Welcome to the Forex Trading School of Manual Trading Systems!
Forex Trading School…Class Is Now In Session
Today’s lessons will cover manual trading concepts and best practices. Pay close attention because falling asleep in class CAN cost you money!
Forex Trading School Lesson #1 – Manual Trading Overview
forex trading school manual trade Manual trading is where you, the trader, do all the work. Also referred to as “discretionary trading”, every aspect of the trade is 100% under your discretion.
You research information, analyze data, reach a decision, and then execute the trade.
You also decide where to place your stop-loss and when to exit the trade.
Forex Trading School Lesson #2 – Control Your Emotions
Making consistent profits from manual trading can be very difficult. It requires both intellectual and emotional intelligence.
You need to be smart enough to analyze and interpret information.
But you also need the mental discipline to prevent fear and greed from interfering with your trading.
If you let it, the Forex market can take you on an emotional roller coaster ride.
When that happens, you’re probably gambling and not actually trading.
Always be mindful that your Forex trading journey does not turn into a roller coaster ride.
Rather, stay on a smooth, steady train to profits!
Forex Trading School Lesson #3 – Information
Forex trading is all about information. This information can come in any form, including news, economic reports, charts, and indicators.
It can even come in the form of the “latest tip” from your neighbor at a barbecue.
However, information by itself is pretty much useless.
It’s the application of information that really matters, and this is what separates the good traders from the bad.
How well you can analyze and interpret information to assess future price action will determine your trading success.
Of course, there’s more to it than that.
Proper money management, setting stop-losses (in case you’re wrong), and emotional discipline are just as important in determining your success as a trader.
Forex Trading School Lesson #4 – Fundamental Analysis
Generally, there are two types of analysis you can perform as a discretionary trader.
Fundamental analysis is where you assess a country’s economic strength by reviewing news, economic indicators, and other “fundamental” data to determine future direction of the country’s currency.
forex trading school news You might even derive some insight from a Forex currency market report. Many Forex advisory sites provide such reports that go over trends in the currency markets.
This type of analysis is best suited for long-term traders, although one exception is when you trade on the news.
When important news hit the wires, the Forex market can react very quickly with a high degree of volatility.
With that said, be very careful if you decide to build yourself a Forex news trading system.
It can be highly profitable, but also very risky.
For example, when a very important report such as the NonFarm Payrolls report is released, I’ve seen price movement in the 50+ pip range occur in a matter of minutes.
Imagine being on the right side of the trade when this report is released…
…or the wrong side. Yikes!!!
Forex Trading School Lesson #5 – Technical Analysis
Forex technical analysis is what most short-term traders use to analyze the markets.
By looking at price patterns and technical indicators on price charts, you could anticipate future price action.
I consider this type of analysis part science and part art.
The “science” part consists of the rules and definitions for the various price patterns and technical indicators.
The “art” part involves your interpretation of these price patterns and indicators.
One trader can look at a chart and believe the price will go up. Another trader can look at the same exact chart and believe the price will go down.
Still, another trader can look at the same chart and think the price will go nowhere…simply fluctuating within a tight range for a while.
One of these traders will be correct…
…with enough practice and experience, that trader could be you!
Forex Trading School Lesson #6 – Trading Time Frame
As you start to trade Forex currency, one important aspect to consider is the amount of time you are able to devote.
If you work a full-time job, then you probably don’t have the time to sit in front of your computer all day to trade.
Even if you did have the time, perhaps you wouldn’t want to.
Your trading time frame will depend on how much time you have and are willing to spend on trading.
Generally, there are 5 types of trading time frames:
- Day Trading
- Swing Trading
- Trend Trading
- Position Trading
Forex Trading School Lesson #7 – Live Trading Versus Demo Trading
Forex currency trading for beginners can be very, very risky. When you’re just starting out and haven’t gained enough experience, chances are higher that you will lose your capital.
I’m not trying to scare you. It’s just the reality of the situation.
But don’t despair, there is a solution…
…you can demo trade!
Most, if not all, Forex brokers will allow you to open a “demo” account where you trade with fake money.
Demo trading eliminates risk, and it does help you practice your trading strategies.
However, it does not replicate trading reality completely.
As you trade Forex online with a demo account, one thing missing is the emotional aspect of trading. You’re not trading with real money, so you have no emotional investment.
For example, if you lose $1000 in a trade, you couldn’t care less. It’s not real money!
As soon as you start trading with your own money, however, it’s amazing how fear and greed can creep in.
But that’s simply the real test of your trading abilities…trading on a real, live trading account with real money.
As a beginner to trading, a safe approach would be to demo trade first. Then trade on a live account with a very small deposit of capital.
Some Forex brokers allow “micro” lot trading with no minimum deposit. With a micro lot position size, every one-pip move would be measured in pennies instead of dollars.
Trading on a live, micro account would help you experience trading using real money…
…and with real emotions, without risking too much capital.
Always, always take a conservative approach as you learn Forex online currency trading.
Your wallet will thank you for it!
Okay, here we go! It’s time to build your best forex trading system. It won’t be a trading system that’s best for everyone. Rather, it will be a trading system that’s best just for you. It will be based on your own unique personality, trading style, and tolerance for risk.
Remember, the goal here is not to build your best forex trading system that will give you super-high returns. Those systems usually go hand-in-hand with super-high risk, and as a result, they usually don’t last very long. Not only is that NOT your best forex trading system, that’s a failed system in my book.
No, your best forex trading system is one that has longevity. Your best forex trading system will yield consistent profits, year over year. Over time, these profits definitely add up…
…and they’ll continue to keep adding up, slow and steady.
(Keep in mind, “consistent profits” does NOT mean that every trade will be a winner. That’s not possible. Having losing trades is a normal part of any trading activity. With that said, YOUR best forex trading system will consistently put money in your pocket, not take your money away.)
In the following sections, I will show you the exact steps to build your best forex trading system. I will also provide links to specific pages where you can get more detailed information. You can also go directly to these pages from the Navigation Bar on the left.
Before You Build Your Best Forex Trading System
Before we begin, give your motivation a boost by visiting my page on why we conduct online forex currency trading in the first place. Think about your own dreams and goals that you wish to achieve through forex trading.
If you are completely new to forex, it’s best to fully acclimate yourself to the forex basics and currency trading basics.
Also, review forex systems basics to get an overview of forex trading systems. Here, you’ll learn about trading plans and the other components that make up a forex system.
Step 1: Find Your Best Forex Trading System Strategy
This is your first step into building your best forex trading system, and it also happens to be the most difficult. It’s what most forex traders spend the most time and effort trying to discover. No wonder…it’s also the most important step, since your best trading strategy will form the very core of your best forex trading system.
Now I’m not in a position to tell you exactly what YOUR perfect trading strategy is. Only you can determine that for yourself. However, I can help you explore all the different trading strategies out there. I will also show you the safest way to test out new strategies.
Basically, your best trading strategy will consist of one or a combination of the following:
Three Types of Trading Strategies
Manual Trading: This strategy requires the most skill. That’s because everything is up to you. You do all the research; you do all the analysis; and you make all the decisions when to enter a trade, when to exit, and how much money to risk.
Whew! So much responsibility! It’s like you need to attend a forex trading school to prepare you for such an endeavor. Fortunately, I’ve got one on this site to show you the ropes.
When manual trading, most forex traders employ fundamental analysis, technical analysis, or some combination of both:
Fundamental Analysis – Typically requires the trader to make decisions based on the “fundamental” strength or weakness of a country’s economy. Theoretically, this strength or weakness will be reflected in the currency value of the respective country. Data is usually expressed in some type of forex currency market report, such as the very important Non-Farm Payrolls Report in the U.S.
Trading based on fundamental analysis is usually long-term. Think of Warren Buffet’s “buy-and-hold” approach, but instead of looking at the fundamentals of specific companies, forex traders analyze the fundamentals of specific countries.
Technical Analysis – A trader will analyze price charts to forecast future price movement. Forex technical analysis can be as simple as pure price action trading, or extremely complex using multiple technical indicators.
Whatever form of analysis you choose, there are a number of different manual trading strategies that can be used to trade forex online. The sky’s the limit when it comes to all the different trading strategies that can be developed using fundamental and technical analysis.
Signal Trading: This is a nice mix between manual trading and auto trading. If you don’t feel up to the task of finding ideal trade entry points, or if you have a way but wish to automate it, you can employ automated trading software to generate the best forex signals for you. A forex signal system will alert you of ideal trading opportunities, but the decision to actually enter the trade is still up to you.
Auto Trading: Simply put, automated forex trading systems trade for you. Everything is automated through software, which uses a programmed set of trading rules to automatically identify trade opportunities, enter trades, and exit trades. Some even implement money management for you. The most popular automated trading software are Expert Advisors, or “EA’s”, which run on the Metatrader4 trading platform.
Commercial EA’s have gained tremendous popularity these days, probably due to their appeal of making “easy money”. Be careful, however. Most of these “forex robots” are turning out to be scams.
Try to find the best forex trading system review of any commercial EA you’re looking into. It can help you determine an EA’s credibility, especially if the review provides live money test results of the EA. However, do not base your opinion entirely on the reviews you read. Below, I will show you a thorough and safe way to evaluate any EA for yourself.
Regardless of the type of strategy you encounter in your quest to find your perfect strategy, always approach each one with a degree of skepticism. In other words, do not jump in head-first by committing all your trading capital, no matter how promising the strategy sounds. Patience pays here. Remember, it’s YOUR money on the line.
A common mistake that many traders make when checking out a new trading strategy is asking, “How much profit can this system generate?” Wrong! The first question every trader should ask is “What’s my risk?”
Remember, protecting your capital comes first. Making money comes second.
With that said, here is how I approach every new trading strategy. It doesn’t matter if the strategy is manual, signal-based, or automated. This methodology applies to all types.
It’s the safest way to determine the suitability of any trading strategy to your own personality, trading style, and tolerance for risk. It’s a very conservative approach that aims to protect your money as much as possible while testing.
Safest Approach to Evaluate Any New Trading Strategy
Research and Learn: When I come across a new trading strategy that shows promise, I do as much due diligence as possible. How does the strategy work? Is it based on sound trading principles?
I also research the strategy’s history. Who created the strategy? How long ago? Why is it so popular? Is it just that good, or is it popular simply due to excellent marketing?
Finally, I read reviews on others who have used the strategy. What do they have to say about it? Is it a part of their best forex trading system?
Keep in mind, you’re not researching to determine if a strategy is the “holy grail” of forex systems. It’s amazing how many trading strategies out there are marketed this way.
It doesn’t really matter if a trading strategy worked for other traders. Just because it made them profits doesn’t necessarily mean it will make you profits. Conversely, just because it did not make them profits doesn’t necessarily mean it will not make you profits.
Your main job when reading reviews is to get preliminary information on any strengths or weaknesses the trading strategy might have. You’ll be testing the strategy for yourself during the next steps.
Demo Test: When you’re ready to test a trading strategy to see if it will work for you, test it on a demo trading account first. You don’t want to risk any real money just yet, considering you have no personal experience with the trading strategy.
Do this for at least several weeks, preferably several months. The more time you can test the strategy, the better. If, during that time, the strategy is not generating consistent profits, don’t scrap it just yet. Perhaps you just need to make adjustments. If applicable, change time frames, lot size, or any other tweaks you deem appropriate. Try changing brokers.
If and when the trading strategy is making consistent profits, you’re ready to test it on a live money account…
…but don’t fully commit just yet!
Micro-Lot Test: After the trading strategy has made consistent profits for at least several weeks on a demo trading account, you can now test it on real money. However, test it on a micro-lot trading account first. This way, you’re risking only pennies instead of dollars.
You might be asking, “Why can’t I test on a micro-lot account first? I’m only risking pennies after all.”
Well, that’s up to you. My goal is to help you find your best trading strategy using the least amount of risk. If you forego a demo trading account and test only on a micro-lot account, it could get costly, especially if you test many different strategies. Those pennies can really add up. But, it’s your call.
Again, I recommend taking as much time as possible testing on a micro-lot account. Allow at least several months for testing. Give the trading strategy the chance to run under different market conditions. Better to be safe than sorry.
This is worth repeating…it’s YOUR money on the line, so protect it first, grow it second.
Raise Your Risk: Okay, you’ve done your due diligence on a trading strategy. And you’ve spent several months testing it on a demo account and on a live micro-lot account. It’s passed with flying colors and has made consistent profits under different market conditions. And it “feels” right to you. Profits are being made almost naturally.
Congratulations! You have possibly found YOUR perfect trading strategy! You’re now ready to risk more capital to it.
However, continue proceeding with caution. Move up to a mini-lot trading account first. After several months of consistent profits, you can then consider trading on a standard-lot account.
Why continue with a cautious approach? You’ve done your research and the strategy is based on sound principles. It’s gotten great reviews from other traders. You know all about its strengths and weaknesses. You’ve managed to make consistent profits using it on a demo account and live micro-lot account.
Why can’t you just “go for it” and start trading it on a standard-lot account?
Well, must I say it? Yes, I think I should…
Capital protection comes FIRST. Profits come SECOND.
Forex trading is extremely risky. In fact, it’s so risky that most forex traders lose their shirts trading it. Don’t be one of them. Always approach forex trading with extreme caution, and the best way to do that is through proper money management.
Step 2: Build Your Best Forex Trading System Trading Plan
Once you’ve found your best trading strategy in Step 1, make it “official” by writing it into your own Trading Plan. This will form the core of your best forex trading system.
Why write it down? You need to treat your trading as a business. It’s not a hobby. If you think that way, you’re setting yourself up mentally to lose money. You’ve got to treat it as a business. And as a business, your number one goal is to MAKE MONEY. Making serious money requires serious thinking.
business plan best forex trading system Just as any business has a “Business Plan”, your forex trading business has a “Trading Plan”. Outline your trading strategy into your Trading Plan, even if its a signal or automated trading strategy. Review it daily. It’s the only way to stay focused and disciplined, especially if you’re manually trading. It helps to keep your emotions under control.
Emotional trading, by the way, is the biggest reason traders lose money.
It even affects the profitability of automated trading systems. For example, a trader may experience fear when he sees his forex robot incurring a large drawdown on a given trade. He may decide to intervene by manually closing out the trade too early. Chances are, the trade would have closed in profit had he left it alone and allow the robot to run on its own. The trader’s actions might have caused an otherwise profitable trading system turn into a losing one.
If you need help creating a Trading Plan, please refer to my trading plan example.
Step 3: Find Your Best Forex Trading System Broker
You might have already done this during Step 1, but it’s worth looking into further. There are a multitude of different forex brokers out there, each with their own strengths and weaknesses. Some are better at executing certain strategies than others. For example, a forex broker that offers excellent rollover interest rates would be best if your strategy involves the “carry trade”. A broker that offers very tight spreads would be best for scalping strategies (by the way, I can help you find the broker with the best forex spread for any given currency pair).
Depending on your trading strategy, do a thorough research to find your best forex broker. For starters, check out my forex broker review.
Step 4: Find Your Best Forex Trading System Tools
Tools are what you use to execute your Trading Plan. For the most part, most of these will already be provided by your forex broker, including your charts, live quotes, and technical indicators. Since you’ve found your best forex broker in Step 3, it’s likely you’re already using the best tools for your strategy.
However, don’t limit yourself to only the tools that your broker provides. There are plenty of other great tools that are worth looking into, many of them free. Check out my forex trading tool chest to get a free currency rate alert service, economic calendar, glossary, current news video, and much more.
My tool chest also provides information on a virtual private server, or “VPS”, offered by a great company. Although your forex broker may already offer a free VPS with your account, there are advantages of paying for a cheap windows VPS from a third party…definitely worth looking into to optimize your trading strategy.
If your ideal trading strategy involves candlestick pattern analysis, I provide a reference tool of patterns for candlestick charts.
Or you may have developed a preference for classic chart pattern analysis while you were learning to trade forex. I provide a reference tool for these patterns as well.
And for the extreme technical analysts, I also provide a thorough forex indicator reference tool. It provides information on many common (and not-so-common) technical indicators.
Step 5: Maximize the Profits of Your Best Forex Trading System
So you’ve done your research, found and fully tested your best trading strategy that fits your personality, trading style, and tolerance for risk. You’ve incorporated it into an official Trading Plan, which now creates the core of your best forex trading system.
You’ve also done your due diligence and found the best forex broker for your Trading Plan. And you’re using the best tools to execute your Trading Plan, including those provided by your broker and some provided by third parties.
The result? You’re actually MAKING MONEY by forex trading!
The question now remains, “Are you squeezing as much profit potential as possible from your best forex trading system?”
In this final step to complete your best forex trading system, I’ll help you explore ways to maximize your profits. I’ll give you forex tip trading as well as forex secret trading information that can give your profits a boost.
For example, forex introducing brokers can give you cash back on every one of your trades, regardless if it’s a winner or loser. That’s a sure way to maximize profits and minimize losses.
Or you might consider binary option trading instead of spot forex trading as your trading strategy. This has the potential of earning you up to 80% in a matter of minutes! (Be careful, though…high reward also equals high risk).
What Are Forex Systems?
Merriam-Webster’s Online Dictionary (www.merriam-webster.com) defines a system as “a regularly interacting or interdependent group of items forming a unified whole”.
Forex online trading systems are just that…a group of interacting components working together as a single entity. This entity is your Forex business.
Your Trading Plan forms the core of your system. It contains the trading strategy that best fits your personality, trading style, and tolerance for risk.
In addition, three other components complement your Trading Plan to complete your forex system:
- mt4 forex broker
- Profit Maximization
The figure below illustrates how your Trading Plan and the three components fit together to form a complete Forex Trading System.
Think In Terms of Forex Systems, And You Think In Terms of a Trading Business
Contrary to popular opinion, Forex trading is NOT a way to get rich quick. It’s actually quite difficult to consistently earn profits while trading.
That’s why it’s so important to take trading spot Forex seriously, with discipline and the hard work it deserves.
When you view your trading as a forex system, then it encourages you to treat it as a business. And having an organized, methodical way to trade is the only real path towards long-term success.
When Are Forex Systems Built?
Whether you’ve just begun to learn to day trade forex, or you’ve been trading for a while, a Forex trading system can be built at any time during your Forex journey.
However, it would be ideal to build your system from the very beginning, before you even open up a Forex broker account.
Don’t worry if you already have an existing broker account. You can easily incorporate this account into your system.
Forex Systems Have a Trading Plan At Its Core
So you wanna earn pips, eh? Well, you’re gonna need a plan…
…a Trading Plan, that is. Just like a business needs a Business Plan, your trading system needs a Trading Plan.
Every trading plan is unique to every trader, simply because it contains the trading strategy unique to the trader.
With that said, there are generally three types of plans, depending on your trading strategy:
- Manual Trading
- Signal Trading
- Automated Trading
Only you can determine the trading strategy that best fits you and your own personal style of trading.
Are you a discretionary trader? You’d be using a manual trading strategy.
Or perhaps you’d rather use a signal trading strategy. Software can alert you to the best forex signals, but you will still have ultimate control in executing the trade.
Finally, you may just defer currency trading completely to automated forex robot software. The software will open and close positions for you based on a set of trading rules.
Compared to manual and signal trading, automated trading eliminates the most emotions out of the trading equation.
It doesn’t completely take emotions out, however. Just think of the anxiety you might feel when your trading robot has caused your account to incur a VERY LARGE drawdown.
Check out this trading plan example to learn the basic components that make up a manual trading plan. Of course, these same components can be applied to a signal or automated trading plan as well.
Forex Systems Explained In Further Detail
Explore the rest of this website to get further details of each component of the Forex Trading System Model.
Learn and decide which Trading Plan is best for you. Review Forex brokers to find out which one is best for your plan. Find the best tools to keep your system running smoothly.
And finally, learn and utilize the ways to maximize your profits.
Every trader is unique. Get the right combination that suits you, and you have the potential to build YOUR best forex trading system!
urrency Trading Basics #1 – Trading Versus Gambling
Currency trading is speculation, plain and simple. You’re speculating on the value of one currency versus another, with the sole intent of making a profit.
Some people call currency trading “gambling”. These are probably the same folks that call Forex trading easy.
Let’s set the record straight…
…currency trading is not gambling and it’s not easy.
With that said, if you’re not careful, Forex trading can become gambling. And it can become very easy to lose your money.
Currency Trading Basics #2 – Trade With A Plan
The key is being able to control your emotions. And the best way to control your emotions is to trade with a set of rules that you stick to.
These set of rules form your Trading Plan, which every trader must have in order to make consistent profits.
Without a Trading Plan to help you stay on course, it becomes easier for your emotions to take control and affect your decision-making ability.
That’s when trading turns into gambling, and chances are, you’ll eventually lose your hard-earned cash.
Treat your trading as a business.
And it’s perfectly okay if your trading becomes boring. It should be boring.
(I love the boredom of cashing checks, don’t you?)
Slow, steady, and consistent profits…
…that’s the name of the Forex game.
Save your emotions for the Las Vegas casinos!
Currency Trading Basics #3 – The Mechanics of a Currency Trade
In Forex currency online trading, what exactly happens when you make a currency trade?
Well, you’re exchanging one country’s currency for another country’s currency…
…hence the name, “foreign currency exchange” or “Forex” for short.
If you’re buying (going “long”) one currency, then you’re simultaneously selling (going “short”) another currency, and vice versa.
That’s why in Forex trading, you hold positions as a currency pair, such as USD/JPY (U.S. Dollar/Japanese Yen) pair.
Currency Trading Basics #4 – Every Transaction Is A Trade
If you think about it, any transaction you’ve ever made can be viewed the same way as a currency trade.
For example, if you were to buy a pack of chewing gum for $1 USD, you’re basically exchanging your $1 USD for 1 pack of chewing gum.
You’re buying 1 pack of gum by selling your $1 USD…
…or in trader’s terminology, you’re “long” 1 pack of gum and “short” $1 USD.
If you then sell your pack of gum to your buddy, who’s willing to exchange it for $3 USD, you would essentially close your open position in chewing gum.
You would sell your long position in gum to buy back your short position in USD for $3 USD.
You have now closed your long position in chewing gum, but with a $2 profit. Not bad!
Imagine if there was a country that actually uses chewing gum as its currency…
…hey, if you blew a bubble with your gum, would that be considered “inflation”?
Currency Trading Basics #5 – Currency Pair Designations
Let’s get back to reality and talk about real currency pairs.
In a currency pair designation such as USD/JPY, the currency on the left (USD) is the “base currency”, while the currency on the right (JPY) is the “counter currency”.
The base currency is the main currency you are buying or shorting. The counter currency is what you are selling in order to buy the base currency (or buying when you short the base currency).
The two currencies in a currency pair are always held in opposite directions from one another…
…one long, the other short.
Currency Trading Basics #6 – Currency Pair Categories
Forex currency pairs can be categorized into three groups…major currency pairs, minor currency pairs, and cross-currency pairs.
All major and minor currency pairs include the U.S. Dollar as one of the currencies in the pair. These include pairs such as EUR/USD, USD/JPY, and GBP/USD.
The “majors” are the most actively traded pairs, making up 80% of Forex trading volume.
Since they are the most actively traded, they tend to be the pairs with the highest liquidity and lowest spreads…great pairs for currency trading!
Cross-currency pairs do not include the U.S. Dollar. The most actively traded “crosses” include EUR/JPY, GBP/JPY, and EUR/CHF.
Currency Trading Basics #7 – Lot Sizes
A currency unit is a standard unit of value. For example, 1 currency unit of USD is $1. 1 currency unit of EUR is €1.
In Forex trading, currencies are bought and sold in fixed currency unit bundles, known as “lots”.
Forex brokers allow trading in one or more of the following lot sizes:
standard lot = 100,000 units of base currency
mini lot = 10,000 units of base currency
micro lot = 1,000 units of base currency
For example, if you wanted to go long 1 standard lot of USD/JPY, you would be buying $100,000 by selling an equivalent amount in Japanese Yen (depending on the ask price).
Currency Trading Basics #8 – Margin & Leverage
In the previous example, you might be wondering, “Do I really have to purchase $100,000 for a standard lot, or even $1000 for a micro lot? That’s a lot of money!”
Well, thanks to a concept called “leverage”, you don’t need a lot of capital to trade Forex.
When you open a Forex trading account online, your Forex broker will allow you to leverage the margin in your account.
The amount of leverage depends on the broker, but it can be as high as 500:1 at some brokers.
500:1 leverage means that you have 500 times the purchasing power for every $1 of margin. So $1000 allows you to purchase $500,000 worth of currency.
Be very careful with leverage. It magnifies profits, but it also magnifies losses. Ideally, you should trade with leverage no higher than 200:1.
Risk management, particularly proper position sizing, is just as important as trading strategy.
Don’t get greedy and risk too much capital on any one trade.
If you do, a losing trade has the potential of becoming a catastrophic loss that can wipe out a significant chunk of your account balance.
Currency Trading Basics #9 – Currency Pair Pricing
Prices for Forex currency pairs are always quoted in the denomination of the counter currency. It’s the “exchange rate”, the amount of counter currency equal to 1 unit of base currency.
As such, your profit or loss is always in the denomination of the counter currency.
There are actually 2 prices quoted for a currency pair…the bid rate and the ask price.
The bid rate is what you would sell the base currency for and the ask price is what you would buy the base currency for.
For example, let’s say the current price quotation for the USD/JPY is:
Bid 89.31 x Ask 89.33
This means that it would cost ¥89.33 to buy $1. At the same time, if you were to sell $1, you would receive ¥89.31.
Currency Trading Basics #10 – The Spread
The difference between the bid and ask price is called the “spread”.
As a trader, it would be in your best interest to find a good Forex broker who offered low spreads.
You could also trade during more active times of the day for your currency pair, when spreads tend to tighten due to the higher liquidity.
The lower the spread, the lower the number of pips to break even, and the higher your chances of making a profit.
A “pip” is the smallest price increment a currency can make. It’s how you measure your profit or loss.
As you can see in our previous example, as soon as you go long or short the USD/JPY pair, you’re already in the hole by 2 pips (the spread).
89.33 Ask minus 89.31 Bid = 2 pip spread
If you’re long, the currency pair would have to move up 2 pips in order to break even…
…a move higher than 2 pips and you’re in profit!
Currency Trading Basics #11 – Rollover Interest
When you trade Forex, your open position will consist of the currencies of two different countries.
Don’t forget that currency is money, and money itself has a price…interest.
The difference in interest rates between the two currencies in your open position is known as the “interest rate differential”.
If you’re holding an open position at 5 p.m. Eastern Time, you will either pay or earn the interest rate differential.
It depends on whether you’re holding the base currency long or short, and whether that base currency has a higher or lower interest rate than its counter currency.
The table below will help you determine whether you pay interest…
…or get paid interest. (Cha-ching!)
Currency Trading Basics Rollover Interest
If you’re holding a position that earns interest, it would be like having an “automoney machine” generating automatic cash flow for you.
Of course, the amount of interest you earn would depend on the size of your position.
Currency Trading Basics #12 – The Carry Trade
There is actually a long-term strategy known as the “carry trade” that takes advantage of this interest-rate differential. It could be worth looking into as a viable trading strategy.
However, if your trading strategy does not involve the carry trade, then don’t let rollover interest affect your trading decisions. The amount of interest earned or paid is usually insignificant relative to the amount of profits you’re going for.
Forex Basics #1 – Forex Is “Foreign Currency Exchange” forex basics The Forex market is a market of world currencies.
If you’ve ever traveled abroad and had to exchange your currency for the currency of another country, you made a “foreign currency exchange”. You participated in the Foreign Exchange Markets.
However, you probably weren’t exchanging your currency to make a profit. You simply wanted to have the proper currency acceptable for making purchases in the host country.
Conversely, about 90% of the currency exchange that occurs in the Forex market is motivated by profit…
…in other words, the majority of trading volume in Forex is based on speculation.
Forex Basics #2 – Forex By Any Other Name
The Forex market can and has been called many different things:
- Foreign Currency Exchange
- Foreign Exchange
- Currency Exchange
- Spot Forex
- Spot FX
- FX Market
Or any combination of the above. The list goes on, but for all intents and purposes, I’ll simply refer to it as the “Forex market”.
Forex Basics #3 – How Big is Big?
The Forex market is a trader’s paradise. It is the biggest and most liquid financial market in the world.
Since it is a global market, it’s open 24 hours a day, 5 days a week. It’s like your local convenience store…
…only bigger, much bigger…say, about $3.2 trillion bigger.
That’s the average daily trading volume of the Forex market.
We hear the word “trillion” thrown around so often these days in the media that we’ve forgotten how big this number really is.
Allow me to put it into perspective.
Think of how much money $1 million is. In conceptual terms, think of all those zero’s, or in physical terms, think of a pile of 10,000 $100 bills on the floor. (Now that would be a nice looking pile, wouldn’t it?)
Got the $1 million pictured in your mind?
Now imagine 1 million times that $1 million. That’s right…a million piles of 10,000 $100 bills, scattered all around you. That’s $1 trillion!
Okay, let’s take it one more step further.
Try to imagine 3 million piles of 10,000 $100 bills. It’s getting difficult, huh?
Add another 200,000 piles for good measure, and you’ve got yourself $3.2 trillion…the amount of money being traded per day in the Forex market.
If you were to combine the daily trading volume of all the stock markets in the world, the total still wouldn’t even come close to $3.2 trillion.
It’s no wonder the Forex market is so liquid.
This is great news for a speculator/trader because high liquidity keeps the “spread” low. The spread is the difference between the buy and sell price (we’ll get more into this in the Forex Trading section of this website).
High liquidity also makes for pretty stable price action (under “normal circumstances”, that is). The market is so big that trades as large as $10 million or even $100 million won’t be enough to jolt prices.
Forex Basics #4 – Trade While Everyone Else is Asleep
Unlike a market such as the New York Stock Exchange, there is no single place for currency exchange.
The Forex market is traded around the world. As one market closes, another one is open, making Forex trading times truly 24 hours a day (for 5 days a week).
Although I wouldn’t recommend it, you can literally trade all day and all night if you wanted to…
…just don’t forget to feed the cat!
Forex Basics #5 – Other Kids in the Forex Sandbox
Forex traders like you and I are the new kids on the block. Thanks to the Internet, Forex trading has become accessible to just about everyone with some risk capital and a dream.
But there are other, much bigger participants in the Forex interbank market.
International commercial banks
Hedgers looking to reduce or remove risk
Hedge funds and other speculators
Governments and Central Banks
These guys have been at it a lot longer than we have, so be careful out there!
Forex Basics #6 – It’s Really Mother Nature That Shapes The Sand
Some of the participants I mentioned roll with some heavy cash. They make multi-million dollar trades without breaking a sweat.
Although the Forex market is way too big for any of these power players to have any real influence, the market is still subject to some external forces.
I already mentioned Mother Nature. If a natural catastrophe occurred somewhere, it would definitely have an immediate influence on the market.
But it’s not just Mother Nature. Other forces have a major impact on the currency system and Forex trading in general:
- Economic growth
- Interest rates
- Monetary policy
- Other financial markets
- Political events
These are the real forces that shape the sands in the Forex sandbox. (Pretty poetic, huh?)
Forex Basics #7 – See the Forex For The Trees
Excuse the pun, but it’s something to keep in mind.
By learning the Forex Basics, you’ve built a foundation of knowledge upon which to build.
Next, we’ll move on to learning the finer details of Forex trading. Then, we’ll dive deeper still into the wonderful world of Forex Trading Systems.
As you learn more and more details, always be aware of the Forex Basics…the “Bigger Picture”.
It will keep your Forex knowledge balanced and well-rounded, which can only help your trading.