Learn FOREX Foreign Currency Trading, Free FOREX Trading Mini-Course
FOREX foreign currency trading is the largest and most liquid market in the world. In dollar terms, more money is transacted in the FOREX foreign currency market in one day than is done on the New York Stock Exchange in a month. Even if you don't know a thing about FOREX foreign currency trading, don't sweat it. You've come to the right place because the combination of your common sense and this mini-course will get you up to speed pronto.
This is what you'll learn about FOREX foreign currency trading after you read through this FOREX trading mini-course.
Our Free FOREX trading mini-course is a basic "quick-start" crash course in the FOREX currency trading market. It is specifically designed to provide the "newbie," "rookie," and "small investor" with enough real-life knowledge to get started in this new and exciting, 24 hour Global marketplace.
It's also like a FOREX currency trading bootcamp for seasoned traders, speculators and investors that are experienced in other markets, who also want to break into FOREX currency trading.
We'll briefly review quotes and spreads, pips and pip values, leverage and margin, order types, and order execution. So let's get started with some common terms used in FOREX trading, but first...
FOREX Foreign Currency Trading Glossary of Terms
FOREX - Acronym meaning "Foreign Exchange," also known as "FX"
Currency pair - The quotation structure of the FOREX currency market. FOREX trading is the simultaneous buying of one currency and selling of another aka "currency pair."
Currency pairs look like this: USD/CAD. The first currency listed is the "base" currency: (USD), the second currency, (CAD), is called the "quote" or "counter" currency. Together, they make up what is known as the "exchange rate."
Bid price - The price at which an investor can sell a FOREX currency pair. This price is lower than the ask price.
Ask price - The price at which and investor can buy a FOREX currency pair. This price is higher than the bid price.
Spread - The difference between the lower bid price and the higher ask price.
PIP - Stands for "price interest point." The PIP is the minimum price movement in a given FOREX market or currency pair. In other markets it's known as a 'tick" or a "point."
Margin - The minimum deposit required to place a trade in the FOREX market.
Mark to market - The ever-changing equity value of all open positions verses the underlying market price. In other markets, positions are priced against the market at the end of the trading day using a settlement price as in commodity futures or the closing price as in stocks and bonds.
Market order - An order to buy or sell that is executed at the prevailing market price.
Limit order - An order to buy or sell and enter the market at a specific price. Limit orders to "buy" are placed below the current market price. Limit orders to "sell" are placed above the current market price.
Stop loss order - An order to buy or sell a currency pair that limits the amount of losses incurred. Buy stops are placed above the current market price. Sell stops are placed below the current market price.
FOREX Foreign Currency Trading Mini-Course
Forex trades are done electronically which is why it's considered an Over-The-Counter market. This differs from commodity futures and stocks which can trade at a specific exchange using a centuries old system called "open outcry."
Electronic trading news update - As of this writing, all the major futures and stock exchanges are ramping up their markets to provide electronic trading platforms.
FOREX Trading Hours - The FOREX is open 24 hours a day, from Sunday at 5pm Eastern time to Friday at 4:30 pm Eastern time. Beginning with the New Zealand and Australian markets, FOREX trading flows around the globe.
The business day begins in each of the world's financial centers, moving from Sydney to Tokyo, then to London, and finally to New York. In this 24/7 environment, you can choose your own trading hours as well as respond to events immediately day or night.
Pricing and quotes - A foreign exchange quote covers a pair of currencies and is made up of two three-letter currency symbols. The following symbols represent the eight currencies that make up the pairs.
USD = United States Dollar
EUR = European Euro
JPY = Japanese Yen
GBP = British Pound
CAD = Canadian Dollar
CHF = Swiss Franc
AUD = Australian Dollar
NZD = New Zealand Dollar
The first currency listed in a pair is called the base currency, and the second is called the counter (or quote) currency. The value of the base currency is always
For example, in these pairs of "major" currencies, the US dollar is the base currency: USD/JPY, USD/CHF and USD/CAD. For these currencies, quotes are expressed as a unit of $1 USD per the counter currency quoted in the pair.
To illustrate, a quote of USD/JPY 112.89 means that one U.S. dollar is equal to 112.89 Japanese yen. On the other hand, you might see a quote for a pair where the US dollar is the counter currency, rather than the base currency. In the case of the quote GBP/USD 1.7366, the British pound is the base currency. This means that one British pound equals 1.7366 U.S. dollars.
When you see a quote going up, it means that the value of the base currency is rising, in other words, getting stronger. If a quote is going down, it means that the base currency is weakening.
Pips (ticks, or points) and Pip Values - The term "pip" stands for "price interest point." A pip is the smallest increment in any currency pair. As such, it is interchangeable with "tick" and "point." For example, in the pair EUR/USD, a movement from .8832 to .8833 is one pip (or tick, or point), so a pip, the smallest increment in this pair, is .0001.
In USD/JPY, a movement from 114.63 to 114.64 is one pip, so a pip, the smallest increment in this pair is .01.
Calculating PIP (TICK, POINT) Value - When USD is the base currency: Suppose that we are trading USD/JPY and we want to know what value of a pip in US dollars is. In calculating pip value, we will refer to the size, in this case 100,000 units of the base currency, as the "Lot Size". When USD is the base currency, the formula for calculating pip value in US dollars is:
(one pip, with proper decimal placement / currency exchange rate) x
Using USD/JPY with a move from 114.63 to 114.64 as an example, we get
the following result:
(.01/114.63) x USD 100,000 = 8.72 or $8.72 per pip
Spreads - As with all financial products, FX quotes include a bid and ask. When
it comes to forex trading, the bid is the price at which the market-maker, or "dealer," is willing to buy (and clients can sell) the base currency for the counter currency.
The ask is the price at which the dealer will sell (and clients can buy) the base currency for the counter currency. The difference between the bid and
the ask price is referred to as the "spread."
In foreign exchange, like any traded instrument, there is an immediate cost in establishing a position. To illustrate, USD/JPY may bid at 114.63 and the asking price may be 114.67.
In this example, the difference between 114.63 and 114.67 equals a spread of 0.04, or 4 "pips." This spread defines the trader's cost, which can be recovered with a favorable currency move in the market.
Leverage and Margin - One of the main reasons many traders are attracted to the FOREX is because of the leverage available in forex trading. If you are familiar with trading commodity futures contracts, you are already acquainted with leveraged trading, or trading on margin. It simply means that you are not required to put up the full value of the position.
In fact, in FOREX the word "margin" means something very different than it does in stocks. With stocks, trading on margin means that a trader can borrow up to 50% of a stock's value to buy that stock. This can be expensive because the investor must pay interest to the brokerage firm on the amount borrowed.
This is not so in FOREX trading. With FOREX, the term "margin" means the minimum required balance to place a trade. When you fund a FOREX trading account, say for $3000, the money in your account is your margin, and acts as total collateral for your trades.
To enter a trade you must make a deposit, typically 1% of the value of the position. For example, if you want to buy $100,000 of USD/JPY at 100:1 leverage, the money required is 1% of the value of the position, or $1000. The other $99,000 is collateralized with your remaining account balance. What's more, you pay no interest.
Order Types and Order Execution:
Limit orders: An order with restrictions on the maximum price to be paid or the
minimum price to be received. Often used in conjunction with profit targets.
If you are long USD/CHF at 1.4627, a limit order would be entered to
sell dollars at a profit target above that price, for example, at 1.4800.
Stop Loss orders: Order type whereby an open position is automatically liquidated at a specific price. Often used to minimize exposure to losses if the market moves against an investor's position.
If, as in the example above, you are long USD/CHF at 1.4627, a stop
loss order could be placed at 1.4549, in case the dollar falls below 1.4549.
As a rule, sell stops are filled on the bid price, and buy stops are
filled on the ask price. In the rare instance that the market gaps over a requested rate, the stop is filled at the best available price.
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