What Is Forex Trading ? – A Definition & Introduction
What is Forex? – The basics…
Basically, the Forex market is where banks, businesses, governments, investors and traders come to exchange and speculate on currencies. The Forex market is also referred to as the ‘Fx market’, ‘Currency market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’, and it is the largest and most liquid market in the world with an average daily turnover of $3.98 trillion.
The Fx market is open 24 hours a day, 5 days a week with the most important world trading centers being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.
It should be noted that there is no central marketplace for the Forex market; trading is instead said to be conducted ‘over the counter’; it’s not like stocks where there is a central marketplace with all orders processed like the NYSE. Forex is a product quoted by all the major banks, and not all banks will have the exact same price. Now, the broker platforms take all theses feeds from the different banks and the quotes we see from our broker are an approximate average of them. It’s the broker who is effectively transacting the trade and taking the other side of it…they ‘make the market’ for you. When you buy a currency pair…your broker is selling it to you, not ‘another trader’.
• A brief history of the Forex market
Ok, I admit, this part is going to be a little bit boring, but it’s important to have some basic background knowledge of the history of the Forex market so that you know a little bit about why it exists and how it got here. So here is the history of the Forex market in a nutshell:
In 1876, something called the gold exchange standard was implemented. Basically it said that all paper currency had to be backed by solid gold; the idea here was to stabilize world currencies by pegging them to the price of gold. It was a good idea in theory, but in reality it created boom-bust patterns which ultimately led to the demise of the gold standard.
The gold standard was dropped around the beginning of World War 2 as major European countries did not have enough gold to support all the currency they were printing to pay for large military projects. Although the gold standard was ultimately dropped, the precious metal never lost its spot as the ultimate form of monetary value.
The world then decided to have fixed exchange rates that resulted in the U.S. dollar being the primary reserve currency and that it would be the only currency backed by gold, this is known as the ‘Bretton Woods System’ and it happened in 1944 (I know you super excited to know that). In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves, this marked the end of the Bretton Woods System.
It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign currency exchange market, although it did not become widely electronically traded until about the mid 1990s.
(OK! Now let’s move on to some more entertaining topics!)…
What is Forex Trading?
Forex trading as it relates to retail traders (like you and I) is the speculation on the price of one currency against another. For example, if you think the euro is going to rise against the U.S. dollar, you can buy the EURUSD currency pair low and then (hopefully) sell it at a higher price to make a profit. Of course, if you buy the euro against the dollar (EURUSD), and the U.S. dollar strengthens, you will then be in a losing position. So, it’s important to be aware of the risk involved in trading Forex, and not only the reward.
• Why is the Forex market so popular?
Being a Forex trader offers the most amazing potential lifestyle of any profession in the world. It’s not easy to get there, but if you are determined and disciplined, you can make it happen. Here’s a quick list of skills you will need to reach your goals in the Forex market:
Ability – to take a loss without becoming emotional
Confidence – to believe in yourself and your trading strategy, and to have no fear
Dedication – to becoming the best Forex trader you can be
Discipline – to remain calm and unemotional in a realm of constant temptation (the market)
Flexibility – to trade changing market conditions successfully
Focus – to stay concentrated on your trading plan and to not stray off course
Logic – to look at the market from an objective and straight forward perspective
Organization – to forge and reinforce positive trading habits
Patience – to wait for only the highest-probability trading strategies according to your plan
Realism – to not think you are going to get rich quick and understand the reality of the market and trading
Savvy – to take advantage of your trading edge when it arises and be aware of what is happening in the market at all times
Self-control – to not over-trade and over-leverage your trading account
As traders, we can take advantage of the high leverage and volatility of the Forex market by learning and mastering and effective Forex trading strategy, building an effective trading plan around that strategy, and following it with ice-cold discipline. Money management is key here; leverage is a double-edged sword and can make you a lot of money fast or lose you a lot of money fast. The key to money management in Forex trading is to always know the exact dollar amount you have at risk before entering a trade and be TOTALLY OK with losing that amount of money, because any one trade could be a loser. More on money management later in the course.
• Who trades Forex and why?
Banks – The interbank market allows for both the majority of commercial Forex transactions and large amounts of speculative trading each day. Some large banks will trade billions of dollars, daily. Sometimes this trading is done on behalf of customers, however much is done by proprietary traders who are trading for the bank’s own account.
Companies – Companies need to use the foreign exchange market to pay for goods and services from foreign countries and also to sell goods or services in foreign countries. An important part of the daily Forex market activity comes from companies looking to exchange currency in order to transact in other countries.
Governments / Central banks – A country’s central bank can play an important role in the foreign exchange markets. They can cause an increase or decrease in the value of their nation’s currency by trying to control money supply, inflation, and (or) interest rates. They can use their substantial foreign exchange reserves to try and stabilize the market.
Hedge funds – Somewhere around 70 to 90% of all foreign exchange transactions are speculative in nature. This means, the person or institutions that bought or sold the currency has no plan of actually taking delivery of the currency; instead, the transaction was executed with sole intention of speculating on the price movement of that particular currency. Retail speculators (you and I) are small cheese compared to the big hedge funds that control and speculate with billions of dollars of equity each day in the currency markets.
Individuals – If you have ever traveled to a different country and exchanged your money into a different currency at the airport or bank, you have already participated in the foreign currency exchange market.
Investors – Investment firms who manage large portfolios for their clients use the Fx market to facilitate transactions in foreign securities. For example, an investment manager controlling an international equity portfolio needs to use the Forex market to purchase and sell several currency pairs in order to pay for foreign securities they want to purchase.
Retail Forex traders – Finally, we come to retail Forex traders (you and I). The retail Forex trading industry is growing everyday with the advent of Forex trading platforms and their ease of accessibility on the internet. Retail Forex traders access the market indirectly either through a broker or a bank. There are two main types of retail Forex brokers that provide us with the ability to speculate on the currency market: brokers and dealers. Brokers work as an agent for the trader by trying to find the best price in the market and executing on behalf of the customer. For this, they charge a commission on top of the price obtained in the market. Dealers are also called market makers because they ‘make the market’ for the trader and act as the counter-party to their transactions, they quote a price they are willing to deal at and are compensated through the spread, which is the difference between the buy and sell price (more on this later).
Advantages of Trading the Forex Market:
• Forex is the largest market in the world, with daily volumes exceeding $3 trillion per day. This means dense liquidity which makes it easy to get in and out of positions.
• Trade whenever you want: There is no opening bell in the Forex market. You can enter or exit a trade whenever you want from Sunday around 5pm EST to Friday around 4pm EST.
• Ease of access: You can fund your trading account with as little as $250 at many retail brokers and begin trading the same day in some cases. Straight through order execution allows you to trade at the click of a mouse.
• Fewer currency pairs to focus on, instead of getting lost trying to analyze thousands of stocks
• Freedom to trade anywhere in the world with the only requirements being a laptop and internet connection.
• Commission-free trading with many retail market-makers and overall lower transaction costs than stocks and commodities.
• Volatility allows traders to profit in any market condition and provides for high-probability weekly trading opportunities. Also, there is no structural market bias like the long bias of the stock market, so traders have equal opportunity to profit in rising or falling markets.
While the forex market is clearly a great market to trade, I would note to all beginners that trading carries both the potential for reward and risk. Many people come into the markets thinking only about the reward and ignoring the risks involved, this is the fastest way to lose all of your trading account money. If you want to get started trading the Fx market on the right track, it’s critical that you are aware of and accept the fact that you could lose on any given trade you take.
Forex Trading Terminology
The Forex market comes with its very own set of terms and jargon. So, before you go any deeper into learning how to trade the Fx market, it’s important you understand some of the basic Forex terminology that you will encounter on your trading journey…
• Basic Forex terms:
Cross rate – The currency exchange rate between two currencies, both of which are not the official currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the quote is provided in.
For example, if an exchange rate between the British pound and the Japanese yen was quoted in an American newspaper, this would be considered a cross rate in this context, because neither the pound or the yen is the standard currency of the U.S. However, if the exchange rate between the pound and the U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the quote involves the U.S. official currency.
Exchange Rate – The value of one currency expressed in terms of another. For example, if EUR/USD is 1.3200, 1 Euro is worth US$1.3200.
Pip – The smallest increment of price movement a currency can make. Also called point or points. For example, 1 pip for the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.
Leverage – Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.
To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000).
Margin – The deposit required to open or maintain a position. Margin can be either “free” or “used”. Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1.
If a trader’s account falls below the minimum amount required to maintain an open position, he will receive a “margin call” requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.
Spread – The difference between the sell quote and the buy quote or the bid and offer price. For example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203, or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an amount equal to the spread.
• The major Forex pairs and their nicknames:
• Understanding Forex currency pair quotes:
You will need to understand how to properly read a currency pair quote before you start trading them. So, let’s get started with this:
The exchange rate of two currencies is quoted in a pair, such as the EURUSD or the USDJPY. The reason for this is because in any foreign exchange transaction you are simultaneously buying one currency and selling another. If you were to buy the EURUSD and the euro strengthened against the dollar, you would then be in a profitable trade. Here’s an example of a Forex quote for the euro vs. the U.S. dollar:
The first currency in the pair that is located to the left of the slash mark is called the base currency, and the second currency of the pair that’s located to the right of the slash market is called the counter or quote currency.
If you buy the EUR/USD (or any other currency pair), the exchange rate tells you how much you need to pay in terms of the quote currency to buy one unit of the base currency. In other words, in the example above, you have to pay 1.32105 U.S. dollars to buy 1 euro.
If you sell the EUR/USD (or any other currency pair), the exchange rate tells you how much of the quote currency you receive for selling one unit of the base currency. In other words, in the example above, you will receive 1.32105 U.S. dollars if you sell 1 euro.
An easy way to think about it is like this: the BASE currency is the BASIS for the trade. So, if you buy the EURUSD you are buying euro’s (base currency) and selling dollars (quote currency), if you sell the EURUSD you are selling euro’s (base currency) and buying dollars (quote currency). So, whether you buy or sell a currency pair, it is always based upon the first currency in the pair; the base currency.
The basic point of Forex trading is to buy a currency pair if you think its base currency will appreciate (increase in value) relative to the quote currency. If you think the base currency will depreciate (lose value) relative to the quote currency you would sell the pair.
• Bid and Ask price
Bid Price – The bid is the price at which the market (or your broker) will buy a specific currency pair from you. Thus, at the bid price, a trader can sell the base currency to their broker.
Ask Price – The ask price is the price at which the market (or your broker) will sell a specific currency pair to you. Thus, at the ask price you can buy the base currency from your broker.
Forex trading is everything.
CFD Trading Tips for CFD Traders
No matter if you are looking for CFD trading tips to apply to a live account or demo account, you will find our best trading ideas and strategies to help you become a better trader over time (not overnight).
There are no get rich quick tips here, so if you are looking for the next Holy Grail, then you have come to the wrong place.
If you are looking to build a solid trading foundation you can use to trade CFDs, forex trading, the Dow Jones or any of the global markets, then you are in the right place.
No hype. Just straightforward and efficient trading tools and strategies you can apply to day trade, swing trade or short sell the financial markets.
But before we get into the top 7 CFD trading tips, let’s take a look at what are CFDs.
What is CFD Trading?
If you are new to trading, you may be wondering ‘What is CFD trading?’.
Put simply, Contracts for Difference CFDs trading is the ability to speculate (buy or sell) on the rise and fall of financial products.
With CFD trading you can trade share CFDs, Forex, Indices and Commodities.
Many CFD brokers allow you to access more than 10,000 trading instruments around the globe.
With CFD Trading, you can trade similar products you normally would on the share market, but you only need a small amount of margin up front. Your CFD provider allows you to trade on margin using their trading platform to speculate on market moves for potential profit.
Now you have the CFD basics covered, let’s get into the top 7 CFD trading tips.
1. Preserve Precious Capital – PPC
This fantastic money management/capital preservation idea was unashamedly taken from Marcel Link’s brilliant trading book titled “High Probability Trading“.
Marcel goes on to explain in his book how in his early days a fellow trader saw him over trading and suggested Marcel concentrate on preserving precious capital.
He said…
Forget about making money; just try as hard as possible not to lose any. Every dollar you have is precious, and fight as hard as possible to keep it in your pocket and out of someone else’s.
What is the point of having the best CFD trading system in the world if you have lost all your money? Therefore your goal will always be to keep your losses small.
2. Ensure you have an edge
It goes without saying, you need a positive expectancy trading system or an edge in the markets. There is a saying at poker tables along the lines of “if you look around the table and you can’t see who the sucker is, it’s you!”
In trading, the professionals are dedicated to stripping money off you. You must be diligent, disciplined and confident about your edge in the markets. Work hard and stay focused on keeping your edge and continually improve your financial situation.
What are some examples of a trading edge?
Your money management plan
The ability to time your entry technique to perfection
Your ability to remain patient and wait for opportunities
You may be great at NOT making mistakes
It could be your ability to trade the news and react quickly during news events like nonfarm payrolls
Your skill could be adding to winning positions and maximising a profitable trade
The list above is just a starting point. Don’t underestimate your skill sets. Work hard to improve your strengths and minimise your weaknesses.
3. Control your CFD leverage
CFD leverageCFD leverage is so powerful when things are going well. And it can be so easy just to keep increasing position sizes as you are winning. But the inevitable loss is always lurking around the corner.
You have probably heard of a trader who managed to turn a small account into a much larger account, only to then give all the winnings back.
You don’t need the emotional roller coaster ride or the margin calls. Be aware of the risks involved with every CFD position you take.
Start small with your CFD leverage and keep your total exposure low relative to your capital base. If you are starting out, trade from zero leverage up to a maximum of 3 times your account size.
If you are a day trader trading forex on the short term and you are getting started, then keep your leverage very small.
4. Use CFD stops religiously
Stop losses make sense.
They help minimise your loss which helps you with CFD Tip number 1 – preserve precious capital.
Every trade you enter should have a clearly defined CFD stop assigned to it. Ideally, you should have identified your stops outside of live trading with prices moving.
You see it’s very easy to get emotionally charged when you are in a falling market. Not only that, but it is more than possible to believe your stock is going to head in your direction miraculously.
It probably isn’t, and HOPE is not going to help. Define a CFD Stop outside of market hours and stick to it. Many stop loss trading examples rely on technical analysis to determine their sell prices. Fundamental analysis isn’t used as much with short term traders’ stop loss strategies.
5. Establish clearly defined, realistic trading goals
CFD Trading goals“All I want to do is make a measly $1,000 a week trading with my $10,000. That’s achievable isn’t it?”
Alongside your 1st rule, preserving precious capital, your 1st major goal with your CFD trading account is to keep your trading account intact and stay in the game for the 1st year.
Survival is paramount if you are going to make a decent living buying and selling any financial instrument.
A mentor of mine, Jim Rohn, used to say…
If you don’t know where you are going, well you will get there.
See the truth is, you will end up somewhere but is that really where you want to be? Wouldn’t it make sense to attempt to plot a path towards a steady and fruitful CFD trading career?
Here is a simple goal writing procedure
Identify what it is you want
Focus on it daily
Kill all distractions that move you away from your goal
Gently bring yourself back to point 2
6. Keep a CFD trading or Share trading journal
A CFD trading journal allows you to record the trades you make just like you would with a diary entry on your life.
Your CFD trading journal enables you to gain clarity on the reasons why you entered or exited a trade. Also, it will form the most powerful learning experience you will ever have in your trading career.
Hindsight is the most powerful educator, and when you look back on your thoughts and strategies, certain patterns will emerge – the good, the bad and the ugly. Take note of these and map a path to recovery.
Here are some essential items you should record in your CFD trading journal:
What instrument did you trade?
The time the trade was entered and exited
Reasons behind the trade – Technical, fundamental, tip or dart board?
Was the trade a profit or a loss
Did you follow your trading rules (not following your rules is a mistake)
Out of 10, how would you rate your the trade
What were the lessons you learned on entry, exit and overall trade management?
Include a chart showing proposed entry, stop and profit target. Always good to show your thoughts before making the trade. You know, the part where you were analysing the trade before the markets opened (fewer emotions).
7. Have a well-defined trading plan
Solid trading plan and strategyAre you a discretionary trader or a mechanical system trader?
Either way, you need to establish a sensible trading plan that identifies the following:
Entry Strategy – Test hundreds of entry set ups. Prove to yourself that it works. For those with backtesting software (Metastock, AmiBroker, TradeStation, NinjaTrader, etc.), this process becomes enjoyable. If you don’t have the ability to backtest ten years of data in a few minutes, then your only option is manual testing. Obviously, manual testing takes time, but the rewards are worth it.
Money management strategy – How much of your capital to place on each trade.
Risk Management Strategy – How much risk to allocate to each trade based on money management rule and stop loss size.
In profit stop loss – You need to identify a Stop Loss when in profit. For example a trailing stop loss.
Initial stop loss – For those trading the fixed percentage risk per trade money management model, you will need to know your stop loss level to calculate your position size.
Record keeping strategy – Keep your trading statistics up to date with a daily CFD trading journal.
A handy side note is to keep an eye on the economic calendar every day. There are a few trading apps to help you keep an eye on the high impact events every day.
Your trading plan is designed to keep you calm during the heat of the moment. It also helps your confidence, especially when you know you have an edge but you just had a few losses in a row.
8. Be Disciplined
Now that you have created your CFD trading plan be disciplined to stick to it.
Consider the countless hours and sleepless nights that went into researching your trading methodologies. The testing, re-jigging then testing and testing again.
Trust what you have done is right and trust that you have a proven edge in the markets. The rest will take care of itself.
How many times have you decided to take profits before your system exit said to?
You watch the position go down, and you pat yourself on the back confirming what a great trader you are. You then watch as the trade moves back in your favour, move higher than your impromptu exit and then blasts off to the blue-sky territory without you on it.
So frustrating.
Stick to your system. It will prove you wrong more often than not. Otherwise, build a new trading strategy and be disciplined to keep to those trading rules.
9. Scale in and out of your CFD trades
In it uncanny how successful traders are neutral for most of the year. This means they are not making any money, but they are not losing any money. But there is usually a window in any 12 month period of 2-4 months where profits are above average.
During any one trading year, there is usually a period of 2-4 months where your system hits a purple patch. You bank a series of wins in a row.
The thing is you don’t know when the winning period is going to happen. So you need to keep your capital intact (Preserve Precious Capital) during those lean months.
When the market turns, it’s time to start adding to your winning positions by scaling in.
All the greatest traders have studied how to apply pyramiding techniques and then mastered how to execute it on their trading systems.
One thing to remember is that scaling strategies work best with trending trading strategies. If your trading system does not provide the opportunity for good trending trades, then scaling may not be suitable for you.
10. Keep a positive mindset
Don’t treat trading like it’s life or death. Have some fun (Funny Trading Videos) and take your time to learn the essential foundations to successful share and CFD trading.
Along the way, maintain a positive attitude. If you have done the work to develop an edge with your trading, then you give yourself the greatest chance to experience a series of wins.
Everyone has heard the saying ‘fake it till you make it’ and you have to trust you can do this. Use positive affirmations on a daily basis to keep your mindset positive.
Hopefully, these CFD trading tips can point you in the right direction.
No matter which CFD broker or Forex broker you choose, whether you trade Direct Market Access CFDs or use CMC Markets Next Generation trading platform, you must look after your CFD account.
In order to make 2018 your best trading year ever, it is going to take action and a dedicated plan. There is no time like today.
Best of luck with your trading.
HALAMAN SELANJUTNYA:
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