ACTUAL FOREX TRADING
The Essential Guide to Forex Trading
"Forex trading can be a lot of fun... If you know what you're doing! This guide will teach you EVERYTHING you need to get started with Forex trading"
THE ESSENTIAL GUIDE TO FOREX: THE BASICS
1.1 The What and Why of Forex and Forex trading
Forex is an abbreviation of Foreign Exchange. It refers to the financial market where people buy and sell currencies. Forex trading can also be called FX trading or currency trading.
Forex trading is the act of buying and selling currencies, or trading currencies, to make a profit. It follows the same principle as stock or crypto trading.
1.2 Currency Acronyms
In the Forex market, currencies are displayed as acronyms. These include:
AUD - the Australian Dollar
CAD - the Canadian Dollar
CHF - the Swiss Franc
EUR - the Euro
GBP - the British Pound (or Sterling)
JPY - the Yen
NZD - the New Zealand Dollar
USD - the US Dollar
1.3 Currency Pairs and Pricing
Currencies cannot be traded individually. They must be valued and traded against another currency, forming currency pairs. The most popular currency pairs are AUDUSD, EURUSD, GBPUSD, USDCAD, USDCHF, and USDJPY.
A currency pair consists of a base currency (the first currency of the pair) and a secondary currency (the second currency of the pair). They're priced by valuing 1 unit of the base currency against the secondary currency.
For example, let's have a look at AUDUSD (the Australian Dollar against the US Dollar). The base is the Australian Dollar. The secondary is the US dollar. If AUDUSD is priced at 0.8500, this means that 1 Australian Dollar (the base), buys 0.85 US Dollars.
Another example. USDCHF (the US Dollar against the Swiss Franc) trades at 1.1000. This means that 1 US Dollar, buys 1.10 Swiss Francs.
1.4 Pips
Currency pairs are typically priced in ten-thousandths of the secondary currency. For example, GBPUSD could be trading at 1.4512. The price is not traded at 1.45 ($1.45 for £1). The price is broken down to ten-thousandths; hence 1.4512.
These ten-thousandths are called PIPS (price interest point or point in percentage). If GBPUSD trades from 1.4512 to 1.4513, the price has moved by 1 pip. If USDCAD moves from 1.3950 to 1.3945, it has moved by 5 pips.
Yen pairs are priced a little differently. They're priced in hundredths, not ten-thousandths. For example, USDJPY may be trading at 145.79. A move to 145.81 is a 2-pip move.
1.5 Buying and Selling Currency Pairs
Traders and investors buy currency pairs when they believe prices will rise. This is called going long or being bullish.
For example, if a trader predicts that EURUSD will move higher, they are bullish on EURUSD. When they buy, or go long, EURUSD, they buy the euro and sell the US dollar. This is how trading a currency pair works: you buy one currency and sell the other. Going long a currency pair is buying the base currency and selling the secondary currency.
Traders and investors can also sell currency pairs when they believe the price will fall. They can sell currency pairs without buying them first. This means they can profit if prices fall. This is called going short or being bearish.
For example, if a trader predicts AUDUSD will move lower, they are bearish on AUDUSD. When they sell, or go short, AUDUSD, they buy the US dollar and sell Australian dollars.
Going short a currency pair is buying the secondary currency and selling the base currency.
Being able to go long and short currency pairs lets traders and investors make money in either direction. If prices are falling, you can make a profit. If prices are climbing, you can make a profit.
1.6 24 Hour Market
The Forex market can be traded 24 hours a day, 5 days a week.
1.7 Market Participants
The Forex market includes many types of traders and investors. Hedge funds, pension funds, central banks, investment banks, and professional traders are the largest participants. These are called institutional traders or investors.
Small, independent traders, i.e., you and me, are referred to as retail traders.
THE ESSENTIAL GUIDE TO FOREX: BROKERS
2.1 Forex Broker and Trading Platform Basics
You must have access to the Forex market to trade Forex. The only way to have access to the market is through a broker.
Forex brokers provide access to the Forex market. They do this via trading platforms. Retail traders open an account with a Forex broker and download the broker's trading platform. On this platform, a trader can view currency pair prices and buy and sell accordingly. Trading platforms typically also offer price charts and technical analysis tools, which we cover later on this page.
The most common trading platforms for retail traders are MetaTrader 4 (MT4), MetaTrader 5 (MT5), cTrader, and TradingView.
Here is a screenshot of a typical trading platform:
2.2 Spreads and Commissions
Forex brokers make money through spreads. A spread is the difference between the market price and the price the broker offers clients to buy and sell.
For example, USDJPY may be trading at 137.50. However, your broker lets you buy at 137.51 and sell at 137.49. This is a 1-pip spread. It is 1 pip above and below the actual price. Even though USDJPY is trading at 137.50, if you buy (go long), your entry will be 137.51. The broker pockets the difference between the market price and its quoted price.
Forex brokers can also charge a commission for each trade. Commissions are inexpensive. Some brokers offer commission-free trading. However, their spreads are typically wider to compensate.
2.3 Spread Widening
Spreads are variable. This means they change throughout the trading day.
In the USDJPY example above, the 1-pip spread isn't fixed. This means that throughout the trading day, the spreads could be tighter, say 0.5 pips, and at other times much wider, say 7 pips.
During more liquid trading hours, i.e. the European and US trading hours, spreads are tighter. During less liquid trading hours, i.e. the Asian trading hours, spreads are wider. Spreads can also widen during periods of high-impact news events.
2.4 Orders
Buying or selling a currency pair instantly at the current quoted price is a market order. However, you can instruct your broker through your trading platform to buy or sell at specific prices if the market reaches them. These are called limit or stop orders.
Once a trade (position) is open, a trading platform allows you to set an order to close the trade at a specific loss or profit. These are called stop-loss and take-profit orders.
By placing orders, you can automate your trading. This means you don't constantly need access to your trading platform. The broker will open and close trades as per your instructions.
2.5 Leverage & Margin
All Forex brokers offer leverage to their retail trading clients. Trading with leverage is also called margin trading.
Leverage lets a trader open a position with only a fraction of the trade size as a deposit. For example, I could open a GBPUSD long position worth £1,000. However, because of leverage, or margin trading, the broker may require me to fund the trade with only £50. This allows a retail trader to fund multiple positions with a small amount of capital and increases potential profits and losses.
2.6 Swap Rates & Finance Charges
Holding a position overnight triggers a swap rate. This swap rate is based on the interest rates set for each currency and the financing charges of using leverage.
Swap rates can be positive or negative. This means you'll pay or receive interest for holding the position overnight. Some traders hold currency pairs with a positive swap rate to increase profits. This is called carry trading.
2.7 Demo Trading
I understand this is a lot to take in. For new traders, the learning curve is very steep. This is why you should practice on a risk-free trading account. These demo accounts cost no money and give you a real-life trading experience by using a trading platform with virtual funds.
I suggest IC Trading. They offer free demo trading. Click on the link and open a free demo account to get started. If you have any questions about using the platform, please refer to my demo trading guide or email me (samuel@love-the-pips.com).
If you would prefer a Forex broker registered and located in the UK, I suggest Darwinex. Both brokers offer free demo trading, and I personally use both.
THE ESSENTIAL GUIDE TO FOREX:
TECHNICAL ANALYSIS
3.1 The What and Why of Technical Analysis
Your success as a Forex trader relies on your ability to predict the future direction of currency pairs accurately and to monetise those predictions. To help predict future currency pair direction, traders use technical and fundamental analysis.
Technical analysis is the study and analysis of historical prices. This is done using price charts. Trading platforms typically offer price charts for all tradable currency pairs.
3.2 Price Chart Basics
Price charts display historical prices of currency pairs. The x-axis shows dates and times, and the y-axis shows prices.
Price charts can display historical price movements from the last few minutes to the last few decades.
Here is an example of a price chart:
3.3 Price Action
Historical price movement is called price action.
Traders study price action to help them predict future price direction. This study consists of analysing previous price reversals called support and resistance, historic highs and lows, patterns formed by price action, and the current direction of price movement.
3.4 Indicators
Technical analysis also includes studying technical indicators. These are drawings on the price chart that can help analyse and signal price movements. Common indicators include moving averages and oscillators.
Here is an example of a trader's technical analysis on the USDCAD price chart:
3.5 Japanese Candlesticks
The above price charts are line charts. However, most traders analyse Japanese candlestick charts. These look a little different and are covered in other courses.
If you would like to learn more about technical analysis, take my Free Technical Analysis Course.
THE ESSENTIAL GUIDE TO FOREX:
FUNDAMENTAL ANALYSIS
4.1 The What and Why of Fundamental Analysis
Forex traders also use fundamental analysis to predict the future price direction of currency pairs.
Fundamental analysis involves studying economic news and data, which are the main drivers of the market.
New traders often prefer technical analysis. Fundamental analysis can seem impossible to learn, which can be overwhelming. However, it's often easier to learn than most traders think, and it's essential to trading. New traders who ignore fundamental analysis often regret skipping fundamental analysis later on. They come to realise that they can't predict currency movements without it.
4.2 Economic Data
Economic data is released daily and impacts the FX markets. This includes employment and unemployment data, GDP and inflation figures, interest rates, and trade, consumer, sales, and industry statistics.
Fundamental analysis studies this data to predict trends in economic activity and interest rate changes.
Trading Economics is the best free website for Forex economic data. The site offers historical data and a calendar of upcoming events.
4.3 Economic Events
Not just economic data moves currency markets. Economic events significantly affect FX rates.
Significant economic events are any events that can impact an economy. These include elections, trade wars, military conflicts, tensions between economies, referendums, trade deals, and pandemics.
To learn more about fundamental analysis, take my Free Forex Fundamental Analysis Course.
THE ESSENTIAL GUIDE TO FOREX:
FOREX SCAMS
5.1 Forex Scams: The Sad Truth
Unfortunately, the Forex industry is tainted by scams. You must be aware of several scams and countless scammers.
All scams have one thing in common. They want your money and offer nothing in return. So, the best rule of thumb is not to part with your cash until you've done your due diligence.
5.2 Broker Scams
One of the most common trading scams is fake brokers. These are scam organisations that imitate brokers. Their aim is for you to open a trading account and fund it. Any cash you deposit into the account will be gone forever. If you've been a victim of a Forex broker scam, I'm so sorry. Unfortunately, there is no way to get your funds back.
There are several things you can do to prevent being a victim of a scam broker:
#1 Ensure the broker is well-regulated. A financial body must regulate any genuine Forex broker. These regulators are often detailed in the footer of a broker's website. The best financial regulators are the FCA (UK), the ASIC (Australia), and the CFTC and NFA (US).
#2 Check the broker's website. Most broker scams have very simple websites. Compare the broker's website with official Forex brokers like CMC Markets and IG Trading. If the website looks too simplistic or amateur, the broker could be a scam.
#3 Promises of profit. Genuine Forex brokers have disclaimers and warn against potential losses. Fake brokers promote profits and sell returns.
#4 Pressure to deposit. Real Forex brokers will leave you alone. You can deposit when you want and trade with as little as you want. Scam brokers often pressure you to deposit and start trading. This includes pressure through social media messaging and phone calls.
Fake brokers don't just target Forex clients. Fake crypto brokers are also common.
If you need a genuine Forex broker, I recommend IC Trading. Also try Darwinex.
5.3 Educator Scams
Fake brokers are not your only concern. Social media is full of fake trading gurus and educators. These individuals offer educational and copy trading services but can't actually trade. Their paid content and services are often unreliable and can waste your money.
Here is how to spot a scam Forex educator:
#1 They sell a lifestyle. Fake gurus often sell a flashy lifestyle rather than real trading content. This includes showing off expensive cars and houses, telling listeners that trading requires very little commitment, i.e. they only trade 20-30 minutes a day, and travelling the world and staying in fancy hotels. These scammers are selling a false lifestyle. They are not traders and cannot teach you how to trade successfully.
#2 They have no proven results. To prove their profitable trading, scam educators publish testimonials or screenshots of trades and payouts. All of these can be easily faked. A real trader with real results can have a third party verify their trading performance, just like my verified trading performance. Common third-party verifiers include myfxbook, Forex Factory, and FX Blue.
#3 They send social media messages. Any genuine Forex educator will not contact you unless you contact them first. If you receive social media messages from educators, they are likely a scam or a scammer impersonating an educator.
#4 They oversimplify trading and show significant returns. Most scammers portray trading as easy. They usually do this by demonstrating trading strategies focused on simple technical analysis, such as price action setups and support and resistance. They often show these strategies making thousands of pounds or dollars in minutes.
THE ESSENTIAL GUIDE TO FOREX:
OTHER ITEMS
6.1 Risk Management
Once you've managed to avoid the trading scams and you have a trading account with a genuine Forex broker, there are other risks you must be aware of.
Unsurprisingly, trading has risk. Covering all these risks and managing them appropriately is a course in itself. Just like technical and fundamental analysis. For this essential guide, there are 3 high-risk factors you need to be aware of:
#1 You can lose more than your deposit. If you trade with too much leverage and overexpose your account, you can lose more than your account balance. This means you'll owe the broker money. To prevent this, keep leverage sensible (you shouldn't need more than 1:100) and educate yourself as much as possible, including trading demo, before funding a live trading account.
#2 You can lose a lot of money very fast. Because of leverage, FX trading is very high-risk, high-reward. You can make a lot of money quickly. You can also lose a lot of money quickly. Once again, educate yourself as much as possible and trade demo for as long as possible.
#3 The market can gap. The Forex market is closed over the weekend. If drastic, often unexpected news happens over the weekend, opening currency pair prices can differ greatly from closing prices, creating gaps. These gaps can open beyond stop losses and other orders, resulting in unexpected losses.
6.2 Trading Psychology
A major challenge for traders is overcoming emotional obstacles. Trading psychology is very difficult.
New traders often struggle to understand the psychological challenges of trading. However, they will eventually experience these challenges themselves.
Traders often feel fear, greed, and impatience. To stay logical and profitable, traders need to find ways to overcome these challenges.
6.3 Different Types of Brokers
The traditional Forex broker for retail traders is a CFD broker. This is the main broker type that retail traders use. The brokers recommended on this page are all CFD brokers.
If you're based in the UK, then spread betting brokers are another option. These brokers offer an easier way to open and close trades, and any profits are tax-free, making them very appealing. If you're interested in spread betting, I suggest using CMC Markets.
6.4 Expectations
Having the right expectations is crucial. If your expectations are too high, you will often be disappointed. This often leads to taking too much risk, followed by losing too much money.
Your expectations should be to create a money-making hobby or side hustle at best. Very few retail traders are full-time, and most retail traders lose money.
6.5 Have Fun!
The most important thing about trading is to enjoy it. You have a huge advantage in the beginning, as you don't rely on your trading income. Trade with a small amount of capital, learn as much as you can, and enjoy the process.
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