basics guide. If you are new to Forex trading and willing to start learning, you have landed at the right page.
This is a step by stepForex trading tutorial for newbies. This tutorial aims to provide all the necessary information to newcomers in one place.
This tutorial is created by a Forex trading expert; AKA Technician. Technician has been in the markets for over a decade . He is specialized in technical analysis and running for the Chartered Market Technician(level 2) certification. In addition to a Masters degree in finance .
In this guide, we will explain the most basic definitions and concepts. The concepts you must know before you start learning how to analyze the markets, and make trades.
We will explain things like, what Forex trading is, and how trading works. Also, what is a Forex broker and how to choose one. How to read the prices and much more .
After completing this tutorial, you will be ready to start the intermediate level tutorial. The intermediate tutorial covers analysis and forecasting:Forex Technical Analysis Tutorial.
We ask you to be patient while reading, especially in the beginning. If you feel that a topic is not clear keep going, it will be clearer by the end of the tutorial.
If you have any questions after completing, please drop it in the comments section. It is at the end of this page.
Trading is the action of buying and selling a product, aiming to generate profit,over a short period of time.And that what makes trading different than investing. Investors usually hold their positions(trades) for a longer period, more than a year.
The products that you buy and sell can be several; a currency, a companys share, a commodity or any other Security (also called Instrument). A security is any tradable asset. Such as Microsoft shares, or the Euro currency, or commodities like oil or gold.
In thisForex Trading tutorial for beginners, our main focus is the Forex market. The Forex market is where currencies trading happen.
Trading Forex allows you and me (individual retail traders) to speculate(bet) in the currencies market, also called the Forex market.
To be able to do so, we need to open a trading account with a Forex broker, then we can start buying or selling currencies, aiming to generate profits.
In Forex, we simultaneously buy and sell currencies.Simply, just like if you want to travel from the U.S. to Japan, you will go to the bank to exchange your dollars to the Japanese Yen.
Simply,Forex Trading is exchanging a currency with another currency aiming to generate a profit.
In the USD and Japanese Yen example we just mentioned, since you exchanged your bucks to Japanese yen, you would generate profit if the Japanese Yen rose in value against the U.S. dollar.
Lets say you exchanged $2,000 to JPY at an exchange rate of100 Yen for every dollar.
After a couple of months, the exchange rate changed to90 Yen for every U.S dollar.
This is a 10 percent decrease in the value of U.S. dollar against the Japanese Yen.
Now, if you exchange back the JPY you have to U.S dollars.
Since trading has a short time horizon. Traders buy and sell frequently.
In fact, there is a type of traders called scalpers that make dozens of trades each day.
Scalpers enter the market for seconds or few minutes then exit. They buy a product then sell it for a tiny profit. And keep repeating the process(This trading style is not recommended).
Trading types or styles vary, the main styles are:
Day trading: traders enter and exit their trades before the end of trading day. This type of trading is more applicable in the stock market, as the market closes every day. The Forex market only closes on weekends (we will discuss this later in the tutorial).
: traders can hold a position for one day up to few weeks.
: traders trade for a long time horizon. They hold their position for months.
Next, lets have a quick introduction to the Forex market structure.
Trading happens in the marketplace. Our focus in this Forex trading tutorial is the the Forex market, also called Foreign Exchange, or FX.
The Forex market is the market where buying and selling of currencies happen.
The Forex market is the largest financial market. Its average daily trading volume is more than $4 trillion. Putting all the worlds stock markets together, their trading volume would only equal around 20 percent of the Forex market.
That makes the currency market themost liquid market worldwide.
Whatliquidmeans in simple words, is how fast you can sell a product. It is that if you have more buyers and sellers in a market, you are likely to sell your product much faster.
Buying and selling stocks happens in the stock exchange. If you are looking to trade stocks, your trades will be processed through one of these stock exchanges. So, it is a physical entity that facilitates the trading of shares to investors.
Accordingly, the stock market is acentralized market, where the exchange is the center.
Unlike the stock market, the Forex exchange is adecentralizedmarket. It is called theover-the-counter market(OTC).
That simply means that there is no physical exchange like the New York stock exchange or NASDAQ that complete the trades between traders. Instead, trading is done through a computer network with no centralized physical location.
The Forex market is a network of multiple banks and financial firms that exchange currenciesdirectly or indirectly.
At highest levels, major banks trade directly with each other. These major banks are called the interbank market.
At the next levels, small sized banks trade indirectly with major banks through an electronic brokerage service.
Next are the brokerage firms, hedge funds, and regular corporations. And finally, the retail Forex traders(Individuals).
Generally, each level provides the next lower level with liquidity.
For example, if a retail trader placed an order to buy euros at a broker, the broker passes this order to a bank at the higher level which has sizable amount of euros. The bank executes this transaction by selling the broker the euros, the broker then reflects that in my trading account. This happens instantly through a trading software.
Usually higher level firms like banks, provide lower level firms or clients liquidity, and therefore they are called liquidity providers.
Largest Banks such as Citibank, JP Morgan, HSBC to name a few, are the main liquidity providers in the market.
In Forex,you can trade mainly currencies. One currency against another, and thats why it is called a currency pair. The value of one currency against another currency.
For example, the EUR/USD is a currency pair, which is the value of one Euro in U.S. dollar.
Remember: Major and most traded currency pairs in the Forex market are the EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD and NZDUSD.
In the past decade, Forex brokers have expanded their offering to include other types of instruments. If you open a trading account with any good broker nowadays, you would be able to trade several types of products. For example:
Forex trading tutorial hint: When you are ready to start trading, always look for brokers that have a wide variety of instruments. You never know where the opportunity resides.
As a Forex retail trader, you dont have direct access to the inter-bank market. And here comes the role of a Forex brokerage firm.
To be able to start trading, you must open a Forex account with a Forex broker. We will give a quick introduction about forex brokers, and at the last section of the tutorial How to Choose a Forex broker we will revisit this topic with greater details.
The Forex market makeris a company that is always ready to buy or sell a financial instruments, and sets both the sell and the buy prices for their clients.They make transactions at these prices with their customers. Thats why it is called a liquidity provider for its clients.
If you want to sell, the Forex market maker will be the buyer and if you want to buy it will be the seller. Market makers must take the opposite side of your trade.
In Forex, we simultaneously buy and sell currencies.Simply if you want to travel from the U.S. to Japan, you will go to the bank to exchange your dollars to the Japanese Yen.
So if you buy EUR/USD, it basically means that you are buying euro and selling U.S. dollars at the same time.
Now, lets have a look on how the exchange rate of the Euro against the U.S. dollar will look like, its called a price quote:
The first price is the selling price(called Bid as well) and the second one is the buying price. The selling price is the price that you will get if you want to sell the EUR/USD, while the Ask is the price you will get if you want to buy it.
The difference between the bid and ask prices is called the spread, and it goes to the Forex broker as sort of commission on the trade.(We will discuss price quotes later in this tutorial).
ECN Forex brokers provide access to the inter-bank market by using an electronic system that passes prices from multiple liquidity providers to clients. Such as banks and market makers connected to this electronic communication network (ECN). The broker then displays the best bid/ask quotes on their trading platforms for traders.
ECN brokers provide the tightest spreads in the industry.An ECN broker usually charges a commission (in addition to the spread) on each trade made by clients.
To trade Forex, you need to open an account with a broker. Then using their trading platform, you can start making trades. But, before opening a real account, a common and necessary practice among new Forex traders is to start trading using a demo account.
Toopen a demo accountstart by downloading the trading software. A widely used software to trade Forex is the MetaTrader platform. It is used by most Forex brokers. We will use MetaTrader software as our default trading platform for this tutorial. You can download ithere.
Lets first introduce you to the Metatrader 5 terminal. Go ahead and open the MT5 terminal if it is not already open. The default window should be like this:
: On the left-hand side is the market watch panel, where all the pairs that you can trade are shown, along with their prices. The initial list is far from complete. To show the rest of the pairs, right-click on any of the pair and click Show All.
: Just below the market watch, the navigator panel. Here you can access your accounts and many other tools that we dont need at this moment.
: At the bottom is the Toolbox panel. This is where you can see your capital and your trades along with many metrics that we will explain shortly.
You can move along the tabs, one important tab is history, which show you closed positions.
: In the right down corner of the platform you will find if the connection with the broker is on or off.
: You can place new orders through this button.
Those are the main elements that you need to know at this stage. Go ahead and explore the terminal and just try, its demo money we do not have to worry :).
A currency quote is simply the current live price of the currency.And it consists of two prices, the one on the left is the Sell or Bid price, which is the price that you will get if you sell the EURUSD. The price on the right is the Buy or Ask price, which is the price that you will get if you buy the EURUSD.
All currencies are quoted this way, first currency/second currency.
The first currency is called the base currency, and the second currency is called the quote currency.
You always buy or sell the base currency. For example, If you decided to buy EURUSD then you bought the EUR and sold the USD. If you decided to sell the EURJPY, then you sold to EUR to buy the JPY.
The selling price for 1 U.S dollar = 107.35 Japanese yen
The buying price for 1 U.S. dollar = 107.37 Japanese yen
Spread = 2 pips(we will explain what is a pip shortly)
USD is the base currency, and JPY is the quote currency
Note: In the last example, the USD is not included in the pair. It is called a Cross Currency.A cross currency pair is a currency pair that doesnt include the USD.More examples of cross currency pairs are the GBPJPY and the NZDCHF.
In Forex, apip is the fourth decimal place of the price(0.0001). For example, if the Bid price of the EUR/USD is 1.1356, the last and fourth digit is 6. If the price changed from 1.1356 to 1.1357, then it moved one pip higher.
In the USD/JPY, because it has only two decimal points, the second decimal place is a pip. For example, if the price changed from 107.35 to 107.34 then it moved one pip lower.
In recent years Forex brokers introduced a fifth decimal place for more precision. It is called a pipette. And it is a 1/10 of a pip.
For example, EUR/USD at 1.13561. The fifth digit (1) is a pipette. If the price moved from 1.13561 to 1.13571 then it moved 10 pipettes, which is equal to one pip.
As a retail Forex trader, your starting capital is probably limited. Perhaps you have few thousands to dedicate for trading. Lets assume the following:
(1)You decided to buy 1000 Euros worth of the EUR/USD pair at 1.1350 prices. At 1.1350 exchange rate, this 1k of euros is equal to 1,1350 U.S. Dollars.
Note that, on average, a pair like the EURUSD can move 100 pips in a single day. It can move more or less depending on how active the trading day was.
(2)lets say that after buying this amount, the EUR/USD pair moved 100 pips higher toward 1.1450 within the next two days. Now your investment is equal to:
So, you have just gained 10 dollars from this trade. Trading 1000 euros in a period of two days have returned 10 dollars.
This is a small amount and apparently not worth the time and effort you would dedicate and risks associated with Forex trading.
So basically,leverage in Forex is the ability to boost their trading capital. For example, what if the 1000 euros you used in the prior example turned to 100,000? (multiplied by 100).
If we repeat the same trading example with 100,000.
(2)After buying this amount, the EUR/USD pair moved 100 pips higher toward 1.1450.
You gained 1000 dollars from this trade. 100 times more than the first example, obviously that is because the amount you traded is 100 times more. Each pip is equal to $10 dollar while in the first example each pip was equal to 10 cents.
In the above example, our Forex trading leverage was 1:100. Forex Brokers provide different leverage options for clients, you can choose to have up to 1:1000 leverage in some Forex brokers.
Forex Trading Tutorial Hint: The bigger the leverage the bigger the risk. High leverage is not recommended.
Forex Industry gurus have also introduced a standard unit called a lot in trading. In Forex,a standard lot is worth 100,000 units of the base currencyof the pair being traded. A mini lot equal to 10,000 units and a micro lot 1,000 units.
For example, one lot of the EUR/USD pair is 100,000 Euros. Which equals to 100,000 x EUR/USD rate in dollars. if the exchange rate is 1.1350, then 1 lot of EURUSD is equal to 113,500 U.S Dollars.
So, to be able to open a one lot trade position of EURUSD you need to have 113,500 dollars?
No. Here comes the leverage. If you choose to have a 1:100 leverage with your Forex broker, then you need only $1,135 to open a position of one lot. Which is 113,500/100. And this is called theRequired Marginfor your 1 lot trade or EURUSD.
Accordingly,the higher the leverage you have the less amount of money you need to control one lot.
We explained that you need 1,135 to control one lot of EURUSD if you have 1:100 leverage. If you have higher leverage, lets say 1:200, then you need only 567.5. For 1:400 leverage you need 283.75. And so on.
Note: You dont have to calculate pip values manually. There are plenty of calculators available onlinehereorhere.
To get the value of one pip in a currency pair, we have to divide one pip in decimal form (0.0001) by the current exchange rate, and then multiply it by the position size.
For one lot positions size (100,000 unit), the pip value for the EURUSD equals:
Now to get it in U.S. dollars , we multiply by the exchange rate:
The pip value for the EURUSD is 10 USD for every bought or sold 100,000 units (one lot).
Remember: If we apply that to all the currency pairs that have the USD as the Quote currency, like EURUSD, GBPUSD, AUDUSD, NZDUSD, etc. We will find that the pip value is equal to $10 in all the currency pairs with the USD as the quote currency. Otherwise, the pip value is variable.
In this case, we do not need the last step of multiplying by the exchange rate, because the outcome is already in USD term.
The pip value for the USDCAD at the current price is 10.2 USD for every 100,000 units(one lot).
In the above case, where the USD is the base currency, pip value is not constant, it depends on the price of the pair.
In this case, the GBP is the base currency and the JPY is the quote currency. So the result will be in GBPs.
To get the value in USD, we have to convert the pounds to USD. So simple we multiply by the exchange rate of the GBPUSD:
The pip value for the GBPJPY is 9.74 USD for every 100,000 units(one lot).
Metatrader will automatically create a $10,000 demo account when you install it(We explain how to create a new demo account in the video above).
This 10k you see in the toolbox section is called Balance. it is the amount of money that you have.
The balance will change as you make trades. For example, if I made a trade and won $200. The balance will change from 10,000 to 10,200.
Lets summarize everything we have covered and add some more in one example:
Balance= $10,000. This is the amount of money you have before the trade.
Lets make a live demo trade and buy one standard lot of EURUSD at market priceat 1.11387. This is how our account will look like the moment after we opened the trade.
Equity= This equals to the Balance + profit of current active trades.
Thats why its floating, it changes as profit changes. (the value of equity is always floating because the price keeps fluctuating).
I am already losing 5$. and the price hasnt moved yet. How come? Remember the spread.
You already know that you close a buy order by a sell order. So even if the market hast moved, the buying price always differs from the selling price because of the spread. and this is a commission for the broker.
Buying price at the time we executed our order was 1.11387 and selling price 1.11382 . The difference is 5 pipettes (0.5 pips). We explained earlier that each pip equals $10 for every lot on currencies that have the U.S. dollar as a quote currency.
Margin= $1,113.87 (Required margin for your trade).
We also explained that this depends on the leverage you choose and the volume of your trade(in this case it is 1 lot of EURUSD) and our leverage is 100:1.
Required Margin = (Position size x Exchange rate) / leverage
Free Margin: This is equal to the balance margin +/- profit/loss of current trade.
$10,000 $1,113.87 $5 = $8,881.13 .
The free margin is how much purchasing power you still have after this trade. You have $8,881.13 margin available for you to take additional trades.
Margin Level= 897.32%. It is how much equity you have compared to the margin.
If equity drops below the required margin, that mean your margin level is below 100 percent, your open positions will be closed starting from the larger losing position, until margin level reaches back above the 100 percent. This process is calledMargin call.
Margin Level will only appear in the toolbox window of your MetaTrader if you have open orders.
Remember: Different Forex brokers have different margin calls rules. Minimum margin level can be 100%, 50%, 25% or even zero. You should ask the broker about their minimum margin level before opening an account.
Market Order: A market order is executed immediately at the current market price(Bid price for sell or Ask price for Buy).
Buy limit: It is an order that is pending. It is an order to buy at a price lower than the current price. The Buy limit order will be activated if the price reaches this preset price and the order becomes an active buy order.
Use Case: You use buy limit in case you think the price will eventually go higher, but you expect it to move lower before reversing higher.
Sell Limit: It is an order that is pending, it is an order to sell at a price higher than the current price. The Sell limit order will be activated if the price reaches your preset price and the order becomes an active sell order.
Use Case: You use a sell limit in case you think the price will eventually go lower, but you expect it to move higher before reversing lower.
Buy Stop: It is an order that is pending, it is an order to buy at a price higher than the current price. The buy stop order will be activated if the price reaches your preset price and the order becomes an active buy order.
Use Case: You use a buy stop in case you think the price will go high, but you need a confirmation by witnessing the price rise to your specified level first.
Sell Stop: It is an order that is pending, it is an order to sell at a price lower than the current price. The sell stop order will be activated if the price reaches your preset price and the order becomes an active sell order.
Use Case: just like the buy stop. You use a sell stop in case you think the price will go lower, but you need a confirmation by witnessing the price fall to your specified level first.
Take Profit Order: A take-profit order automatically closes an open order when the exchange rate reaches the specified price.
Stop Loss Order: A stop-loss order is a defensive mechanism. You can use it to protect gains, or limit losses. Like the take profit, it also closes an open order when the price reaches the specified level.
Trailing Stop Order: This is a type of stop loss order, but it is variable. It basically a stop loss that trails the price if the price move in the expected direction.
For example, if you buy Gold at 1300$/ounce and create a trailing stop order of 5$. Then if the price of gold reaches 1305, the platform will automatically place a stop loss order at 1300. If the price continues to move higher the stop will move with it. So if the price reached 1306, your stop will be at 1301 and so on.
Now if the price moves back reverses and move back lower towards 1301, your stop loss will be triggered and your trade will be closed at 1301.
Here is an illustration of how the trailing stop works.
Assuming we bought the EURUSD at 1.1280 and placed a trailing stop of 30 pips. The trailing stop will keep moving higher along with price, until the price reaches the highest at 1.1340. At that point stop loss will be at 1.1310. Then the price failed to continue higher and reversed to touch our stop loss at 1.1310 and close the position.
Note: Traders have invented new terminology for the words buy and sell. Long means buy and Short means sell. For example, going long gold means buying gold.
Rollover is a small percentage of interest that can be deducted or credited to your balance if you hold a position overnight.Depending on the currency pair you are holding.
Without going too much into details of what is a rollover, as it has no meaningful impact on a traders performance and maybe a confusing topic for newbies.
What you need to know is that when you make a trade in the Forex market, you are simultaneously buying one currency and selling another.
Therefore, you must pay interest on the currency you sold and you will earn interest on the currency you bought.
For example, if we assume that the interest rate in Australia is 2.00% and 0.1% in the U.S. and you have a buy position of 1 lot in AUDUSD at 0.7500 exchange rate. You will earn 2.00% per year on your Australian dollar and pay 0.1% per year on your USD.
So to calculate an approximate amount of what you will pay or gain on this trade we will do the following:
Buying and holding 100,000 AUD will result in,
Divide 2,000 by 365 to get the amount per day,
You sold USD in this case. So to get the amount you sold, simply multiply the position size by the exchange rate:
We subtract what we paid from what we gained. However, we have to convert the 5.48 AUD to USD first.
Accordingly, the hypothetical amount that we should get on this trade as a rollover is $3.91 dollar per day. However, in real life, this is not the case. It will vary depending on your Forex brokers rollover rates. To have the precise rates you need to review your brokers rollover rates.
We calculated the rollover per day because, it is processed daily. Each day at 5 pm in New York.
In the Forex market, any positions that are open at or before 5 pm sharp are considered to be held overnight and are subject to rollover. A position opened at 5:01 pm is not subject to rollover until 5 pm the next day.
UBS,JP Morgan,Citi , Barclays are just a few names of large banks that exchange currencies in the forex market.
Their purpose of participating varies from speculation(investment banks), to making the market to others. They provide most of the liquidity in the Interbank market.
A Central bank participates in the Forex market directly, by intervening to buy or sell their currency according to its price target.
The price target that maintains the countrys financial and economic stability. Central banks can intervene indirectly through monetary policy tools such as interest rates.
For example, if inflation is higher than the healthy levels, the central bank raises interest rates to shrink money supply in the economy and that would have a positive impact on their currency.
Such as hedge funds. They participate in the market for speculation and investment purposes.
Amazon like companies participate in the forex market for a few reasons.
A simple example is importing component for their new kindle tablet from china requires them to exchange U.S. Dollar for Chinese Yuan.
They can also participate for hedging purposes (hedging is buying or selling a currency at a certain price to protect the company from un-favorable change in the future).
For example, if Amazon is planning to start producing the new kindle one year from now. Production requires amazon to buy components from china worth 50 million yuans.
Lets say every one U.S. dollar equals 7 Yuans at that date. So if the purchasing manager is to purchase right away, it will cost the company 7.14 million dollars.
What if Amazon decided to wait 12 month, and the exchange rate changed to 6 yuans for every dollar?
Amazon will have to pay 8.33 million dollars. That is an increase of around 16 percent in cost.
A good finance manager that expects the US dollar to fall against the Yuan, will advise to hedge this risk and purchase the components right away.
Remember: Always keep an eye on announcements from central banks. As they create major fluctuations (up and down) in the underlying currency, for the first few minutes of announcement.
The Forex Market is open for trading 24-hours, 5 days a week. Because the market operates in multiple time zones, it can be accessed at almost any time. The market closes for retail trading on the weekend.
The Forex market opens on the first business day of the week in Australia and closes on Friday with the end of the business day in the U.S. And that translates to 5:00 pm Eastern Time Sunday through 5:00 pm ET on Friday (22.00 GMT on Sunday until 22.00 GMT on Friday).
A specific currency will usually be most active when that particular market is open. For example, the British pound pairs tend to be most active during the hours when the London market is open. The Japanese yen pairs will be more widely traded during the Tokyo business day.
The market hours for the major Forex markets are as follows:
The Most active pairs during London session are the British pound and the European currencies like the Euro.
Asian currencies will be most active. Currencies such as the Australian Dollar and New Zealand Dollar.
Japanese Yen and other Asian currencies are most active.
Remember: When there is an overlap between sessions, the market tend to be more active(higher trading volumes, hence major prices movement).
During the hours of 8 AM and 11 AM Eastern US time, the two largest markets (London and New York) overlap for about 3 hours. And that makes it the most active Forex trading hours of the day.
Also, Sydney and Tokyo sessions overlap between 7 PM and 2 AM Eastern time. And that makes it the most active session for pairs that include Asian currencies.
First, lets explain the main forex broker types and how they might affect your trading.
The Forex market makeris a company that is always ready to buy or sell a financial asset and sets both the sell and the buy prices for their clients.They make transactions at these prices with their customers. and that makes it a liquidity provider for its clients.
If you want to sell, the Forex market maker will be the buyer and if you want to buy it will b