What Is Forex?

The forex market is Forex (in simple terms, currency) is The forex market is the world’s largest
the world’s largest also called the foreign exchange, FX financial market, and since trading is
financial market. or currency trading. It is a decen- between market participants, there is
tralized global market where all the no “open” or “close” of market except
world’s currencies trade with each on weekends.
other. It is the largest liquid market in
Forex is a seam-
the world. You might enjoy trading the major
less, decentralized
24-hour market currency pairs, or have knowledge
that follows global about the strength of an exotic cur-
Forex traders buy and sell currencies rency, or a feel for commodities; some
banking activity
for profit or to protect investments. opportunities present themselves to
from one
An estimated USD 5 trillion is traded people who keep up with news and
international mar-
ket to another. daily, most of it speculative.. events, while others require patient
analysis. Traders bring their own
strengths and preferences to their
trading and, over time, create their
own trading style.

Most traded
currency pairs

London

EUR / USD New York

USD / JPY Tokyo

GBP / USD
USD / CHF
Sydney Sydney
What Affects The Forex Market
People trade forex Each market participant has their goals; The various market participants place different
based on expecta- some are companies who are hedging weight on information about interest rates,
tions currency exposure to protect their busi- policy (laws), economic announcements
ness; some are fundamental traders and natural or man-made events: all affect
of the future,
who focus on factors that affect the expectations and thus market movements.
which are shaped
strength of whole economies; others
by many factors. are technical traders who look for price Remember that in the forex market, you can
patterns to trigger their trades. profit from down-turns as well as rising prices.

In addition, there are central banks,

hedge funds and financial institutions
who all bring different goals and inter-
pretations to their trading.

Participants

Financial
institutions
Central
Banks

Companies

Individual
Forex
traders
FOREX
MARKET

Interest
Rate Natural/
geopolitical
events

Trade
Laws Economic
news

Influencers
 How A Forex Trade Works

Forex trading is the buying of one If you buy a currency pair expecting it to increase
currency while simultaneously selling in value, you are “GOING LONG.” If you sell a cur-
another currency. These currencies, rency pair expecting it to decrease in value, you
expressed in pairs, are always connect- are “SHORTING.” Whether you are going long
ed to each other, as the value of one or shorting in this market, one currency is al-
currency cannot change unless it’s ways growing stronger against another, and one
compared to another. Trading in this currency is always growing weaker, creating an
marketplace is unique because there opportunity for any type of trader.
are equal opportunities to buy or sell
these currency pairs.

You think a currency will rise You think a currency will fall
You buy the currency You sell the currency
You take a Long position You take a Short position

Keep in mind when you trade Forex, you have the choice between buying or selling a currency pair

When you are buying, When you are selling,

you are said to be bullish you are said to be bearish
Currency Pairs

THE VALUE OF EACH INDIVIDUAL CURRENCY IS RELATIVE TO OTHER CURRENCIES.

THE EURO, FOR EXAMPLE, ONLY HAS VALUE IF COMPARED AGAINST THE VALUE OF
ANOTHER CURRENCY, LIKE THE US DOLLAR. THAT IS WHY CURRENCIES ARE TRADED
IN PAIRS AND NOT AS SINGLE CURRENCIES.

Currency pairs are just that, individual currencies

that are paired up. Examples include: EUR/USD,
which is the euro against the US dollar,
USD/JPY, which is the US dollar against the

EUR/USD
Japanese yen, and GBP/CHF, which is the
British pound against the Swiss franc

The first currency in the pair is called the base

currency; the second currency in the pair is
called the quote, or counter currency.

If we say that the current price of EUR/USD is

quoted at an exchange rate of 1.2000, this would
BASE QUOTE
mean that 1.2000 of the quote currency (USD) is
equal to 1 of the base currency (EUR).

Buying a currency pair is the same as buy- If a trader thinks that the base currency
ing the base currency while simultaneously will go up in relative value while the quote
shorting thequote currency. By the same to- currency will go down in relative value,
ken, selling short a currency pair is the same that trader should buy the currency pair. If
as selling short the base currency while instead a trader thinks that the base
simultaneously buying the quote currency. currency will go down in relative value
while the quote currency will go up in rela-
tive value, that trader should sell short the
currency pair.
Currency Pairs

Forex trading offers a limited number of trading instruments (namely, currencies) to help
focus trading efforts on a few key currency pairs. In addition to the major currency pairs, Forex
also offers trading on the commodity pairs, i.e., Australian dollar (AUD)/USD and USD/CAD (Ca-
nadian dollar), and the major crosses, i.e., EUR/GBP, EUR/JPY, GBP/JPY.

Commodit Pairs
These pairs are highly correlated to certain commodity prices. Generally speaking, the AUD/
USD and USD/NZD correlate with gold prices, and USD/CAD correlates with oil.

Crosses
These pairs do not contain the U.S. dollar.

MOST TRADED PAIRS COMMODITY PAIRS MAJOR PAIRS

EUR/USD USD/JPY AUD/USD USD/CAD EUR/GBP GBP/JPY
GBP/USD USD/CHF USD/NZD EUR/JPY

The most common currencies traded

are the US dollar (USD), Euro (EUR),
Japanese yen (JPY) and British
pound (GBP).

The Dollar is King in the Forex Market

There are many reasons why the U.S. dollar plays a central role in the forex market:

-The United States economy is the LARGEST economy in the world.

-The U.S. dollar is the reserve currency of the world.
-The United States has the largest and most liquid financial markets in the world.
- The United States has a stable political system.
- The United States is the world’s sole military superpower.
- The U.S. dollar represents about half of international loans and bonds. Lots of
countries and foreign companies borrow in USD.
Pips

PIPS ARE THE PRIMARY UNITS OF MOVEMENT FOR ALL CURRENCY PAIR
EXCHANGE RATES.

For example, if EUR/USD moves up from 1.2000 to 1.2001, that is a bullish movement of 1 pip, which in
this case is an exchange rate movement of 1/100th of one U.S. cent. Major currency pairs can routinely
move hundreds of pips per day

1.20014
PIP FRACTIONAL PIP

Here’s a pip “map” to help you to learn how to read pips…

FRACTIONAL PIP.

Providing an additional tenth of a pip

allows traders to minimize their costs
and take advantage of even the most
minute market movements.

Lots

LOTS ARE A MEASUREMENT OF THE NUMBER OF UNITS OF A CURRENCY PAIR

THAT ARE BEING TRADED. USING LOTS SIMPLIFIES TRADING IN THE FOREX
MARKET, AS IT PROVIDES A STANDARDIZED TRADE SIZE.

A standard lot is worth 100,000 units of the nominal value of the base currency. A mini-lot is worth
10,000 units, and a micro-lot is worth 1,000 units.

For example, on the EUR/USD, each pip move-

Standard
ment on a standard lot trade is the equivalent of a
$10.00 movement. Each pip movement on a mini-
lot trade is the equivalent of a $1.00 movement.
Mini
Each pip movement on a micro-lot trade is the
equivalent of a $0.10 movement.
Micro Your broker may have a different convention for
calculating pip values relative to lot size but what-
ever way they do it, they’ll be able to tell you what
the pip value is for the currency you are trading at
that particular time.

As the market moves, so will the pip value

depending on what currency you are currently
trading. As the market moves, so will the pip value
depending on what currency you are currently
trading.
What Is leverage

Think of your broker as a bank who basically fronts you $100,000 to buy currencies.
All the bank asks from you is that you give it $1,000 as a good faith deposit, which it will hold for you but
not necessarily keep. Sounds too good to be true? This is how forex trading using leverage works.

The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a deposit, also known as “margin“.

Once you have deposited your money, you will then be able to trade. The broker will also specify how
much margin is required per position (lot) traded.

For example, if the allowed leverage is 100:1 You get it back when you close your trade.
(or 1% of position required), and you wanted to
trade a position worth $100,000, but you only The reason the broker requires the deposit is
have $5,000 in your account. that while the trade is open, there’s the risk
that you could lose money on the position!
Assuming that this USD/JPY trade is the only
No problem as your broker would set aside
position you have open in your account, you
$1,000 as a deposit and let you “borrow” the
would have to maintain your account’s equity
rest.
(absolute value of your trading account) of at
Of course, any losses or gains will be deducted least $1,000 at all times in order to be allowed
or added to the remaining cash balance in your to keep the trade open.
account.
If USD/JPY plummets and your trading losses
The minimum security (margin) for each lot will cause your account equity to fall below $1,000,
vary from broker to broker. the broker’s system would automatically close
out your trade to prevent further losses.
In the example above, the broker required a This is a safety mechanism to prevent your
1% margin. This means that for every $100,000 account balance from going negative.
traded, the broker wants $1,000 as a deposit on
the position.

Let’s say you want to buy 1 standard lot

(100,000) of USD/JPY. If your account is allowed
100:1 leverage, you will have to put up $1,000 as
margin.

The $1,000 is NOT a fee, it’s a deposit.

www.exness.com
Types of Forex Orders

Orders fall into two buckets:

Market order: an order instantly executed against a price that your broker has provided.

Pending order: an order to be executed at a later time at the price you specify.

Market Orders Pending Orders

Buy Limit
Buy
Buy Stop
Sell
Sell Limit
Sell stop

For example, the bid price for EUR/USD is currently at 1.2140 and the ask price is at 1.2142.
If you wanted to buy EUR/USD at market, then it would be sold to you at the price of 1.2142.

You would click buy and your trading platform would instantly execute a buy order at that (hopefully)
exact price.

Limit Order
A limit order is an order placed to either buy
below the market or sell above the market at a
certain price.
This is an order to buy or sell once the market
reaches the “limit price”.

_You place a “Buy Limit” order to buy at or below

a specified price.
_You place a “Sell Limit” order to sell at a speci-
fied price or better.
Once the market reaches the “limit price” the or- The blue dot is the current price.
der is triggered and executed at the “limit price”
(or better). Notice how the green line is below the current
price. If you place a BUY limit order here, in
order for it to be triggered, the price would have
to fall down here first.
As you can see, a limit order can only be execut-
ed when the price becomes more favorable to
you.
Stop Entry Order
A stop order “stops” an order from executing until price reaches a stop price.

You would use a stop order when you want to buy only after price rises to the stop price or sell only after
the price falls to the stop price.

A stop entry order is an order placed to buy above the market or sell below the market at a certain price.

_You place a “Buy Stop” order to buy at a

price above the market price, and it is trig-
gered when the market price touches or goes
through the Buy Stop price.

_You place a “Sell Stop” order to sell when a

specified price is reached.

In the image, the blue dot is the current price.

_Notice how the green line is above the current

price. If you place a BUY stop order here, in order
for it to be triggered, the current price would have
to continue to rise.

As you can see, a stop order can only be executed

when the price becomes less favorable to you.
Cash Flow In Trading

When a trader opens and closes a position, his account is credited and/or debited a notional amount
equal to the size of the trade times the exchange rate. The trader doesn’t necessarily see the amount
that is transacted; for ease, he sees the current profi t and loss that is refl ected by this cash fl ow. To
help you better understand this idea, let’s look at the following example.

OPEN POSITION CLOSE POSITION

Chris wants to buy one standard lot If the price of EUR/USD rises to 1.2512,
(100,000 units) of EUR/USD at the price Chris may want to close his position by
1.2350. In order to buy euro, he has to sell selling the same EUR amount of 100,000.
the US dollar amount: Upon closing his position, his account will
be credited the dollar amount of:

BUY 100,000 units SELL 100,000 units

at 1.2350 EUR/USD PRICE at 1.2512 EUR/USD PRICE

123,500 USD 125,120 USD

Upon opening his position, Chris’s account was debited USD in order to purchase euros. When closing
his trade, Chris received a credit for buying back the same amount of units of currency. The Trade Profit
is the difference between the two:

123,500 USD 125,120 USD

overall profit - $1,620

Technical Analysis

TECHNICAL ANALYSIS ATTEMPTS Because the Forex market moves so quickly and ag-
gressively, currency pairs are said to be highly trend-
TO PREDICT FUTURE PRICE ing, with a pair’s value often following a pattern of
MOVEMENT BY ANALYZING PAST growth or decline. With so many trades going on every
PRICE PATTERNS AND day, we are able to utilize common analytical tools to
MATHEMATICAL INDICATORS. detect patterns and make predictions.

Price charts are the primary platform used

by technical analysts. These exchange rate
charts show historical price patterns that
can be used to help predict possible price
events in the future. Some key technical
analysis tools and techniques include
trends.

downtrend
The concept of trends refers to a net price
movement over time either to the upside
or to the downside. Currencies tend to
trend frequently and for fairly prolonged
periods of time. Trading with a trend is
often advocated because, in doing so, the
trader is trading with the general net flow
of the market. uptrend

Fundamental Analysis

FUNDAMENTAL ANALYSIS INVOLVES THE ANALYSIS OF THE INFLUENCES THAT

MAY CAUSE A CURRENCY PAIR TO MOVE HIGHER OR LOWER.

Fundamental analysis involves the analysis If, for example, the EU economy is weaker than the
of the infl uences that may cause a currency US economy, the EUR/USD should go down.
pair to move higher or lower. If the Australian economy is stronger than the US
Generally speaking, a currency pair will move economy, the AUD/USD should go up.
higher if the economic infl uences of the base
currency are more positive on a relative basis
than the economic infl uences of the quote or
term currency (and vice versa).
FUNDAMENTAL INFLUENCES

There are many economic factors that can cause an economic bias, which then affects the value of cur-
rency pairs, all of which are interdependent due to our increasingly global economy.

. GDP . FISCAL POLICY

. INTEREST RATES . STOCK PRICES
. INFLATION . GOLD PRICES
. EMPLOYMENT . COMMODITY PRICES
. RETAIL SALES . EVEN CURRENCY VALUE
. TRADE BALANCE/CURRENT
ACCOUNT
. CENTRAL BANK POLICY

Pure fundamental traders tend to focus on the longer-term trends of economies. Those judgments are
typically derived by analyzing the trends of economic data. If the trends suggest economic growth of a
nation, this will positively affect its currency. If the trends suggest economic decline, this would negative-
ly affect its currency.
CREATING A TRADING PLAN

CREATING A SOLID TRADING PLAN IS ONE OF THE KEYS TO BECOMING A SUC-

CESSFUL TRADER.

By detailing all aspects of your trading in a comprehensive plan, you can eliminate ambiguity and po-
tentially negative trading behaviors.

A plan for trading is similar to a plan for any other business. It is essential to ensure that the business
owner (trader) sticks with a well-thought-out and tested approach to growing the business while mini-
mizing risk.

Elements of an effective trading plan should include all of the most important aspects of the trading
process. This should include, at the very least

- AMOUNT OF STARTING CAPITAL TO BE - SPECIFIC DAILY, WEEKLY AND MONTHLY

USED FOR TRADING LOSS LIMITS (THE POINT OF MONETARY
LOSS AT WHICH A TRADER STOPS
- PRIMARY LOT SIZE AND LEVERAGE TRADING FOR THE GIVEN PERIOD).
USED
- SPECIFIC TRADE ENTRY CRITERIA AC-
- PRIMARY CURRENCY PAIRS TRADED CORDING TO THE TESTED TRADING
STRATEGY.
- MAXIMUM PERCENTAGE OF TRADING
CAPITAL RISKED ON EACH TRADE - SPECIFIC TRADE EXIT CRITERIA (STOP
LOSSES, PROFIT LIMITS AND/OR MANUAL
- REWARD-TO-RISK RATIO TARGET EXITS) ACCORDING TO THE TESTED TRAD-
ING STRATEGY METHODS FOR MANAGING
- REALISTIC DAILY, WEEKLY AND OPEN TRADES.
MONTHLY PROFIT GOAL
- METHODS FOR MANAGING OPEN
TRADES
FOR MORE INFORMATION VISIT
https://www.babypips.com/learn/forex