Global Money Markets Fundamentals Series: Forex Trading
How To Make Money With Forex (Foreign Exchange) Trading
What is Forex trading?
How does Forex trading work?
In the Forex market, you buy or sell currencies.
Trading in the Forex market is very simple, and the principle is similar to trading in other financial markets. So, if you have experience trading other financial markets (such as the stock market), then you will learn quickly.
Don't worry if you don't have trading experience in other financial markets, through our courses, you can quickly learn how to trade Forex.
for example:
for example:
An exchange rate is the ratio of one currency to another. For example, the U.S. dollar to Swiss franc exchange rate indicates how many U.S. dollars can buy one Swiss franc, or how many Swiss francs are needed to buy one U.S. dollar.
How to Read Forex Quotes
Currencies are always quoted in pairs, such as GBP/USD or USD/JPY. The reason they are quoted in pairs is that in every Forex transaction, you buy one currency and sell the other at the same time.
Here's an example exchange rate for British Pounds to U.S. Dollars (GBP/USD):
The first currency to the left of the slash is called the base currency (in this case GBP) and the second currency to the right is called the quote or quote currency (in this case USD). In this example, you have to pay $1.51258 to buy 1 pound; when you sell 1 pound, you will get $1.51258.
The base currency is the "base" for buying and selling.
If you buy EUR/USD, it means that you are buying the base currency, EUR, and selling the quote currency, USD. Buy the pair if you believe the base currency will appreciate relative to the quote currency, and sell the pair if you believe the base currency will depreciate relative to the quote currency.
Long/short (long/short)
First, you need to decide whether you want to buy or sell.
If you want to buy (which means buying the base currency and selling the quote currency), you want the base currency to appreciate in value, so you can sell it at a higher price. In trading jargon, this is called "going long" (long=buy).
If you want to sell (which means selling the base currency and buying the quote currency), you want the base currency to depreciate so that you can buy it back at a lower price. In trading jargon, this is called "shorting" (short=sell).
Bid, Ask & Spread
All Forex quotes include two prices: the buying price (Bid) and the selling price (Ask). Generally speaking, the buying price is lower than the selling price.
The bid price is the price at which your broker is willing to buy the base currency in exchange for the quote currency. This means that the ask price is the best price for you, the trader, to sell into the market.
If you want to sell a currency pair, your broker will buy it from you at the bid price (Bid). The ask price is the price at which your broker sells the base currency in exchange for the quote currency. This means that the ask price is the best price you can buy from the market.
In addition to Ask, there is another name for the selling price: offer price.
If you want to buy a currency pair, the broker will sell it to you at the Ask price.
The price difference between buying and selling is the spread, also called the spread.
In the EUR/USD quote above, the bid price is 1.34568 and the ask price is 1.34588. Let's take a look at how the broker makes it easy for you to trade in the market:
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Image credit: babypips
Know when to buy and when to sell a currency pair
In the examples below, we will use fundamental analysis to help us decide whether to buy or sell a particular currency pair.
Each currency belongs to a country (or region). Therefore, Forex fundamental analysis mainly focuses on the general condition of the country's economy, such as productivity, employment, manufacturing, international trade and interest rates.
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Image source: pixabay
margin trading
When you go to the grocery store to buy eggs, you're not buying just one egg, you're buying a dozen.
In Forex trading, we will not buy or sell 1 euro, but 1000 euros (1 micro lot), 10000 euros (1 mini lot) or 100000 euros (1 standard lot), depending on your broker and the type of your account.
Maybe you will ask: "I don't have enough money to buy 10,000 euros, can I still trade?"
you can! Trade on Margin!
Margin trading is a simple term that means borrowing money to trade. With margin trading, you can open a $1,250 or $50,000 position with $25 or $1,000. You can make relatively large transactions with less initial capital, and it is very convenient and fast.
Next let us explain:
You think that market signals indicate that GBP/USD will appreciate; you open a new position of 1 standard lot (100,000 GBP/USD), buy GBP with 2% margin, and wait for the exchange rate to rise. When you buy 100,000 units of GBP/USD at a price of 1.50000, you are buying 100,000 GBP worth 150,000 USD (100,000 units of GBP * 1.50000 GBP). If the margin requirement is 2%, then you need $3,000 in your account to open a position ($150,000*2%). You Can Now Control £100,000 With Only $3,000!
The market moves in line with your prediction and you decide to sell your existing position. You close your position at 1.50500 and make about $500.
When you close your position, your margin is refunded to you and your profit or loss is calculated and this profit or loss is credited to your account.
With the development of Forex retail trading, some brokers even allow traders to conduct customized transactions. This means that you no longer need to trade in 1 micro lot, 1 mini lot or 1 standard lot. If 1542 is your lucky number, you can even use it as the amount you want to trade every time.
rollover
For positions you hold at the broker's "cutoff time" (usually 5:00 pm EST), you will need to pay or earn daily overnight interest, the term is called "inventory fee", how much is the inventory fee Depends on the size of your position.
If you don't want to earn or pay an inventory fee, just close your position by 5:00pm EST.
Since every currency transaction involves borrowing one currency while buying another, inventory fees are part of the Forex transaction.
Borrowing currency requires paying interest. If the interest rate of the currency you bought is higher than the interest rate of the currency you borrowed, then the net interest spread is positive (such as USD/JPY), then you will earn interest, that is, the storage fee is positive. Conversely, if the spread is negative, you have to pay interest.
Note that many brokers adjust rollover rates based on different factors such as account leverage, interbank lending rates, etc. Please ask or inquire with your broker for information on rollover rates and lending fees before opening a position.
Here are the interest rates of major central banks around the world to help you calculate spreads on major currency pairs:
How much is a pip (pip) in Forex
Here we need to do a little math.
You may have heard the words "pip", "pipeters" and "lot", now we will explain what they are and show how to calculate their value.
Please learn these knowledge patiently, because this is the knowledge that all Forex traders must master.
Before you are familiar with pip and learn to calculate profit and loss, please do not place an order hastily.
The unit of measurement that represents the change in value between two currencies is called a "pip".
The unit of measurement that represents the change in value between two currencies is called a "pip".
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Most currency pairs are quoted to 4 decimal places, but there are some exceptions such as the Japanese Yen currency pairs (they are accurate to 2 decimal places).
Image credit: babypips
What is Pipette?
image description
Image credit: babypips
or simplified as follows:
In trading software, the number representing a tenth of a pip usually appears in the upper right corner of two larger numbers.
How to calculate the value of a pip?
Since each currency pair has its own relative value, it is necessary to calculate the pip value for a specific currency pair.
In the example below we will use quotes with 4 decimal places. To better explain calculations, exchange rates will be expressed as ratios (i.e. 1.2500 EUR/USD will be written as "1 EUR / 1.2500 USD")
Example: USD/CAD=1.0200
USD/CAD=1.0200 is interpreted as 1 US dollar to 1.0200 Canadian dollars (or 1 USD/1.0200 CAD)
(The change in the value of the quote currency) multiplied by the exchange rate = pip value (in base currency)
[.0001 CAD]×[1 USD/1.0200 CAD]
or simplified as follows:
When you calculate the pip value of your position, how much account funds does one pip mean for your account equity?
In this example, if we were trading 10,000 USD/CAD, then for every 1 pip change in the exchange rate, the position would change by approximately $0.98 ($10,000 x 0.00009804 USD/CAD).
We use "approximately" because as the exchange rate changes, so does the value of each pip.
Calculate the pip value in your account
When you calculate the pip value of your position, how much account funds does one pip mean for your account equity?
This calculation method is the simplest, just multiply or divide the found pip value by the exchange rate between the account currency and the relevant currency.
This calculation method is the simplest, just multiply or divide the found pip value by the exchange rate between the account currency and the relevant currency.
The above calculations will be automatically calculated by the trading software, but it is always good to know their internal logic.
Taking GBP/JPY = 123.00 as an example, the pip value of 0.813GBO is converted into the pip value of US dollars, and the GBP/USD exchange rate of 1.5590 is used as the ratio calculation. If the currency to be converted to is the denomination currency of the exchange rate quote, simply divide the found pip value by the corresponding exchange rate ratio:
.813 GBP per pip / (1 GBP/1.5590 USD)
or:
[(.813 GBP) / (1 GBP)] x (1.5590 USD) = 1.2674 USD per pip move
So, in the case of GBP/JPY, for every 0.01 pip movement, the value of a 10,000 unit position changes by approximately $1.27.
If the currency to be converted to is the base currency in the exchange rate quote, simply multiply the PIP value found by the conversion rate ratio.
The above calculations will be automatically calculated by the trading software, but it is always good to know their internal logic.
What is Lot in Forex trading
Suppose we will trade 100,000 units, which is the standard LOT, now let's calculate how it affects the pip value:
Some brokers represent quantities in "lots", while others use actual currency units.
As you probably already know, the change in value of one currency relative to another is measured in points (pips), which are very small percentages of a currency's unit of value.
In order to take advantage of this small change in value, you need to trade large amounts of a particular currency, magnifying your profits or losses.
Suppose we will trade 100,000 units, which is the standard LOT, now let's calculate how it affects the pip value:
USD/JPY, exchange rate 119.80: (.01/119.80) x 100000=8.34 USD/point
If USD is used as the quote currency instead of the base currency, the formula is slightly different:
If USD is used as the quote currency instead of the base currency, the formula is slightly different:
As the market changes, so will the pip value, depending on the currency you are currently trading.
GBP/USD, the exchange rate is 1.8040: (0.0001/1.8040) x 100000=5.54 x 1.8040=9.99416 10 USD/point
Here are example pip values for EUR/USD and USD/JPY:
Your broker uses different ways to calculate the pip value in batches, but no matter how they do it, they can tell you what the pip value is for the currency you are trading at that particular time.
As the market changes, so will the pip value, depending on the currency you are currently trading.
What exactly is leverage?
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Minimum trade margins vary by broker. In the above example, a leverage of 100 times means that for every $100,000 traded, $1,000 is required as a margin. The $1,000 is not a fee, but a deposit that you get back when you close the deal.
The amount of leverage you use depends on your broker and your own affordability.
Typically, brokers require a deposit, also known as a "margin". Once you have deposited money with your broker, you can start trading. Brokers will specify how much margin is required for each trading position. For example, the leverage ratio is 100:1, and you want to trade a position worth $100,000, but you only have $5,000 in your account, you can still open a position at this time, and your broker will require $1,000 as a margin. Of course, any losses or gains will be deducted or added to the remaining funds in your account.
Minimum trade margins vary by broker. In the above example, a leverage of 100 times means that for every $100,000 traded, $1,000 is required as a margin. The $1,000 is not a fee, but a deposit that you get back when you close the deal.
Now that you know how to calculate pip and leverage, let's see how profit and loss are calculated. Suppose we buy USD and sell CHF.
Assuming the USD/JPY trade is currently the only open position in your account, you must maintain your account equity above $1,000 at all times in order for the trade to proceed. If USD/JPY plummets and your losses take your account equity below $1,000, the broker's risk control system kicks in and automatically closes your trade to prevent further losses. This is a safety mechanism to prevent the account balance from becoming negative.
How do I calculate profit and loss?
Now that you know how to calculate pip and leverage, let's see how profit and loss are calculated. Suppose we buy USD and sell CHF.
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Bid-Ask Spread
Remember, when you open or close a position, you are affected by the spread in the bid and ask quotes. When you buy a currency, you use the ask price (Ask); when you sell, you use the bid price (Bid).
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