WHAT IS FOREX?
Forex stands for foreign exchange also known as FX. Forex market is a global marketplace for exchanging national currencies. Forex market is global worldwide trading currencies from across the globe. The largest and most liquid asset in the world. In Forex trading you are trading against other exchange rate pairs. For example US/EUR they trade against each other as an exchange pair.
Swing/ Trend Trading:
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Swing trading is a style which is centred around executing trades based on medium term market views. Swing trades are those which are normally held anywhere from several days, weeks or months. Trades which run for such periods of time are most often analysed first hand from a higher timeframe chart such as the 4 hour, daily, weekly and monthly. (More on timeframes later.)
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Swing or position traders are generally looking to trade with the near-term daily chart momentum and typically enter anywhere from 2 to 4 trades per month, on average. Certain swing trading has been described as being a type of fundamental trading as many bank and corporate fundamentals generally require several days, even weeks, to sufficiently impact the market in a way which will allow traders to make a profit.
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When you are trading in line with the overall trend, a swing trade setup on the 4-hour timeframe could be in the opposite direction to a daily trend. A trader who executes trades using a swing strategy will more often than not have a decent sized target a long side a fairly wide stop loss, thus allowing the trade to breathe. Risk management with these types of trades is vital. Swing trading is a great style for those who have other responsibilities and have limited time to spend sitting in front of the charts, a set and forget strategy that does not necessitate daily management. Specializing in both swing setups and short-term day setups. Our swing trade targets can often be anywhere up to 80-250 PIPs and is largely based on technical factors.
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This style of trading can be very profitable if you know what you are looking at and where to enter the market. A trend trader is one who waits for the market to display a significant turning point on one of the higher timeframes and take advantages of these high-probability movements by looking for entries either at the start of the trend or jumping in at a significant retracement/resting point.
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The direction of the trend is absolutely essential to trading and analysing the market. In the Foreign Exchange (FX) Market, it is possible to profit from both up and down movements, because the buying and selling of one currency is always linked to another currency e.g. BUY US Dollar SELL Japanese Yen.
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For example:
Up Trend: As the trend moves upwards the US Dollar is appreciating in value.
Down Trend: As the trend moves downwards the US Dollar is depreciating in value.
Sideways Trend: Prices are moving within a narrow range.
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In Forex you are trading the foreign exchange market, commonly known as FX, is a global marketplace for trading of one nation currency against another such as EUR vs. USD currency.
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Forex is the largest most liquid able market in the world. Trillions of dollars exchanging hands every hour of the day. Forex has no centralized location and no government authority oversees it. It's you against the banks. The forex is an electronic network of, banks, brokers, investors and individual traders. Traded through forex brokers and banks.
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The forex market determines the day to day value or exchange rate of most of the worlds currencies. When travelers exchange dollars for euros at a kiosk or bank. The number of euros is based on the forex exchange rate.
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Forex traders seek profit from the fluctuation of currency values.
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While trading currencies are list in pairs such as USD/CAD, USA/JPY and many more. The largest trading is in London, New York, Singapore, Hong Kong and Tokyo. Click here for Forex Trading Hours.
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The Forex is open 24/7 five days a week around the globe. The FX Foreign exchange market was for large companies, governments and hedge funds. Trading currencies is so easy for online traders. Traders can open an forex broker account and trade currencies. The United States is the most traded currency. Trading currency pairs that do not include the US dollars is called to as crosses.
The currencies are neither appreciating nor depreciating. There are popular sayings on wall street which you should live by as a trader. "Never go against the trend" and "The trend is your friend". Keep these phrases is mind. Below are three examples of a trending market. By looking for entries within a trending market, traders have the best chance at making a large profit on their risk. Trad- ers who continuously attempt to trade against the trend by attempting to choose the top and bottom of the market generally lose money quite rapidly.
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The three market trend methodologies explained above are the core price structures and rhythm of all markets. To successfully trade the FX market you must understand the underlying movements, rhythms and how to recognise future turning points. The markets always move within the framework of an underlying market wave (pure price action) whether it be up, down or sideways.
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Uptrend:
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An uptrend is considered to be in place when a market is making higher highs and higher lows. Once established, only buy positions are to be taken.
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An uptrend (also known as a bull trend) is identified by a series of rallies where each rally/swing exceeds the highest point of the previous rally peak. The decline between rallies ends above the lowest point of the previous decline. A series of
successive higher highs and higher lows are shown on the next page.
Downtrend:
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A downtrend is in place when a market is making lower highs and lower lows. Once established, only sell positions are to be taken.
A downtrend (also known as a bear trend) is identified by a series of rallies where each rally exceeds the lowest point of the previous rally decline. The incline between rallies ends below the highest point of the previous decline. A series of successive lower highs and lower low are shown on the above image..
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The start of an uptrend for example, is signalled when the price makes a higher low followed by a rally above the previous high (peak). Below is an example of a bullish trend in action, the turning point, higher highs, lows and reversal.
The End Of A Trend:
The end of a bullish trend is signalled by a lower high (peak), followed by a
decline below and straight through the previous low as shown below.
Either a bear trend starts at the end of a bull trend, or the currency pair will enter a counter trend stage where it will range for a while (also known as consolidation). The end of a bull trend is recognised when each successive rally fails to penetrate the high point of the previous rally. Each decline terminates at a lower point than the previous, displaying a series of successive lower highs and lower lows.
Sideways Market:
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Trading a sideways market is also known as range trading. It involves trading a market that is consolidating between obvious support {bottom) and resistance (top) levels {yellow lines). Often resulting in high probability entries with good risk-to-reward ratios, trade signals are given near to these levels where the price is likely to bounce from. Eventually, the market will find its direction and break through one of the key levels. This is displayed on the example below.
Counter trend trading :
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As you are now aware, trends do take 'breathers' and if you are a skilled trader who has the ability to recognise this, then you could quite possibly begin to successfully trade 'countertrend' move. However, this trading methodology is not advised until you have mastered trend trading. Countertrend trading is inherently more risky as at times market manipulation can print many false tops or bottoms before the real ones emerge.
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In actuality, many traders are unaware they are countertrend trading price action until they are physically in the trade and managing it. Often the speed of the uptrend can assist traders with determining the profit opportunity and odds for success, as aggressive uptrends often have equally aggressive retracements. Countertrends are short in duration and the performance of the countertrend or retracement move is very dependant upon the chart's technical timeframe.
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Traders often become entrapped and lose money when they attempt to accurately trade the countertrend paradigm. For example: buying new lows - also known as bottom fishing. This is where the trader will attempt pick the market bottoms, focusing on getting in at the low of the price action downtrend. This method is extremely risky alongside selling new highs! Traditional trading suggests waiting patiently for confirmation that the underneath support level has held and prices are moving in an uptrend with higher highs and higher lows.
Spread:
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When trading forex, you need access to the market. This access is granted by the broker, the middleman which provides the retail trader with the opportuni- ty to execute trades electronically over a wide range of currency pairs. The broker however, does indeed earn money from each trader who utilises their services most often in the form of commissions.
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In Forex trading there are two prices on a currency pair given at any time these are known as the ASK price and the BID price. The spread is the difference between these two prices and serves as the commission mark up for the broker (in PIPs). For example, when buying/ going long on a currency pair, your trade entry would be executed at the ASK price and when selling/going short on a currency pair your trade entry would be executed at the BID price.
As displayed above, the EUR/ USD (left) quotes display 1.3727(1) - 1.3729 (0) giving a spread value of 1.9 PIPs. This means that when you execute a trade, you automatically go into 1.9 PIPs negative so if the trade is a win or a loss, the broker gets paid their commission mark up regardless. In order to break even on a trade, a position must move in your direction by an amount equal to the spread.
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The most liquid and most popular currency pairs tend to have the lowest spreads and are therefore much cheaper to trade. There are also cross currency pairs which have less liquidity and much larger spreads, dependent on your broker up to around 8 PIPs+ ! Meaning they are very expensive to trade. The spread figures are in constant fluctuation and can widen as volatility picks up, especially around fundamental/economic data releases. Instead of charging commission, banks and brokers earn from the spread of every trade entered and exited.
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Cross Rate:
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A cross rate is the exchange rate between two currencies which are not official to the country in which the exchange quote is given in. For example, if an exchange rate between the Australian dollar and the Japanese yen was quoted in a British newspaper it would be considered a cross rate and if the currencies quoted did include the British pound then it would no longer be considered so.
Major forex pairs and their nicknames in the FX world:
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Currency pairs can be categorised into two main groups - 'Majors' &'exotics'. The majors are the most popular currency pairs available to trade which include; EUR/ USD, GBP/ USD, USD/ JPY, USD/ CHF, USD/ CAD &AUD/ USD. Exotic examples are as follows; CAD/ JPY, NZD/ JPY, GBP/ CAD, EUR/ NZD.
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The majors are the most popular so in turn hold the most liquidity and are much cheaper to trade in terms of spread costs. Below are the nicknames used for the major currencies in the trading world.
Leverage:
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In the world of forex trading and brokers, leverage is an important factor which needs to be fully understood as it plays a vital role in the buying power of your account. The choice of leverage is offered upon the opening of a brokerage account and is what influences your purchasing power into the market as a trader and also determines the amount of margin required for each individual trade.
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Ultimately, Leverage is something which can be customised to really gear up your account in order to execute trade positions greater than your actual margin/ balance. For example; if you have £2000 of margin in your account and a £200,000 position is opened you have leveraged the account by 100 times or 100:1. If you open a £400,000 on the other hand then the account has been leveraged 200 times or 200:1. Many amateurs step into the game with high hopes set on using high leverage in order to achieve large gains but it is important to note that leverage can magnify losses in an equal manner when used inappropriately.
In order to calculate the leverage being used on a certain trading account, you must divide the total value of your open positions by the total margin balance displayed. For example, if you have £20,000 worth of margin in your account and you open two standard lots of EUR/USO (200,000 units of the base currency) for £200,000, your leverage ratio is 10:1 (£200,000/£20,000.) If you have leveraged 400: 1 you can control a large position (£200,000) with a small amount of capital (£500).
Margin:
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Margin is the amount required to open a new Forex position, it is not a fee or a charge to your account. It is an amount set aside, from your free equity, for any new trade. With a £1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional £100,000. This allows a trader to leverage their account by up to 100 times or a le erage ratio of 100:1
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The higher the chosen leverage, the higher the available margin percentage on the tradi g account. If you open to many positions, use high lot sizes or leave a trade running in a loss (which is increasing), then the account could fall under the minimum amount required to maintain an open position. If this happens then a margin call' is likely to occur which will require more money to be deposited into the broker account or close the position totally. When the margin percentage falls very low (mostly under 50%), most brokers will automatically cut the trades in loss and you are likely to cry or smash up the computer! Which is not advised so remember to trade safe!
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When choosing to work with high leverage you obviously need to be careful and highly aware of how many positions you open at the same time, taking into consideration the balance of your account. For instance, on a 400: 1 leveraged account, 2 standard lots (£20 per PIP) would be too huge for a £2000 account as once the margin has been taken into consideration you would only have around £1300 left on your available equity (around 65 PIPs against you to wipe you out). It is wise to calculate lot sizes in accordance to money management ratios which we get to later on.