Forex Trading Guide PDF

Chapter 1 Welcome to the World of Forex Trading So you have heard about Forex Trading and you are now curious to check it out, but really don't know where to start. Well you have come to the right place, as this book will take you through the basics, explain Forex in a plain and simple manner and g...

Chapter 1 Welcome to the World of Forex Trading So you have heard about Forex Trading and you are now curious to check it out, but really don't know where to start. Well you have come to the right place, as this book will take you through the basics, explain Forex in a plain and simple manner and give you enough information to get started sooner rather than later, in the exciting world of Forex Trading. What is Forex? Forex is the common term used to describe Foreign Exchange. It is also called currency trading, or just FX trading, and every now and then you may see it referred to as Spot FX. It is essentially the trading of the world's various currencies. Trading currencies is a little different to trading shares or stocks, as currencies are traded against each other. What I mean by this is that you are comparing one country's currency to another country's currency. It is not as confusing as it sounds, so bear with me. Why would I want to trade Forex? Good question! Most people have heard about trading stocks, maybe even futures and options. They have been around for years and your grandparents may have even traded them. But I guarantee you that they wouldn't have traded Forex, unless they were exceptionally wealthy individuals or worked for a major bank. It is only in the last 15 or so years that the retail Forex industry has opened up to the likes of you and I, where you can start trading with a very small deposit into a brokerage account. Obviously the popularity of the internet has helped create this boom as about 99.9% of all transactions are carried out online. Why Forex? For a start, it is by far the most liquid market in the world that runs 24hrs a day for 5 1/2 days of the week. Just to give you an idea of what I mean, in early 2014 and according to the Bank for International Settlements, Forex trading increased to an average of $5.3 trillion dollars a day. To put this in perspective, this averages out to be $220 billion per hour. In fact, it would take 30 days of trading on the New York Stock Exchange to equal one day of Forex trading. These figures are huge! There is no other way to put it. But obviously that doesn't really affect the average trader other than giving that trader very good liquidity, which means if you want to buy or sell any of the top 10 currency pairs, there is never an issue of that pair not being available to trade. Also with this much volume on a daily basis, the average trader like you and I have absolutely zero chance of influencing market direction. Advantages to Trading Forex Because the Forex market is running continuously for 24 hours during the week, there is very little gapping, which can be a common problem with stock trading. For example you may have bought XYZ stock at $24.20 on Tuesday just before the market close with a stop loss set at $23.50 to protect you against any major losses. During the night, when the market is closed, there is a major announcement that affects the company trading as XYZ, and the market opens on Wednesday morning, with XYZ trading at $22.10. Not only has it gapped down $3.10 overnight, it has also opened $1.40 below your stop loss giving you a much bigger loss than you ever anticipated. This rarely happens in Forex trading, but having said that it can happen, especially over the weekend as this is the only time the Forex market is closed. But it is rare! I can give you one example where I was caught out on a weekend. Late 2003 I was in open positions over the weekend where I was basically going against the US dollar, and then US troops captured Saddam Hussein. This was very positive for the US dollar, which then opened much higher on the Monday inflicting some financial pain my way. I have learnt my lesson and I am rarely in open positions over the weekend. As you will soon see, with regards to Forex trading, you only have a small amount of currency pairs to choose from. This is a very small basket compared to the number of stock choices you have. On the US stock exchanges, there are literally thousands of stocks to choose from. Here you have the problem of finding a needle in a haystack. You will see that your Forex choices are much, much narrower, hence there is certainly a lot less searching and analyzing required. All of your efforts and concentration can be targeted in a very narrow field, so you can get on with the trading sooner than later. Once you have a look at a few different Forex charts, which I discuss later, you will see some very nice smooth trends that seem to occur quite often. Now this is something that you may not understand if you have never traded a financial instrument before, especially if you have never looked at charts. For those stock traders out there, you would be very aware of stocks that just get stuck in a range for what seems forever, or stock charts that show plenty of gaps and a general ugly sort of look. I am not saying that Forex doesn't range. It does, trust me, but when it breaks out it is normally something very good. You will understand this once you start looking at the charts. The low cost of trading is also important. Most trading is conducted electronically over the internet on your nominated broker's online account. The cost is minimal for each trade as there is normally no commission involved, however you do have to cover the spread. This will be explained shortly, but it can be very cheap to trade considering some pairs now have less than one pip spread. Further to the low cost, you can open an account with a broker for a very small amount, and in some cases, just a couple of hundred dollars. Granted you are not going to make millions from this, but it is a start. I will cover brokers later. Some Further Advantages of Forex Trading So we need somewhere to trade and as stated earlier, this is all done online via the internet. The good thing about this is that most brokers offer unlimited demonstration platforms where you can practice trading for as long as you like without risking any of your own money. This is brilliant if you want to try out different trading methods and ideas. Commonly referred to as 'demo trading,' there is no reason that you can't have both a 'live' and 'demo' account with the same Broker. Just ensure you don't get them confused. Demo trading is quite a useful tool where you can try out different things etc, but please be warned, trading on a 'demo' account is nothing like trading on a 'live' account as there is zero risk with a 'demo' account and therefore your emotions do not come into play at all. It is like walking across a plank of wood 6 inches above the ground, compared to walking across the exact same plank of wood ten stories up in the air. I'm sure your emotions would be different, and the same goes for trading. When there is real money on the line, you will think and act different! Trust me on this. And to take this one step further, Forex data is live and it is free. Unlike a lot of stock data where you have to pay a monthly data subscription fee or stuck with 15 minute delayed data, your Forex data is all freely provided to you by your chosen broker's trading platform. I’ll have more on brokers and their platforms later. When is the Forex Market Open? Here I will discuss the trading times and as you will see, there is ample time to trade Forex. As stated earlier, it is a market that is open longer than it is closed. As most people would be aware if you were trading stocks then you would trade these through an exchange, whether it was the New York Stock Exchange or the Australian Stock Exchange. Forex trading does not have any central exchange as such. All trading is done through the banks or market makers, which are basically the brokers that traders like you and I would use. Forex trading follows the world's time zones and is broken down into three major time zones. ▪ The first to open is Asia, which includes New Zealand, Australia, Singapore, Japan etc. This is called the Asian session and is normally the quietest of the sessions with regards to trading volume. ▪ This is then followed by the European session. In the meantime, traders in the Middle East are kicking in, and then all the major European centres, where eventually London opens. The European session is the main session as it normally has the greatest volume traded. You have to remember also that London is the financial capital of the world, even though most people think it is Wall Street in the US. ▪ The last session to open is the US session, and this session can also be very frantic, especially early in the day where there can at times, be major news releases that have a big effect on the US dollar itself. So we have the three trading sessions, which do overlap each other. There are no set times, just when banks open for business in each major financial city and volume picks up. For me living in Australia, I know that during the day here, it is the Asian session, followed by the European session which kicks off at about 5pm, followed by the US session at 11pm. I am normally in bed by 2am at the latest, which would be getting close to lunchtime in the US. In a nutshell, you can trade at any time, but if you intended on trading the London open and you lived in the US, you may have to set your alarm clock and get up very early in the morning. Every time zone has its advantages and disadvantages. There are plenty of free online time zone clocks available that relate to the different session times, so it is quite easy to find a session or sessions that suit your lifestyle. You can also find free custom indicators that clearly put the different session times on your trading charts. This is a great visual tool for some.