Limit of Liability / Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this Forex Trading For Beginners Guide, they make no representations or warranties with respect to the accuracy or completeness of the contents of this guide.
Risk Disclosure: The information in this Forex Trading For Beginners Guide is for educational purpose only. Past performances do not guarantee future results. FOREX Trading involves substantial risk and there is always the potential for loss. Your trading results may vary. Trade only capital you can afford to lose. We assume no liability for losses incurred using the information on this site.
The Basics of FOREX Trading for Beginners
Why Trade The FOREX Market
How To Get Started With Forex Trading
Introduction To A Basic FOREX Strategy for beginners
Introduction To Forex Charts For Beginners
Forex Charts, Technical Indicators, and Forex Trading Systems
The Basics of FOREX Trading for Beginners
What precisely is FOREX trading? Put simply, FOREX trading is the buying and selling of international currencies. Traditionally, participation in the FOREX market was confined to major banking and trading institutions. But in recent years, technological developments have opened up this once exclusive arena to smaller companies and even individuals by allowing them to trade currencies online.
The world’s currency rates are not fixed. They follow a floating exchange rate and are always traded in pairs – Euro/Dollar, Dollar/Yen, etc. Most international transactions are exchanges of the world’s major currencies.
When it comes to Forex trading, there are a number of major currency pairs. : Euro v. US dollar, US dollar v. Japanese yen, British pound v. US dollar, and US dollar v. Swiss franc. These currency pairs are considered major in comparison to the other currency pairs because of their trading volume.
In the FOREX market, these relationships are shortened: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. They may also be listed as follows (without the slash): EURUSD, USDJPY, GBPUSD, and USDCHF
Below is a chart of 4 currency pairs clearly illustrating forex beginners their relationship to each other.
Forex Trading For Beginners Chart 1.0 Major Currency Pairs – Daily Data
It is also important to remember that there are no dividends paid on currencies. If you are a trader in the FOREX market, you look to see whether one currency’s value will appreciate against another currency. When this is the case, you exchange the latter for the first. Ideally, you will be able to exchange the first currency for the other at a later time and collect a profit from the trade.
FOREX transactions are typically conducted by professionals at major banks and brokerage firms. FOREX trading has long been an important feature of the international market. At all hours of the day, currencies are being traded by brokers around the world.
In fact, the FOREX market operates virtually twenty- four hours a day and five days a week with traders at international banking institutions working a number of separate shifts.
The FOREX market is different from the normal stock market in the fact that price shifts are much smoother and do not result in significant gaps. Each day the FOREX market turns over trillions of dollars, allowing traders to enter and exit certain position very easily. As you can see, the FOREX market is a dynamic and continuous system that basically never sleeps. To be sure, even on September 11 in 2001 it was still possible to obtain currency quotes.
Also known as the foreign exchange market, or FX, it is the oldest and most expansive financial market in the world. In comparison, the currency futures market is a mere one percent the size of the FOREX market.
Trades are brokered between major banking groups and circulate around the globe, from America to Australia, to Asia, to Europe, and back to the U.S. For a long time, financial prerequisites and hefty minimum transaction amounts put the FOREX market out of reach of small traders. Consequently, at one time major banks and financial institutions were the only parties that could benefit from participation in the FOREX market’s fluidness and strong exchange rates.
Today is a different story. FOREX market dealers can divide large units within the market, allowing smaller corporations and even individuals the ability to trade these smaller units. Even though it is the oldest financial market in the world, the FOREX market has evolved a great deal in a short amount of time. High-speed internet connections and sophisticated online Forex trading platforms has definitely made it easier for individual traders to get involved in Forex trading and possibly be very successful at it. This basic guide is your first step towards a successful future in trading in the extremely lucrative FOREX market.
If you asked Forex traders the number one reason they traded Forex most of them would say, “profit potential”
Forex Trading For Beginners Chart 1.1 Daily GBPUSD Data
The chart above shows the daily GBPUSD (British Pound/US Dollar) currency pair. This chart shows the ?BUY? entry where the blue arrow is (the bottom left of the chart). This
represents where a particular Forex trading system went long (bought).
The profit so far in this trade is approximately $24,000 per Forex contract. This is from just one simple trade in the Forex market! So as you can see the profit potential is there and opportunities such as these exist in all Forex currency pairs.
There is a unique and potentially very profitable opportunity offered through cash/spot FOREX markets regardless of the condition of the market.
How To Get Started With Forex Trading
Learning to trade with Forex is not unnecessarily difficult; however, there are definitely a few items you must be aware of and instructions to follow. Before beginning any trading, obviously you need to locate and forge a relationship with a broker to execute the trades. Just as with doctors, lawyers and other professions, there are a multitude of Forex brokers from which you can select.
To help you choose, here are some factors to consider:
Minimal Spreads – Unlike standard stock trading brokers, Forex brokers do not charge any commissions on the trades. They earn their income from what is called a spread. The spread is simply the difference between the buy and sell price of currency at a particular point in time. As you locate and investigate the brokers, you should inquire as to the spreads they charge. The lower the spread, the less it will cost you to trade in Forex. This is the same rule as with traditional brokers. The higher their commission on the trades, the lower your profit at the conclusion of the buy and sell transaction. It is in your best interest to choose a Forex broker offering a low spread.
Compliance and Reputation – Traditional stock trading brokers generally operate through their own brokerage houses. Forex brokers, however, are most often affiliated with a large bank or other financial institution. This is due to the substantial sums of capital required. In addition, you should confirm that the Forex broker you choose is properly licensed and registered. Forex brokers should be registered with the Futures Commission Merchant (FCM). IN addition, they are regulated by the Commodity Futures Trading Commission (CFTC).
You can locate and verify the registration as well as other facts and background information at the CFTC website at http://www.cftc.gov .Without a doubt, you want to retain and trade through a broker who is affiliated with a reputable bank or financial institution.
Available Research Tools and Information – Like traditional stock and commodity brokers, Forex brokers maintain various types of websites, trading platforms and underlying research and information portals. The sites should provide you with real time information, current charts, technical information and comparison ability and other relevant data. A good Forex trader will also sustain the ability to trade on different systems. As with any major financial endeavor of this type, ask for free trials to you can evaluate the Forex broker’s various trading platforms. Forex brokers should offer a wide array of information, schedules, tools and other support functions and records.
The bottom line is to locate a broker who will provide you with all the tools and services you require to be successful.
A Variety Of Leverage Options – To succeed in Forex trading you Leverage the price spreads on your trades. The price differentials are minute down to the small percentages of a penny. You are, however, using more than your actual capital borrowed from the broker to make the trades which is how you Leverage larger amounts for your trades than you actually have in cash. This allows you to earn money on the small price deviations. As an example, if you are leveraging at a ration of 100 to 1, this means that for every one of your dollars with which you are trading, you are borrowing 100 from the broker. A wide majority of brokers will allow you to leverage up to a 250 to 1 ratio.
You need to be careful, however, because the leverage ratio is directly related to risk. The higher the ratio, the more you are effectively borrowing from the broker. While you can earn more profit from the trades, you can also lose more if the price fluctuation is not in your favor. This risk reward evaluation is based on your own capital amounts and your tolerance level for profits and losses on the trades. If you are flush with capital, leveraging a higher amount is not as much of a concern. Nevertheless, brokers offer a large number of leveraging ratios and you will certainly find one or more to fit your desires and financial constraints. Even if you have a good amount of capital and can accept a certain amount of risk, you may not want to leverage a high amount if the market becomes volatile such as with exotic currency pairs.
Types of Accounts – You will need to open an account with a broker to execute trades. There are a variety of types of accounts which you can maintain. The lowest account is referred to as a mini account. It has a low minimum opening balance requirement of approximately $300.00. A mini account provides you with the highest ratio of leverage since you are using a small amount of capital with which to execute larger sums in your trades. Aside from the mini account is a standard account. That type of account provides a multitude of various leverage ratios. It has a higher minimum balance to open of approximately $2000.00. Finally, another type of account which brokers offer is a premium account. These require substantially higher minimums to open. They also offer you multiple ratios of leverage as well as give you access to additional platforms, tools and services. As you evaluate and pick a broker, find one that has the right mix of accounts, leverage, information and services for your requirements and financial circumstances.
Stay Away From Disreputable Brokers – Just like in any profession, there are good and bad representatives. Brokers are no different. Some are reputable and others are the ones you just need to avoid, especially as a forex trading beginner. These are the brokers who do not have your best interest in hand and simply buy prematurely or sell near a preset price point to increase their own profits.
These brokers will pick up a fraction of a penny always against on your trades. None of the brokers you evaluate will ever admit to such trading, but there are methods to determine if you are considering a broker who engages in this practice. You can speak with other brokers to get their opinion on the one or more that you are considering. You can ask if they are aware of the brokers trading proclivity in terns of the buying and selling near the price points.
There is no organization that tracks this type of activity. You can try to look on the Internet for discussion boards or messages that might disclose certain brokers and their trading activity.
Margin Calls and Requirements – Obviously since leveraging is all about borrowing money from the broker you need to understand exactly how much risk your broker is going to allow you to take on trades. Once you establish that together and discuss it, the broker will know the prices and differentials in the fluctuations within which to trade by buying or selling. This can, however, adversely impact you if the broker has that discretion and trades at losses.
For example, assume you maintain a margin account and your positions dramatically fall before turning around and rising substantially even exceeding the beginning price. Whether or not you have sufficient capital, a broker might have traded out your position during the fall to lessen the broker’s risk and potential loss. That trade could have been at or near the bottom of the price fluctuation. That would result in a margin call to you and you could be liable for substantial sums of money even though the price rebounded after the broker liquidated your position.
Opening a Forex account, regardless of the type, is similar to taking out a rotating equity loan or maintaining an equity account. The main thing that separates them from the Forex account is that you are required to execute a margin agreement with relation to your Forex accounts. The margin agreement acknowledges that you are trading with money borrowed from the broker and that the broker can insert itself into your trades as necessary to lower its risk and protect its interest. It also explains your liability relating to any losses. After you execute the agreement and deposit the beginning capital to the account you opened, you are ready to begin trading.
Introduction To A Basic FOREX Strategy for beginners
Technical analysis and fundamental analysis are considered the two main forms of analysis in both the FOREX market as well the equity markets. However, most FOREX traders opt for using technical analysis.
The following is a quick overview of both types of analysis and how they are used in FOREX trading.
Fundamental Analysis for Forex Trading Beginners
Using fundamental analysis in the FOREX market tends to be somewhat difficult and is generally used to forecast long-terms trends. There are, of course, some traders who conduct their trades on a short term basis solely on current news releases. There are many fundamental indicators of currency values that are released at various times so we have provided a list of a few for to be aware of:
- Non-farm Payrolls
- Purchasing Managers Index or PMI
- Consumer Price Index or CPI
- Retail Sales • Durable Goods
Of course these are not the only fundamental indicators you need to be aware of. There are also several meetings that can provide you with additional information that may affect a market. These meetings usually focus on interest rates, inflation, and other causes of currency value fluctuation. Sometimes a volatile market is caused by something as simple as the wording of issues such as the Federal Reserve chairman’s discussion on interest rates.
The most significant meetings you should be aware of are the Federal Open Market Committee and Humphrey Hawkins Hearings. Simply studying the commentary can help FOREX fundamental analysts to better understand long-terms market trends and can also help short-term traders capitalize on the market.
Should you opt for the fundamental strategy, you should keep an economic calendar on hand so you know when these reports are available. Your broker should be able to keep you up-to-date on this information as well.
Technical Analysis for forex trading beginners
Technical analysis helps FOREX traders analyze price trends much like their counterparts in the equity market. The only difference is that FOREX markets are open 24 hours every day. In order to work with that 24 hour a day time frame, some types of technical analysis to be changed or modified.
The following is a short list of technical analysis tools that are most commonly used in FOREX:- Moving Averages
- Stochastic Oscillator
- Channel Breakout
- MACD (Moving Average Convergence Divergence)
- Candlestick charts
- Elliott Waves
- Fibonacci Studies
- Parabolic SAR
- Pivot Points Introduction To Forex Charts for beginners
No discussion of technical analysis would be complete without an introduction to Forex chart basics. The very first Forex chart we will start with is called a ?bar? chart. It gets its name because of its elongated bar-like shape. The typical bar on a bar chart is composed of 4 components:
Open – Opening price of the time period used High – Highest price of the time period used Low – Lowest price of the time period used Close – Last price of the time period used Below is a typical bar of a bar chart
Forex Trading For Beginners Bar Chart 1.1Open – Tick on left side of bar
High�– Top of bar
Low – Bottom of bar
Close – Tick on Last price of the time period used
The chart below is a monthly chart of the EURUSD (Eurodollar/US Dollar) currency pair. Monthly charts are longer-term charts used to get a feel for the ?big picture? of the market. Many traders start here and then work their way through a series of smaller timeframe charts.
Forex Trading For Beginners Chart 1.2 Monthly EURUSD DataThe weekly chart is the next timeframe available. The weekly chart confirms the EURUSD’s upward movement since the beginning of 2009.
Forex Trading For Beginners Chart 1.3 Weekly EURUSD Data When we focus in on the daily chart we see that the market continues to be in an uptrend. Traders who are trend followers often take this ?top down? approach to gain perspective on the market’s movements and establish the direction of the trend. If a trader using this method feels that the upward trend will continue they will see to find a suitable entry point for a long position in this market.
Figure 1.4 Daily EURUSD DataBelow is a very popular timeframe to use in Forex charting. It is a 4-hour bar chart. The 4-hour chart is an excellent chart to use in trading. It has become increasingly popular with those traders who feel that the smaller timeframes, i.e., 15 minute, 5 minute, etc. move too erratically to base trading decisions on.
Figure 1.5 4-Hour EURUSD DataThe hourly chart is by far one of the most popular. It may be used by longer-term traders to refine their entries and exits. The 1-hour chart is also used by day traders who wish to gauge short-term market direction.
Figure 1.6 1-Hour EURUSD DataThe 5-minute chart is used almost exclusively by day traders.
Figure 1.7 5-Minute EURUSD DataAnother form of Forex chart is the candlestick chart. Candlestick charting originated in Japan and is one of the oldest methods of charting in the world. Candlestick charting has enjoyed increased popularity and is now used by more Forex traders than ever.
Figure 1.8 Daily EURUSD Candlestick Data
The name ?candlesticks? comes from the appearance of the data on the chart. They price data looks like a ?candle? with a ?wick? on each end. In the chart above the solid green and solid read areas are known as the ?real bodies?. The gray lines that are extending from each end are known as ?wicks?. You may also here ?wicks? referred to as ?shadows?Candlesticks have become so popular because you can look at a candlestick chart and instantly get useful information. For instance, the green candles are called ?bullish candles? because the price moved in an upward direction.. The closing price for a green candle is always higher than the opening price. Red candles are called ?bearish candles? because the price moved in a downward direction. The closing price for a red candle is always lower than the opening price.The chart below shows a green candle at the start of a strong uptrend (see blue arrow).
Figure 1.9 Daily EURUSD Candlestick Data
The chart below shows a red candle at the start of a strong downtrend (see red arrow).
Figure 1.10 Daily EURUSD Candlestick Data
Consecutive candles of the same color generally indicate the continuation of a trend.
You can see from this brief introduction to candlestick charts that they can be very useful. After our brief introduction to candlestick charts it’s time to move to our next topic.Forex Charts, Technical Indicators, and Forex Trading Systems
Forex charts and technical indicators, also known simply as ?indicators? have become a standard of Forex market analysis. An indicator is a visual element that is placed on the same Forex chart as the currency pair. It gets its name because it ?indicates? something. An indicator can tell a trader when prices are at a favorable level to place a trade such as a buy trade or a sell trade.
Figure 1.11 Daily EURUSD DataThe green line we see below is an example of an indicator. This particular indicator is called a ?simple moving average? or SMA. Arrows have been placed on the chart to represent buy and sell triggers. The ?triggers? in this case are as follows:
When the price closes above the moving average then we have a buy trigger. When the price closes below the moving average we have a sell trigger.
Figure 1.12 Daily EURUSD Data
One question you may ask is, ?When we see a trigger what do we do?? That’s a good question. The standard way of using a moving average is to take the trade on the nextbar after the trigger. This means that we would buy on the open of the bar ?after? the trigger bar (blue up arrow bar in this case). The reverse is true of selling.
This is a simple example how you can use a simple Forex indicator to make a trading decision. Notice that this is just an observation and that in order to profit in Forex you will need to analyze the market further.
Why analyze a market? You need to analyze a market in order to make a decision to buy or sell…or do nothing at all. Let’s further explore how Forex technical indicators can be used to help us make trading decisions. In fact, we are going to look at how technical indicators can be used to create simple Forex trading systems.
Simply put, a Forex trading system is a set of rules designed to help you trade Forex profitably. A Forex system generates trading signals. These trading signals tell the trader to take a certain action such as BUY or SELL.
The moving average we are using is a 9-period moving average. Since we are working with daily data this we will be using a 9-day moving average.
Date Open High Low Close Avg.
Table 1.1 Daily EURUSD Raw Data with Simple Moving Average
The table above shows the open, high, low, and close prices with the moving average values in green. As you can see the values of the moving averages changes as the prices of the EURUSD changes,. It ?moves? as the price moves, hence the namemoving averages.
This particular moving average is calculated using the last 9 ?closing? prices (listed under Close in the table).
Below is a daily EURUSD chart showing the buy and sell signals generated by using a simple 9-period moving average trading system we created.
Figure 1.13 Daily EURUSD Data with Simple Moving Average
One of the greatest advantages of using trading systems is to see how they would have performed on past data. If the results on past data look favorable then we may have asystem that will work on future data as well. So how did our 9 period moving average system perform? Let’s take a look:
Test Period: 1/20/2003-1/20/2008 Stop Loss Amount = $1000 (100pips)We have added a risk control measure in the form of a stop loss. A stop loss is an order designed to ?stop loss? on a trading position. If the market moves in a way that causes your position to lose value the stop loss is designed to limit the amount of that loss.
10 Day Simple Moving Average System Net Profit = ~ – $2,300
So far this doesn’t seem to be the type of moving average system that we would like to trade. Fortunately for us we can change the parameters of this indicator and research to find one which best suits our needs.
We have run a few tests and found the following:
42 Day Simple Moving Average System Net Profit = ~ $23,000
That’s quite a difference in net profit isn’t it? As you can see from this simple example it pays to do your research to find indicator settings that work well.
Note: The above examples and all examples that follow are for the purposes of illustration only. They are not meant to suggest that the displayed settings are to be used.
Introducing The Stochastic Oscillator
The next indicator we will explore is called the stochastic oscillator or stochastics for short. Unlike the simple moving average the stochastic oscillator is not displayed on the same scale as the price. It is typically displayed below the prices as shown below.The stochastic oscillator is grouped within type of technical indicators called oscillators because its value move or oscillate between two extremes. These extremes range between 0-100.
Figure 1.14 Daily EURUSD Data with 14-period Stochastic
The typical interpretation of the stochastic oscillator is as follows:- When the stochastic is over 80 that indicates that the market is overbought and losing upward momentum. Traders can either look to liquidate their long (buy) positions or look to sell.When the stochastic is below 20 that indicates that the market is oversold and losing downward momentum. Traders can either look to liquidate their short (sell) positions or look to buy.
Figure 1.15 Daily EURUSD DataThe above chart shows entries and exits based upon using a 14-day stochastic oscillator.
Test Period: 1/20/2003-1/20/2008 Stop Loss Amount = $1000 (100pips)
14 Day Stochastic Oscillator System Net Profit = ~ – $1,900
So far this doesn’t seem to be the type of system that we would like to trade. We have run a few tests and found the following:6 Day and 46 Day Stochastic Oscillator System Net Profit = ~ $22,000
That’s quite a difference in net profit isn’t it? In this example you are shown two different parameters for the stochastic oscillator to introduce you to a new concept. In the first test we used a single parameter for both the buy and the sell trades. In the second test we used 6 days for our buy entries and 46 days for our sell entries.
Why does this seem to work so well? Because market may behave differently when moving downward than they do when moving upward so the best parameters for a bull market will not necessarily be the best parameters for a bear market.
Note: The above examples and all examples that follow are for the purposes of illustration only. They are not meant to suggest that the displayed settings are to be used.
In Conclusion
The rules, tips, and techniques laid out in this Forex Trading For Beginners guide are designed to lay the groundwork for you to trade successfully. Some of these are hard and fast rules that you definitely must not ignore. Many of the hard and fast Forex trading rules have to do with discipline and risk control. Without these you simply cannot be successful. Even if you are exceptionally well capitalized you can easily make your account disappear without risk control