GBP, find the price for GBP/CHF and convert the amount.
CHF 10 / 1.4200 (GBP/CHF market rate) = GBP 7.04
So, each pip movement in USD/CHF will equate to £7.04.
Point of note: Remember pips for cross-JPY pairs are quoted to only two decimal places (0.01 represents 1 pip).
Forex Trading in practise
LOTS
A ‘lot’ is a standard unit of measurement in forex trading. (Generally speaking) 1 lot = 100,000 of the base currency.
A standard contract (one Lot) where USD is the counter currency, one pip (i.e. 0.0001) will equal to: 100,000 x 0.0001 = $10 per pip
For example, if you open a long position of one lot of EUR/USD for the ask price of 1.4000, you are purchasing 100,000 Euro while, selling 140,000 USD.
Lots
When trading on your MT4 platform, this will be the standard contract size you are trading. You can also trade in mini and micro lots.
1 lot = standard lot = 100,000 of currency 0.1 lot = mini lot = 10,000 of currency 0.01 lot = micro lot = 1,000 of currency
How much leverage? How much margin?
Forex Trading in practise
If the base currency of the currency pair you want to trade is the same as that of your account currency, then the required margin is calculated as follows:
Contract size / Leverage = Amount in base currency
You have a GBP denominated account and want to trade 1 lot of GBP/USD with 200:1 leverage your required margin is calculated as follows:
100,000 / 200 = 500 GBP
You require free margin of £500 in your account to open that particular position.
However, if the base currency does not equal your account currency, there is an extra step you will need to take. You will need to translate the base currency into your account currency using the exchange rate for that currency pair.
Required margin when trading a different base currency than that of your account currency:
Contract size / Leverage = Amount in base currency
THEN translate the base currency into your account currency
You have a GBP denominated account and want to trade 1 lot of EUR/USD with 100:1 leverage:
100,000 / 100 = 1,000 EUR
Then, convert EUR to GBP using the EURGBP exchange rate: EUR/GBP @ 0.8400
1,000 EUR x 0.8400 = 840 GBP
You therefore require free margin of £840 in your account to open that particular position.
This time you require £840 to open a 1 lot position because the traded currency pair was worth less.
Learning and understanding the relationship between these three elements is an integral part of the knowledge that will form the foundation of your forex trading.
Leverage
Mentioned earlier, leverage
is expressed as a ratio and
correlates the size of the actual
investment to the amount of
margin required by the broker to
open and maintain the position.
It allows you to open a position
without putting up the full face
value of the transaction.
A leverage of 100:1 (1% margin
requirement) means that in order to open
a position with a face value of $100,000,
you would need only $1000 for margin. If
you increased the leverage to 200:1 (0.5%
margin requirement) you would need
only $500 to open and maintain the same
position.
The leverage you decide to use will
impact the risk you expose yourself to.
The more leverage, the higher the risk.
When opening an account you can choose
the leverage you wish to trade with. You
needn’t worry about having to calculate
the margin required to open positions, the
platform will automatically do this for you.
1 2
Your analysis for GBP/USD suggests a bullish outlook on the pair. You believe that GBP will rise in value against the USD. Following your strategy, you identify an opportunity to place a trade.
You buy 1 lot of GBP/USD at $1.5350 with 100:1 leverage. To open and maintain the position you need $1,535 or £1,000 for the margin requirement.
The market moves in your favour and you gain 25 pips. You decide to close out the position whilst in profit. Your closing price is $1.5375.
For this particular trade the pip value is: $0.0001 x $100,000 = $10 per pip
Your profit:$10 per pip x 25 pips = $250 profit
Let’s have an example that shows how this all fits together.
The rollover (also commonly referred to as the swap cost) is the
interest paid or earned for holding a position open overnight.
Due to interest rate differentials, there is a charge for maintaining
open positions between the close of one business day and the
open of the next. Each individual currency will have an interest
rate which will change on a weekly basis. As currencies
come in pairs, each pair will have two interest rates attached.
If the interest rate of the currency you bought outweighs
that of the interest rate of the currency you sold, you will
earn rollover. If the opposite is the case and the interest rate
of the currency that you have bought is less than the interest
rate of the currency you have sold, you will pay a rollover.
This can affect the profit and loss on the trades you make.
Much like the margin amounts,
your MT4 platform will
automatically calculate this for
you, but it is always good to
know the formula:
Rollover value X pip value
X Number of lots X number
of swap days
= Swap amount in quote
Currency of the pair
You would then need to
convert the amount in the base
currency into the currency you
wish to display it in.
Rollover Rates
You can find the current rollover/swap rates on Hantec Markets’ website: www.hantecfx.com/content/forex-conditions
Most banks across the globe are closed on Saturdays and Sundays, so there is no rollover on the weekend, but most still apply interest for the two days.
To account for this, the forex market accumulates 3 days worth of interest on a Wednesday. This is because the rollover is always calculated 2 business days in advance.
This is known as “Wednesday Rollover”.This makes a typical Wednesday rollover three times the amount on Tuesday.
N.B. There is no rollover on public holidays, but an extra day’s worth of rollover usually occurs 2 business days before the holiday.
Check out our example of rollover in practise.
You buy 1 lot of GBP/USD with an account currency of EUR.
You hold the position overnight and therefore see the following rollover:
-0.026 x $10(USD) x 1 x 1 = -$0.26
Not only that, the rollover was on a Wednesday evening:
(Remember that on Wednesdays swap days are counted as 3 rather than 1 to take the weekend into consideration.)
-$0.26 x 3 = -$0.78
We then convert the amount into the currency of choice:
(Assuming the rate of EUR/USD is $ 1.3720)
0.78 / 1.3720 = -€0.57
Wednesday Rollover
Forex Trading Terms
The impact of Rollover
Forex Example
Now Let’s Move Forward
It’s now time to ditch the textbooks and take a hands-on
approach.
If you haven’t already registered for our MetaTrader4 demo,
you can do this by opening a demo account here. Starting
with $10,000 demo funds, you have the opportunity to trade in
a real-time environment and test your trading strategies before
committing real money.
But wait, before you go gallivanting off into the unknown, heed
the obligatory motivational quote and make sure you read our
common mistakes e-book.
We wish you good luck in your trading.
Sign up for a free 30 day demo account here and get started today.
“Experience is the
name everyone gives
to their mistakes”
– Oscar Wilde
Risk Warning:
Trading in Foreign Exchange (FX), Bullion and Contracts for Differences (CFDs) is not be suitable for all investors due to the high risk nature of these products. Forex, Bullion and CFDs are leveraged products that can result in losses greater than your initial deposit. The value of an FX, Bullion or CFD position may be affected by a variety of factors, including but not limited to, price volatility, market volume, foreign exchange rates and liquidity. You may lose your entire initial stake and you may be required to make additional payments. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions. Before deciding to enter into FX, Bullion and/or CFD trading, you should carefully consider your investment objectives, level of experience, and risk appetite. You should only invest in FX, Bullion and/or CFD trading with funds you are prepared to lose entirely. Therefore, only your excess funds should be placed at risk and anyone who does not have such excess funds should completely refrain from engaging in FX and/or CFD trading. Do not rely on past performance figures. If you are in any doubt, please seek further independent advice.
Hantec Markets is a trading name of Hantec Markets Limited who is authorised & regulated by the Financial Conduct Authority (FCA) in the UK - FRN 502635
Trust Through Transparency
Hantec House, 12-14 Wilfred Street, London SW1E 6PL
T: +44 (0) 20 7036 0888
F: +44 (0) 20 7036 0899
W: hantecfx.com