This free 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; most of it is scattered and pretty dry to read. I will try to
make this tutorial as fun as possible so that you can learn about Forex trading
and have a good time doing it.
Upon completion of this course
you will have a solid understanding of the Forex market and Forex trading, and
you will then be ready to progress to learning real-world Forex trading
strategies.
What is the Forex market?
• 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).
