This free beginner Forex mini course is designed to teach you the basics of the Forex market and Forex trading in a non-boring way. I know you can find this information elsewhere on the web, but let's face it; mostly scattered and dry enough to read. I will try to make this tutorial as fun as possible so that you can learn about Forex trading and have fun doing it.
After completing this course, you will have a solid understanding of the Forex market and Forex trading, and then you will be ready to progress in learning real-world Forex trading strategies.
What is the Forex market?
• What is Forex? - Base…
Basically, the Forex market is where banks, businesses, governments, investors and traders come to exchange and speculate about currencies. The Forex market is also referred to as the 'FX Market', 'Currency market', 'Foreign currency market' or 'Foreign currency market', and 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 world's most important trading centers located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
It should be noted that there is no central market for the Forex market; trades are said to be done 'over the counter'; unlike stocks where there is a central market with all orders processed like the NYSE. Forex is a product quoted by all major banks, and not all banks will have the exact same price.
Now, the broker platform takes all theses feeds from different banks and the quotes we see from our brokers are average estimates of them. These are brokers who effectively place the trade and take the other side of it…they 'make the market' for you. When you buy a currency pair… your broker sells it to you, not 'another trader'.
• A brief history of the Forex market
stockxchng history lesson 3 by lusiOk, I admit, this section will be a little boring, but it is important to have some basic background knowledge of the history of the Forex market so you know a little about why it exists and how it got here. So, here's a brief history of the Forex market:
In 1876, something called the gold exchange standard was implemented. It basically says that all paper currency must be backed by pure gold; the idea here is to stabilize the world's currencies by pegging them to the price of gold. That was a good idea in theory, but in reality it created a boom-bust pattern that ultimately led to the collapse of the gold standard.
The gold standard was dropped around the start of World War 2 because the great European powers didn't have enough gold to back up all the currency they minted to pay for major military projects. Although the gold standard was eventually dropped, the precious metal never lost its place as the ultimate form of monetary value.
The world then decided to have a fixed exchange rate which resulted in the US dollar becoming the main reserve currency and it would be the only currency backed by gold, this was known as the 'Bretton Woods System' and that was in 1944 (I know you are very happy know it). In 1971 the US declared that they would no longer exchange gold for US dollars held in foreign exchange reserves, this marked the end of the Bretton Woods System.
It was this dismantling of the Bretton Woods System that ultimately led to most of the global acceptance of floating foreign exchange rates in 1976. This is effectively the "birth" of the current foreign exchange market, although it was not traded electronically until about the mid-1990s.(Okay! Now let's move on to a more entertaining topic!)…
What is Forex Trading?
Forex trading as it relates to retail traders (like you and me) is the speculation of the price of one currency against another. For example, if you think the euro will rise against the US dollar, you can buy the low EURUSD currency pair and then (hopefully) sell it at a higher price for a profit. Of course, if you buy the euro against the dollar (EURUSD), and the US dollar strengthens, you will be in a loss position. So, it is important to be aware of the risks involved in Forex trading, and not just the rewards.
• Why is the Forex market so popular?
Becoming a Forex trader offers the most amazing lifestyle potential of any profession in the world. It's not easy to achieve, but if you are determined and disciplined, you can definitely make it happen. Here is a short list of skills you will need to achieve your goals in the Forex market:
- Ability – accept loss without getting emotional
- Confidence – to believe in yourself and your trading strategy, and not be afraid
- Dedication – to be the best Forex trader you can be
- Discipline – to remain calm and unemotional in constant temptation (the market)
- Flexibility – to trade changing market conditions successfully
- Focus – to stay concentrated on your trading plan and not deviate from the track
- Logic – to view the market from an objective and straight forward perspective
- Organization – to forge and strengthen positive trading habits
- Patience - wait only for the highest probability trading strategies according to your plan
- Realism – don't think you will get rich quick and understand the realities of markets and trading
- Savvy – to take advantage of your trading profits as they appear and be aware of what is happening in the market all the time
- Self-control – not to over-trade and over-utilize your trading account
As traders, we can take advantage of the high leverage and volatility of the Forex market by learning and mastering effective Forex trading strategies, building an effective trading plan around them, and following them with discipline. Money management is the key here; Leverage is a double-edged sword and you can make a lot of money fast or lose a lot of money quickly. The key to money management in Forex trading is to always know the exact dollar amount you are risking before entering a trade and it is OK to lose that amount of money, because any trade can be a loser. More on money management later in the course.
• Who trades Forex and why?
forexbank market participants – The interbank market allows the majority of commercial Forex transactions and a large number of speculative trades on a daily basis. Some big banks will trade billions of dollars, every day. Sometimes these trades are done on behalf of the customer, but many are done by proprietary traders who trade for their own bank accounts.
Companies – Companies need to use the foreign exchange market to pay for goods and services from abroad and also to sell goods or services abroad. An important part of the daily Forex market activity comes from companies wishing to exchange currencies to transact in other countries.
Government/Central Bank – A country's central bank can play an important role in the foreign exchange market. They can cause an increase or decrease in the value of their country's currency by trying to control the money supply, inflation, and (or) interest rates. They can use their large foreign exchange reserves to try and stabilize the market.
Hedge funds – About 70 to 90% of all foreign exchange transactions are speculative. This means that the person or institution that buys or sells currency has no plans to actually accept remittances of currency; instead, transactions are made for the sole purpose of speculating on the price movements of a particular currency. Retail speculators (you and me) are little cheese compared to the big hedge funds that control and speculate with billions of dollars of equity every day in the currency market.
Individual – If you have ever traveled to another country and exchanged your money for another currency at an airport or bank, you have participated in the foreign exchange market.
Investors – Investment firms that manage large portfolios for their clients use the Forex market to facilitate foreign securities transactions. For example, an investment manager who controls an international equity portfolio needs to use the Forex market to buy and sell several currency pairs to pay for the foreign securities they want to buy.
Retail Forex Traders – Finally, we come to retail Forex traders (you and me). The retail Forex trading industry is growing every day with the emergence of Forex trading platforms and their ease of accessibility on the internet. Retail Forex traders access the market indirectly either through brokers or banks. There are two main types of retail Forex brokers that give us the ability to speculate on the currency market: brokers and dealers.
Brokers work as agents for traders by trying to find the best prices in the market and execute on behalf of customers. For this, they charge a commission on top of the price earned in the market. Dealers are also called market makers because they 'make the market' for traders and act as counterparties to their transactions, they quote the price they are willing to deal with and are compensated through the spread, i.e. the difference between the buy and sell prices. (more on this later).