Forex Trading Basics Most Forex Traders Don’t Know

Maybe this is the first time you are visiting this site, while you are either a forex trader already, or you are interested to know what forex trading is and whether you can make money with it or not. Therefore, you’d better to start from the forex trading basics. Unfortunately, there are too many forex traders who are not familiar with basics of forex market and forex trading. It is never too late to learn more about the basics of something you have been doing for a long time. You can start from here today.

Before I explain about the basics of forex market and forex trading, I invite you to bookmark the below articles and refer to them later when you are done reading this post:

This is an article that you must read at least once, no matter if you are a novice trader, or you have been trading for a long time and you know a lot about forex trading: Become A Profitable Forex Trader In 5 Easy Steps

The reason is that this article helps a novice trader find the right track and become a profitable trader as soon as possible. It also helps those who have been trading for a long time without success, to have a new start, recover from the previous mistakes and losses and find the right way of become a profitable trader.

And, here is some articles and videos you must read and watch:

  1. Forex Trading Explained in Simple Words
  2. What Is Forex and How to Make Money with It?
  3. Understanding the Currency Pairs
  4. Candlestick Signals and Patterns
  5. Chart Analysis
Before You Read the Rest of This Article:
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What Is The Currency Market?

Whether you’re a new investor who lacks large amounts of funds or a professional with lots of money, you will definitely want to consider investing in the foreign exchange market. Never before has this market been so user-friendly to beginner and conveniently accessible to traders who prefer to conduct transactions after hours. Plus, if you need to experiment with trades before putting your money on the line, the forex market is a great place to start. You can trade with the demo money to see how forex trading is, and how your trading system or investment plan works: The Importance of Demo Trading and Your Demo Account

The main use of the foreign exchange market (also called the currency market, FX, or Forex) is to provide tools for international trade and investment by permitting companies to convert any type of currency into another. Hence, an entity in the US can import merchandise from Japan and pay for it with Japanese Yens, despite the fact that the business receives its revenue in US currency. This market also assists traders who aim to profit by converting the values of one currency into another.

How do we figure out how much our currency is truly worth? This is done by measuring its purchasing power. For example, if we were to spend $30 on a sack of grocery items, we can then judge the value of the US dollar according to how much it will buy. Let’s say we shop again at the same retailer a month later to buy those exact same items and the cost is $33, we can say the USD dollar’s value has decreased. That’s because we can no longer buy them for $30.

Comparing Currency Values

When it comes to foreign exchange, consumers think of one currency’s value in relation to another’s. For this reason, you will see one currency is quoted with second. So for example the line: USD/JPY, this signifies what a US dollar is worth in Japanese Yens. Hence, in a quote, the base currency is the first and the counter currency is the second type, both listed in a currency pair meaning this is how much of the second currency we can buy with the first.

Commonly traded currencies are symbolized as follows:

  • USD: US Dollar
  • CHF: Swiss Franc
  • EUR: European Euro
  • CAD: Canadian Dollar
  • JPY: Japanese Yen

These are not any different than a symbol that represents a stock. For example, the abbreviation AAPL means Apple Inc, and thus the line AAPL/USD signifies that the quote resembles the monetary value of Apple stock in US dollars. So an Apple quote of 275 means that one share of Apple is worth $275 US dollars. As for the quote EUR/USD quote of 1.2500 would signify that one Euro is worth $1.25 USD, and EUR/USD quote of 1.2514 means that the Euro is worth $1.25 and 14/100th of a penny. However, in the forex market, rather than 1/100th of a penny, the last digit represents a pip meaning percentage in point. Some firms even measure to 1/1000th of a pip and so for this example the quote may be: EUR/USD quote of 1.25141.

This is an image of a quote window found in a Forex trading platform (below image). It represents an EUR/USD currency pair quote. In the illustration you see two prices in the quote window. The first is the sell price (on the left). It means that a euro could be sold for $1.40 and 360/1000ths of a penny or 36 pips. The price on the right is the buy price which means the euro can be bought for $1.40 and 381/1000ths of a penny or 38 1/10th pips. When you subtract the buy price from the sell price, you come up with the spread. The spread is the amount the banks and the brokerage firms profit from.

Currency Trading For New Traders

Trading on the forex market is much the same as trading on another market. Forex trading basics is almost the same with the basics of any kind of trading. Hence, it is best to purchase currency at a lower price and resell it once it goes up in order to earn a profit. Then you can sell it after the price rises and repurchase it at a lower price to make a gain. With such flexibility, the investor is enabled to profit whenever a strong move occurs.

The forex market is an over-the-counter type of market, but has no geographic location as the stock market and the futures markets do. Thus, trading is conducted amongst the world’s largest banks, so termed as the interbank market. It used to be that only prominent traders were able to tap into this market. Recently, advances in technology enabled individual traders to gain access to it through forex companies, also known as brokerage companies. With the newly enabled access, the costs of trading for the consumer have gone down. For this reason, forex has boomed in growth and popularity.

Now we can plainly see why thousands of traders would rather trade forex instead of options, futures, and stocks. First, Forex is accessible 24 hours a day enabling traders unlimited trading times. Second, they have a free demo account allowing traders to become familiar with the market before using real funds. Third, free access to live quotes and free live charts means more money that an investor has to trade with. Fourth, because small trade sizes are available, investors are able to make use of commonly accepted money management methods. Finally, traders can engage in day trading regardless of how little money is in their account. Hence, there are no day trading restrictions whatsoever.

The Foreign Exchange Major Trading Markets

Again, the forex market is accessible to trade on any time of the day or night. Sunday afternoon starts the trading week and Friday afternoon ends it. The FX market is comprised of three heavy trading periods including Tokyo, London, and the New York Trading Sessions. Most of the action in the forex market occurs when these sessions overlap. There is a US/Europe overlap between 8:00 am and 12:00 pm and a Europe/Asia overlap between 2:00 am and 5:00 am. Tokyo (7:00 pm to 4:00 am) starts trading for the week and numerous well-established investors take advantage of trading momentum as a means of creating tactics and as a measurement for dynamics in the future market. All times are define in the eastern time zone (EDT).

Approximately 6% of all of the worlds forex trading events can be done during Tokyo Trading Session hours. The largest and most prominent trading center globally is London, possessing a market of about 34% amount of the daytime foreign exchange volume. The majority of the world’s biggest banks locate their offices in London, since it has a significant market share. The majority of the investors in the London’s market and the large value of transactions enables the London session to be even more active than the Tokyo and New York sessions.

Following is the New York session as it conducts about 16% of all foreign trade. Most of its transactions happen in the US/Europe overlap time frame, but decrease as liquidity becomes dry and European investors leave the market. Because California never acted as a link between US and Asia trade, this causes a 50% decrease in activity by the midday period. Thus, market developers in the New York session’s afternoon hours don’t generate as much patronage. Activity in the New York session is highly affected by the US bond and equity markets. Also, pairs will often change in accordance to such capital markets.

Now that you are familiar with the forex trading basics, you may want to start trying it. With the assistance of foreign exchange brokers, you can set up an account and begin trading right away.

Just remember the basic advantage of investing the forex market rather than on the stocks or future markets:

  • This market is open 24 hours from Sunday afternoon to Friday afternoon EDT.
  • You can learn to trade through a free demo account.
  • You have free access to charts and quotes.
  • You are able to work in small account sizes.
  • There are no limits to day trading transactions.

Because there are no fees for accessing the market, that means more money in your pocket to trade with.

Published by

LuckScout Team

"Whether you think you can, or you think you cannot, you are right." - Henry Ford

41 comments:

  1. Hi, Kamel
    A SHORT setup on EURGBP weekly DBB at LowerBB1 on candlestick 2014.10.26.
    (last week closed). It will be interesting to see if the price action break the support line. Do you think is a valid setup based on DBB?

  2. Hi

    I continue it struggle with pips. Due to the number of decimal places used I cannot always work it out and feel that because of this I am miscalculating my risk when using your risk calculator when putting on a trade. Is there a straight forward way around this?

    Barbara

    1. Hi Barbara,

      Pip is 1/10000 when the price has 4 decimals. For example when EUR/USD is 1.23841, just consider it 1.2384. Then the difference of 1.2384 and 1.2385 will be one pip.

    2. Hi Barbara, i had the same problem when i started to learn. I think the good way is to practise a lot on demo account. buy 0.1 lot , for EUR/USD GBP/USD pair, 1 pip =1 dollar profit. When checking your profit and compare with your entry price and exit price, you can figure out the number of pip easily. For all the japanese pair ,0.01 stands for 1 pip . GL !

  3. Hi,
    these words are great truth: “Having some losses every now and then is normal and is part of the game”. Many people looks holy grail, and change strategy after every loss, but strong trade setups and money managment is all what we need.
    Thank you

  4. Hi Kamel,

    With your DBB system do u close the trade when it goes inside the bb1 if your SL hasn’t moved or do you wait for it to hit the SL? At the moment I only close the trade if it closes inside the bb1 and i previously moved my stop loss to break even otherwise I let it hit the SL. I just don’t want to choke the trades movements before it gets its legs

    1. Cheers, read through it again but just not sure if u always close when it’s inside bb1 or only after moving SL to Breakeven?

    1. No need to respond. I have seen your response. My emails re replys didn’t open the latest with your response.

  5. Hi , my NZD / USD are in +160 pips profit so far , how far have u moved your stop loss ? Mind analyze GBP/ USD and EUR/ USD ? From monthly , weekly , daily chart, they are all bearish . I aim to go for short at 1.6 and 1.25 again. Have you ever tried to short by placing a sell limit ? EUR/USD is likely to have a crazy move like JPY due to QE policy or ABS program .

    I followed to check my position only 2-3 times daily bit i still have the problem on moving stop loss and take profit . Also , USD/CHF had broken the previous resistance ( 0.97) , is it a strong setup ? Thanks .

    1. Hi Richard,

      My NZD/USD stop loss is at breakeven.

      I will analyze GBP/USD and EUR/USD but I really don’t see anything important happening on them.

      Yes, I sometimes use sell limit orders.

      For me, breaking above the resistance (like what usd/chf did) is not a strong setup. But many traders use it as a setup.

    2. Hi,

      https://www.luckscout.com/what-is-the-proper-risk-and-reward-ratio-in- -trading/ In this article, you mention that we can move the stop loss according to the size of our stop loss. If my stop loss is 50 pips, i short at 0.780, once the price move to 0.775, i can move to breakeven, once the price move to 0.77, i should move the stop loss to 0.775 , once the price moves to 0.767 (130 pip profit), i should move the stop loss to 0.775 still. But then the good question comes in:how do i know .

      The USD/JPY is rising fast. Is it wise to have a long position now? The pair bull trend is very strong .

    3. Hi,

      Thanks for your sincere reply and i appreciate it alot. It is amazing that you hold your Nzd/USD position for so long and it is near 800 pips and your stop loss is still at breakeven . There was a time whereby the kiwi rebound from 0.77 to 0.80 during October and you had ignored it !!

      I am holding NZD /USD position now and so far the floating profit is 155 pips ( the biggest pip in my trading record so far ).Will keep holding it till the strong setup is against me.

      And i always wonder how you spend only 30 minutes to finish going through all the 16 currency pairs? Each pair will only take you 2 minutes to analyze.

      And you almost reply everyone’s question . That is even amazing ! This website is very unique and you are extremely helpful. You have my respect!

    4. Hi Richard,

      You are welcome, and thank you too.

      The reason for holding the position for such a long time is that I entered based on the monthly chart, and so I have to hold it for several months, if not a few years.

      I have 25 charts on my platform now. I don’t spend even more than 10 seconds for each, because a too strong trade setup yells and it doesn’t need any analysis. I simply ignore all the other signals and setups. This is how a trader has to work.

      Thank you again for your kind words.

      Are you trading with a live account? Please tell me a little about your trading journey so far.

    5. Hi

      Initially , i start up with a scalper which uses big size lot to maximize my profit ( i had ignored the risk management ) so i lose alot of money in certain trade . I tend to close my position once it moves by 10 pips , that is very stressful since i have to monitor the 1 or 5 minutes chart for 4 to 5 hours . That is not the lifestyle i m looking for in the future. I start to think how to grab 30,50 pips. Also , i tend to hold losing position for too long when it is against me because i trade a big lots. It is very stressful when you see your account in a big red . At the same time , i buy a call option in stock and i lose a lot of money because i risk too much . Since then , i start to google about risk management and chance upon Neal ( learn to trade market ) and your website . He is more on promoting his course but two of you have the same principle : Manage risk reward ratio well and never trade smaller timeframe less than 4 hour . I figure out the math behind risk reward ratio and find it extremely useful .

      However , when it comes to live trading , the story is totally different , the EUR/ USD is very volatile , for example FOMC sentiment can move it by 200 pips . My stop loss is simply too small . I realize that the set up is based on 15 minutes chart so it is not strong enough .

      Now , i would spent 1 hour to analyze the fundamental of few countries and have a rough idea which is strong and not strong . Plus a strong price action trade set up , if they are consistent , i would go for it . Of course , there are some pair which i can’t figure out their relative strength so i just judge from strong set up .

      I deposit $6000 and it is $5350 so far for ard 1.5 months. My NZD / USD gets stopped by noise caused by non farm payroll noise since i move my stop loss to 100 pips profit while i am 180 pips . With emotion , i open 2 0.1 lots position at 0.768 and 0.772 . For EUR/ USD, i also have 2 0.1 lots at 1.24 and 1.237 since the noise activate my sell limit below the price before news. I set a stop loss to them . Well , i have to ignore news unless it is a very important news like interest rate or QE .

      I will stick to LuckScout from now on and monitor it very closely . I look back your past post and amazingly , whatever your post all comes with at least 250 pips big move ( 90% correct most of the time )

      I think psychology effect us not trained in short period of time , must make more mistake before i made it right . It is path of learning and in order to become prof . trader , i have to learn

    6. Hi Richard,

      Thank you for sharing your story.

      What I suggest you is that you stop treading with your live account for now. You have lost $650 and you want to recover it as soon as possible. This causes you to make more mistakes and risk more. Please stop trading your live account for now and follow the program I have outlined here:
      https://www.luckscout.com/become-a-profitable- -trader-in-5-easy-steps/

      Open a demo account and trade with it for a few months at least. If you repeat your success consistently at least for a few to few months, then get back to live trading, while you risk much less than usual (2%) just to practice more.

      Good luck 🙂

    7. Yes , I am too new and need to go back to demo account again. I will read the articles again . Thanks for your advice !

      Need to train my mindset and emotion more . I believe i will become a very good trader in the near future ! 🙂

  6. Hi,

    If we were to trade on weekly strong setup, should we enter on sunday when the market open or friday before the market close? But entering on friday will incur few days of swap

  7. Hi,

    If for example there’s a strong long trade setup on daily charts so it would make the price goes up for a few candlesticks even though the weekly chart is in bearish trend, would it be fine to take long positions and close it when the daily charts show bearish continuation signal (following the weekly chart)?

  8. Hi

    Thanks for your article. Everything helps me a lot! And thank you to everyone who asks a question. It helps with the learning process.

    Ted

  9. Good morning
    What is your opinion on “contrarian trading”? If 95% of traders loses money, doesn’t it make sense to trade against the herd. I’ve read some articles about the Commitment of Traders Report and the Speculative Sentiment Index. I don’t want to confuse anybody, your strategies are excellent, I just want to know your opinion whether this can be supportive of your startegies?

    1. Hi Thys,

      You are right about what you have in your mind: If 95% of the traders lose and 5% win, then with contrarian trading we should have 95% winners and 5% losers.

      This is true theoretically, but it makes problems when applied to live trading. The reason is that in order to act against what a losing trader decides, he has to make the initial decision first and then acts against it. But he forgets to do that and unconsciously makes the correct decision and goes against it. I have tested this on some traders and it didn’t work.

      What I am trying to say is that even contrarian trading needs the discipline to make the first decision and then going against it.

  10. enjoy the great articles mate . The slide in the Rubble is very noticeable here in Thailand the tourists numbers seem way down and Property developers would be hurting and a over supply is very evident ! The Thai baht is a very strong currency considering its political turmoil.
    The Aussie taking a battering and the fundamentals are not good , hopefully the trade agreement with China that could be signed off end off the month will give it a boost . Good luck to all .

  11. Hi, I am enjoying to watch your analysis in monthly and compare to my daily setups. I often Figure out lack and weakness in mine :p thank you for sharing buddy 😀

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