New to Forex trading and want to start trading yourself quickly and safely?
Then check out this free crash course Forex trading.
In this first part we will cover some Forex terms. In the next part you will learn how to set up a trading account and start trading risk free. In the third and last part you will learn how to get ongoing profits.
Forex is short for Foreign Exchange which is sometimes even shorter abbreviated to FX. Forex is the currency market and trading Forex is trading currencies in order to make money. Forex can be traded 24 hours a day and 5 days a week.
Unlike stocks, Forex is not traded at a physical location or a central exchange like the New York Stock Exchange, but it is done ‘Over the Counter’ (OTO). This means that the Forex market is a decentralized market, with no (governmental) regulation.
It is not possible to have direct access to the Forex Markets. You can only trade Forex through a middleman, a broker. There are 1000’s of brokers that operate worldwide, so it won’t be difficult to get one.
For trading you need to have special trading software, or a trading platform installed on your computer.
The most popular trading platform to date is the free Metatrader 4 (MT4). There are MT4 versions for Windows and Mac.
Pairs & prices
If you are trading Forex then you are always trading currency pairs. For example, If you are trading Euro for Dollar then you are trading the Euro-Dollar pair (EUR/USD).
The first part of this currency pair is called the base currency (EUR), the last part is called the quote currency (USD).
The quote prices are the prices you see displayed in the banks and money exchange offices.
Pips & lots
Like distances are measured in units of meters, miles or inches, there are also units of measure in Forex trading. One of these units is the lot, which is a measure for the quantity of money.
1 lot = 100,000 units of money. This means:
- 1 lot in dollars = $100,000
- 1 lot in euros = €100,000
There are also minilots and microlots.
- 1 minilot = 0.1 lot = $10,000
- 1 microlot = 0.01 lot = $1,000
Another unit in Forex trading is the pip. The pip is short for ‘point in percentage’ and it is a measure for change of the currency price.
Spreads & commissions
A broker is a business, so it has to make money to stay in the market. Brokers make money with spreads and commissions.
Selling and buying are not done at exactly the same price. Selling is done at the bid price and buying at the ask price. The difference between these prices is called the spread. This spread can be fixed, but it can also vary.
A commission is a small fee a trader pays to the broker for executing the order.
Some brokers don’t charge commissions for placing orders, but they maintain a relatively big spread. Other brokers do charge commissions, but they maintain low spreads, sometimes even zero! It is up to the broker business model how it makes its money. In this blog post I will cover more about brokers.
Account equity & account balance
Your money in your trading account is sometimes called account balance, and sometimes it is called account equity.
- Balance is all your trading money, excluding the profit/loss of running trades.
- Equity is your trading money, including all profit/loss of running trades.
All profit/loss of running trades is also called unrealized profit.
So if your balance is $1,000 and your unrealized profit is currently minus -$50, then your equity is $950.
The money in your trading account is – of course – your own money, but the money you are trading with is borrowed money. You borrow this money from your broker each time you place a trade.
For borrowing the money a small amount of money is hold on your account’s equity. This money is called margin or margin deposit and it is a kind of collateral.
How much this margin is depends on your account’s leverage. The higher the leverage, the lower the margin, and so the more ‘lots’ you can trade on a higher leveraged account.
The table below gives an indication about how much you can win (or lose) on a 50 and a 500 leveraged account, for equity sizes of $100, $1,000 and $10,000.
On a higher leveraged account you can win more, but you can also lose more!
Margin call & stop out level
If you are losing and your equity goes down, then it will eventually reach a critical level: the margin call level. Your broker will then give you a margin call, and you are not allowed to place new trades.
If your equity continues to go down and it reaches the stop out level, then your broker starts closing out all your positions, one by one, at a loss. This is called liquidation, which is an automatic process that continues until your equity is above the stop out level again.
Pending orders & market orders
Buying and selling currencies is done by placing orders. There are 2 different orders: market orders and pending orders. A market order is buying or selling now. A pending order is buying or selling later when the price reaches a predetermined level.
There are two different pending orders, the limit order and the stop order. There is no difference between them, besides the positions they are placed at.
Sell limit orders and buy stop orders are placed above the price. Sell stop orders and buy limit orders are placed below it (as shown in below image). The reasons why is beyond the scope of this crash course.
Price action charts & timeframes
Price action of currencies are displayed in charts. There are several graphical representations of these price charts, but by far the most popular one is the candle stick chart.
Candle stick charts originate from the Japanese Rice market centuries ago. Steve Nison introduced the Japanese candle in the west in the 90’s and popularized their use in stock trading.
A candle (stick) is a representation of the price action during a fixed time interval or timeframe. Most popular timeframes are 1 minute, 5 minute, 15 minute, 30 minute, hourly, 4 hourly, daily, weekly and monthly.
It is made up from 4 prices:
- candle open: the price at the start of the time period.
- candle close: the price at the end of the period.
- candle high: the highest price in the period.
- candle low: the lowest price in the period.
Candle sticks are called ‘candle sticks’ because they look like a candle, with a body and a wick. The wide part of the candle is called the candle body, the lines on the top and the bottom are called wicks.
The color of the candle indicates if the price has moved down or up during the period. A white candle means that the price has gone up, a black candle means that the price has gone down.
Before traders trade with real money, they firstly practice trading with fake money. This is done on a demo account.
Demo accounts are used by both beginners and professionals. Newbies use them to master the trading software, and the professionals use them to develop and test new strategies on.
In part 2 of this crash course, you will learn how to open a demo-account.