FOREX TRADING- Basic Concepts and Terms

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FOREX- FOReign EXchange

Forex Trading- Exchange(buy/sell) of two national currencies

Who trades with currencies on the forex market?

State authorities( Central Banks): They want to protect their domestic currencies from fluctuations on global financial markets.

Financial Institutions: They want to earn money from these fluctuations.

Forex Traders: Earn money through fluctuations of currency values.

FOREX TRADERS:

Forex traders do not have a physical currency exchange. Rather we just predict the movement of a pair and we earn money if our prediction is accurate.

For example: if we think the EUR/USD pair will grow., you can invest money and buy the EUR/USD currency pair. If the price of this currency pair increases, you will earn money(profit). Similarly, if you think the currency pair value will fall, you can invest money and sell the pair to make a profit.

This is not a physical buy/sell, its a bet for or against a pair price.

HOW TO PREDICT CURRENCY PAIR MOVEMENT

Can be done with the help of technical and fundamental analysis

The most traded currency pairs:

BASE CURRENCY PAIRS

EUR/USD

USD/JPY

GBP/USD

AUD/USD

USD/CHF

USD/CAD

EXOTIC CURRENCY PAIRS

USD/HKD

USD/DKK

USD/MXN .....

SPREAD IS MUCH HIGHER FOR EXOTIC CURRENCY PAIRS

Platforms:

metatrader4

tradingview(https://www.tradingview.com)

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BASIC TERMS IN TRADE:

currency pair: financial derivative consisting of a pair of two national currencies.

ex: EUR/USD: EUR- Base currency; USD: Quote Currency

this is always a buy/sell or sell/buy pair, i.e. if we buy base currency we sell quote currency and vice versa

Chart: Represents the movements of certain currency pairs. Different charts: Line charts, bar charts, candle (Japanese) charts. READ CANDLE CHARTS ELABORATELY

Time frame; 1) Scalpers: the shortest style of trading, have a lot of positions per day, use smaller time frames(m1,

m5, m15, m30)

2) Intraday Traders: hold opened positions for a day or less, used time frames(m30, H1, H4)

3) Swing Traders: positions are held longer couple week or even months, used time frames(H4,

D1, W1, M1)

Pipes: The main measuring unit on the stock exchange that represents a change in currency price. 10000th place after the decimal is called ticks. 10 ticks make 1 pip(that is the 1000th place after the decimal). Hence if the price of EUR/USD increases from 1.14355 to 1.1485, this represents an increase of 3 pips.

Leverage: System that significantly increases the level of the initial investment. eg: if your deposit is 100 EUR and leverage is 100 then your trading amount is 10000 EUR. Without this small traders wouldn't be able to trade.

Offered levels of leverage by brokers 1:10, 1:50, 1:100, 1:500

Spread: Represents brokerage commission. Base currency pairs have in general greater spread than the exotic ones

Lot: Amount of money that we invest in each trade.

Standard Lot= $100.000

Mini Lot= $10.000

Micro Lot= $1.000

Example: If you want to invest $3000 in the volume box you should enter 0.03

1 micro lot= .01= $1000

3 micro lot= .03= $3000

Long: Long position represents the buy position in the market

Short: Short position represents the sales position in the market

Stop loss: An order with which trader wants to stop the loos(restrict the loss). For a long position, stop loss value is set below the entering price and for a short position, stop loss value is set above the entering price.

Take Profit: An order with which the trader takes profit at the desired level. The take profit value is always set above the

entering price for long position and always below the entering price for a short position

Bid: represents offered price

Ask: represents requested price

Spread: Difference between bid and ask price

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PENDING ORDERS:

Pending orders: Option used when we want to enter a certain position at a certain price below or above the current price.

Buy LImit: Placed when we want to enter a long position on a condition that the price comes down to our desired price point. Once the price comes down to the desired price point that we have set as the Buy limit, we will automatically get into the trade with a long position

Sell LImit: Placed when we want to enter a short position and is placed above the current price.

Buy Stop: If we believe that the price will continue to rise if it the previous peak, then we will set up Buy Stop pending order

Sell Stop: If we believe that the price will continue falling if it breaks the previous bottom, then we will place a sell Stop pending order.

*Read about STOP LOSS AND TAKE PROFIT OPTIONS*