eBook-Ultimate-Forex-Trading-Guide-for-Beginners-25-March-20

Ultimate Forex Trading
Guide for Beginners

Francois J Oosthuizen

Ultimate Forex Trading Guide for Beginners

Forex Trading: The Ultimate Beginner's Guide Yes, experts have invented many stock market-based
products over the years to help investors diversify
Meta description: If you are a beginner Forex trader their risks. For example, there are equity-based mutual
seeking to become an expert, here is the Ultimate funds, exchange-traded funds (ETFs), and options
Forex Trading Guide to help you realise your goal. designed to help them take advantage of both the ups
and downs of the stock market. You could choose to
Introduction devote time to understand all these, but, really, do you
have enough time for that?
As far as the economy is concerned, there will always
be good and bad times. On October 28, 2019, the New But there is Forex. The Forex market can help you take
York Stock Exchange, recorded the best single-day advantage of both upward and downward movements
performance since 1950 and the best year-till-date of the economy. Besides, it has the highest potential,
(YTD) performance of the year. For the day, the S&P of all financial markets, to beat inflation. And as you
500, the most tracked market index, inched up by an read ahead, you will discover that the Forex market, in
average return of 0.54%. fact, can even be the ultimate solution to all your
financial woes.
That sterling performance rode on the back of the
United States hinting that it would be keeping the What is the Forex Market?
peace with China. And, 78% of the 202 companies of
the index component companies that had declared The Forex market, short for Foreign Exchange Market,
their financial results at that time, had posted solid is the largest financial market in the world. It is a global
earnings result to beat analysts’ expectations. marketplace where currencies are exchanged for one
another. In its entirety, it has over $5 trillion changing
Conversely, with the S&P 500 shedding 0.51% on the hands in it every day.
average, the same stock market had earlier recorded
its worst performance of the year on October 19.
Following from this, it can be inferred that although
the stock market has, overall, been doing impressively
well over the years, its swinging yearly performance
means that it has not always been able to deliver the
10% annual average return.

In fact, for some years, investors can expect to lose up
to 2-3% of their purchasing power as a result of
inflation. What is even serious is that the effects of the
wild up and downswings of the market can be even
more disastrous for beginner investors. Therefore, this
category of investors might want to look for alternative
financial markets for greater returns.

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Ultimate Forex Trading Guide for Beginners

However, in comparison, the New York Stock In addition to its size, the Forex market is also known
Exchange (the NYSE), the largest stock market in the for its notorious trait of “never sleeping.” Closing only
world, clears just $22.4 billion worth of transactions on weekends, it is open 24 hours a day and 5 days a
every day. Evidently, the Forex market is indeed huge! week!

And here is how it works. If you live in the United The Genesis of the Forex Market
States, your currency in which all your transactions are
conducted is the USD. However, if you are going to Currency trading is almost as old as man. The Greeks
Europe, Germany specifically, you will have to change and Egyptians are known to have transacted goods
your currency for that being spent in your country of using silver and gold coins over 2,000 years ago.
destination. However, currencies were not freely traded for the first
time until roughly 1500 years after in Amsterdam.
At airports, you would notice a currency exchange
desk. There, you can give up your dollars for euros, In 1900, to guarantee the value of its currency, the
the currency of Germany. In that case, you will be said United States decided to fix it to a gold standard. Then
to sell your dollars and buy euros. This transaction is World War II came and devastated the economies of
essentially a Forex one as you are giving up your Europe and Japan. Consequently, the members of the
dollars to get some euros! global economy saw the need to establish a common
ground. So, through the Bretton Woods Accord, they
Exchange rates are not static. Depending on the decided to peg the values of their currencies to the
interaction of a wild range of economic and value of the U.S dollar which had been pegged to the
geopolitical factors, currencies gain or lose in value value of gold.
against one another from time to time. At the time of
your exchange, you could get more euros for your Soon, however, continuing with the gold system
dollars. Other times, you could get less. became impossible. The U.S. had been printing
money at an alarming rate to finance its debt and a
Then, after spending time in Berlin and you want to serious inflationary problem was setting in. To protect
return home, you will have to go through a similar the value and integrity of their currencies by avoiding
process to change your remaining euros to dollars at the impending inflationary crisis, the foreign
the airport. Depending on the same factors earlier governments attacked the peg, when, on August 15,
mentioned, you could be getting more or less dollars 1971, President Richard Nixon moved the U.S dollar off
for your remaining euros. the gold standard. Nixon's step culminated in
currencies eventually floating freely. And the resulting
However, it is important to note that the Forex market free-floating system gave them the ability to rise or
is mostly famous for its speculative segment, even fall in value based purely on the interactions of the
though the segment accounts for only 6% or economic forces of demand and supply.
approximately $400 billion of the overall market
trades. Participants of this segment are known as the
retail Forex traders, and they seek to largely profit
from the intraday fluctuations in exchange rates.

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Ultimate Forex Trading Guide for Beginners

Consequently, the modern Forex market, with its Every Forex transaction is quoted in pairs. That is,
abundant opportunities to profit, was birthed. there must be two currencies before any Forex
Although it is still clear that the market can be erratic, transaction can occur. When you buy a currency in
its participants have been able to devise two effective anticipation of a rise in its value, you must
ways — fundamental and technical analyses — to simultaneously sell another. Based on this
approach it. Fundamental analysis is the study of arrangement, every Forex transaction is made up of
those factors that move it by influencing the supply the base and quote currencies.
and demand of currencies. These factors include
inflation and interest rates, the balance of payments, ©Babypips.com
government debt, and political stability, among others.
The base currency is the first currency in the pair. It
On the other hand, technical analysts seek to interpret represents the currency gaining or losing in strength
the action of price on charts and predict its movement. against the other, the quote/counter currency.
As a result, they use tools such as candlestick chart Consequently, it is the “basis” for every order — buy or
patterns, technical indicators such as Simple Moving sell — that you place. That is, for example, if the GBP is
Average, Moving Average Convergence/Divergence gaining against the USD, you buy the GBP/USD pair.
(MACD), and Relative Strength Index.
On the other hand, the quote currency is important
Despite being a controversial practice, there are because it is the currency in which the exchange rate
traders that combine both methods of analysing the is quoted. For example, when you say that the
Forex market in the hope of making more informed exchange rate of GBP/USD is 1.32471, you are saying it
trading decisions in it. costs 1.32471 dollars to buy 1 GBP. Based on the
volumes of transactions they record, currency pairs
Understanding the Basic Lingo of the Forex Market have been categorised into majors, minors, and
exotics.
Like every other human endeavour, the Forex market
has its terminologies. As a beginner trader, an
understanding of this basic lingo will go a long way in
helping you become successful in the long run.

Currency Pairs

What is traded in the Forex market? Money in the form
of currencies. In fact, there would not have been the
Forex market if currencies were static against one
another. It is the fluctuations in the values of
currencies against one another that create
opportunities to trade.

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Ultimate Forex Trading Guide for Beginners

Major Currency Pairs EUR Crosses GBP Crosses JPY Crosses

The most liquid and widely traded in the world, the EUR/CHF GBP/CHF EUR/JPY
major currency pairs are those pairs that have the USD
in them. They constitute the largest share of the Forex EUR/GBP GBP/AUD GBP/JPY
market, accounting for close to 85% of all its trades.
They are; EUR/CAD GBP/CAD CHF/JPY

EUR/USD EUR/AUD GBP/NZD CAD/JPY

USD/JPY EUR/NZD AUD/JPY

GBP/USD EUR/SEK NZD/JPY

AUD/USD EUR/NOK

USD/CHF For clarification, the SEK and NOK symbols represent
the Swedish Krona and Norwegian Krone respectively.
NZD/USD, and
Finally, there are the exotic pairs. These currency pairs
USD/CAD are made up of one major currency and the currency
of an emerging economy such as Brazil, Mexico,
Those currency pairs that do not contain the USD are Russia, India, Indonesia, or South Africa. The problems
known as the minors, crosses, or cross-currency pairs. with exotic pairs is that because they are not widely
The most frequently traded cross-currency pairs are traded, the transaction charges on them are high.
derivatives of the three currencies, EUR, GBP, and JPY.
Hence, there are EUR crosses, GBP crosses, and JPY Examples are:
crosses.
USD/BRL (USD/Brazilian Real)

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Ultimate Forex Trading Guide for Beginners

USD/MXN (USD/Mexican Peso) For example, in the EUR/USD quote, 1.1051/1.1053, the
bid price is 1.1051 while the ask price is 1.1053. What
USD/SAR (USD/Saudi Arabia Riyal) this means is that to sell 1 euro to the broker/market
maker, you will need $1.1051 while to buy 1 euro from
From those examples, you should have noticed that the broker/market maker, you will need $1.1053.
there is a convention by which currencies are written.
The first two of the three letters represent the country Bid-Ask Spread
while only the last stands for the currency itself.
Forex brokers make money on each completed trade
Pip principally through the two ways: bid-ask
spread/commission and market making. When it is
The pip is the unit of measurement in the Forex through the bid-ask spread, the broker profits by
market. It is the smallest amount by which the taking the difference between the bid price and the
exchange rate of any currency pair can change. Since ask price. For example, in the earlier EUR/USD quote,
you will be measuring your profits and losses in it, the 1.1051/1.1053, the difference between the bid price
pip is a concept you must grasp. and the ask price is 2. This is the spread.

This is how it works. Imagine you buy an item for ©Babypips.com
$1.5000 (since in the Forex market, currencies are
quoted up to 4 decimal places). The last number of The major currency pairs, being the most traded, often
the decimal place represents the pip, and, depending have the lowest spreads. Exotic pairs have the largest.
on the direction of your trade, you either make or lose Then, the relationship between spread and
money when the price moves. commission is that brokers that charge commissions
usually have lower spreads. Conversely, spreads are
When the price moves from 1.5000 to 1.5005, for higher with brokers that do not operate a commission-
instance, it will be said to move 5 pips. Except for based fee structure.
Japanese pairs which are quoted only in two decimal
places, every other exchange rate is carried to four
decimal points.

Bid and Ask Price

Forex brokers always have two prices for each
currency pair. These are the bid and ask prices. The
bid price represents the price at which the
broker/market maker is willing to buy from traders; on
the other hand, the broker/market maker seeks to sell
at the ask price, also known as the offer price.

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Ultimate Forex Trading Guide for Beginners

Market making is a controversial practice. This is so So, how do you decide the lot size to trade? That
because Forex brokers who use it take the opposite decision will depend on your investment style, the
end of their clients' trades. That is, clients must lose size of your trading capital, and your expected return.
before market-making Forex brokers can earn. Nevertheless, for beginners, the micro lot account
type, because of its low risk, is best advised.
Lot Size
Margin Trading
Stock trading is straightforward: you like Amazon
shares? You place an order for a thousand units of it. Forex trading has a low barrier to entry mainly
However, it is not as simple for Forex trading. In fact, because of margin. Margin is a provision that enables
when you trade in the Forex market, you are buying Forex market participants to deposit only small
contracts, also known as lot sizes, of each country's amounts when opening trading accounts with brokers.
currency. As a result, the margin is the minimum amount that a
Forex trader must deposit with his broker.
A lot size is simply the number of quote currency units
you buy or sell. And there are four types to choose A certain percentage of the deposited amount in your
from. They are: account is set aside as the initial margin requirement
for each trade your place. The percentage size is a
Standard function of the currency pair being traded, the lot size,
and the market price. Margin requirements can be as
Mini low as $50 and as high as $100,000 depending on the
broker.
Micro
Margin and leverage are highly correlated. The latter is
Nano the ratio of the amount you are using on a transaction
to the required deposited amount, the margin. The
The standard and mini lot sizes, respectively, are advantage of leverage is that it helps Forex traders to
made up of 100,000 units and 10,000 units of the control large positions with small monetary
quote currency. On the other hand, micro and nano requirements.
account sizes consist of 1,000 and 100 units
respectively. On a standard lot account, a move of 1 Different brokers offer different leverage ratios.
pip equals $10. For a mini lot, it is $1.00. For micro and However, many provide up to 1:1000.
nano accounts, it is 10 and 0.1 cents respectively.

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Ultimate Forex Trading Guide for Beginners

Cons and Pros of Forex Trading The Forex market offers more flexibility in terms of
trading due to its long active hours. It is open 24 hours
Forex trading has its pros and cons. While it is a day from Sunday afternoon to the following Friday
recommended for even traders of other markets to try evening. As a result, you can technically buy and sell
out, some cautions are warranted based on the any time of the day.
peculiarities of the Forex market. Hence, as a beginner
trader, here are the benefits of Forex trading that you However, the same cannot be said for any other
should watch out for. financial market. The stock market, for example, is
closed at weekends and is only open for some
Low barriers to entry specified hours during the weekdays.

Perhaps, the greatest benefit of the Forex market is its Less analysis
low barriers to entry. In fact, nowadays, you do not
have to be rich to start participating in it. While a large Analyses are essential irrespective of any financial
trading capital will boost your returns, you can, market you decide to trade in. In fact, the rule is that
however, start Forex trading with as low as $100. you must be an analyst first before you become a
trader. However, financial markets have differing
Hence, do not be afraid to start trading Forex. You analysis requirements.
need far less in capital that you probably think.
Stock traders have a higher chance of suffering with
Profitability analysis overload compared to their Forex
counterparts. Over 2,000 companies are listed on the
The Forex market is the most profitable financial New York Stock Exchange (NYSE) alone. Add to these
market in the world. It is the only financial market from the thousands of mutual funds and ETFs, too, and you
which you can easily profit irrespective of the direction will agree it can be a hell lot of work.
of the economy of your country or that of the world at
large. Diversification

You think the US economy is weakening against that Diversification decreases risk. While most financial
of Europe? Buy the euro, sell the dollar. While you can planners often recommend only the triad of mutual
also profit from a falling stock market through funds, cash, and bonds, currencies, surprisingly, too,
shorting, it must be noted that this process is never as are one more viable vehicle for investment portfolio
straightforward as it is in the Forex market. diversification.

Flexibility So, when you engage in Forex, you can see it as a
diversification tool. Whenever growth in the other
instruments that make up your portfolio stalls,
currencies will be there to pick up the slack.

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Ultimate Forex Trading Guide for Beginners

Nevertheless, too, the following are the risks of Forex With a small amount, you can start trading Forex. And
that you should work to guard against: with leverage, you can boost your gains. However,
margin trading and leverage, the major reasons for the
Scams huge profit potential of Forex trading, paradoxically, is
its greatest undoing.
Scams are as prevalent in the Forex industry as
opportunities are abundant in it. The alarming fact is Irresponsible use of leverage can result in substantial
that Forex scams come in different shapes and sizes, losses. In fact, it is not uncommon for reckless, highly
in different forms! Still, however, you can be aware of leveraged Forex traders to have their accounts
the crucial ones to easily avoid. completely wiped out during highly volatile market
moves. So, what’s the way out of this risk? Use
First, there are scam brokers. These are brokers with leverage reasonably.
shady regulatory claims. They present a safe and well-
regulated facade while, in fact, they are a fraud. Country Risk
Through intensive promotions and campaigns, they
secure undiscerning folks to sign up for accounts with The Forex market is highly prone to country risks. Most
them. countries, especially the developing ones, indirectly
peg the values of their currencies to the USD.
Often, they are discovered by their unsuspecting Consequently, to maintain exchange rates, they need
victims after they have deposited their funds. to have substantial foreign reserves denominated in it.
Sometimes, those fraudulent brokers can take their
well-orchestrated shady operations further by So, whenever there is devaluation, because of, for
allowing their victims to trade. But when it now comes example, balance of trade deficits, investors can catch
to withdrawing their gains, they show them who they a negative whiff about the country, resulting in
are. massive selloffs of its currency. Considering this risk,
you should, therefore, be involved only in countries
In addition to broker scams, there are also the scams whose currencies are stable and well-structured.
of self-acclaimed Forex gurus and Forex courses.
While there are genuine Forex teachers and highly Tips to Succeed in the Forex Market
effective Forex courses, you should still be careful in
the considerations of your options. As risky as the Forex market is, there are some tips
that, if well applied, can boost your chances of
Leverage Risk succeeding in it. Some are discussed here.

The Forex market is so lucrative because, among
other things, its participants can leverage their trades.
As explained earlier, margin trading is the most
powerful tool that makes Forex easy to start and more
probable to profit with.

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Ultimate Forex Trading Guide for Beginners

Know yourself and understand your needs. Evolve a comprehensive trading plan

“Know thyself” is a popular maxim. It has gained Having identified your trading needs and goals, you
usefulness across diverse spheres of human should then use the knowledge gained about yourself
endeavour. Interestingly, it finds application in Forex to develop a comprehensive trading plan. Often it is
trading, too. In fact, any trader seeking to succeed in said that he who fails to plan plans to fail. In Forex
the Forex market must first abide by it. trading, that is no less true.

Know thyself, dear Forex trader. What are your trading The plan should contain your goals and expectations
goals? Why do you want to trade Forex? To diversity and should highlight your strategy for approaching the
your portfolio? To create an alternative stream of market. Will you be a fundamental-based trader? Do
income. Or, as a desperate, unemployed individual? you want to be basing your trading decisions mainly
Perhaps, you are attracted to Forex trading because of on technical analysis, or a combination of both?
its promise of financial freedom and location
independence. Importantly, how do you intend to be managing risks?
For every pip you want to gain, how many are you
Also, what is your risk profile? That is, how much do willing to risk?
you tolerate risk? Answering those questions is
important in helping you formulate a sound trading Use a safe and secure Broker
strategy and style that will be peculiar to your needs.
Newbie, beware. The greatest undoing of most
Get Coached by Experts beginner traders (and even a few established ones) is
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Forex trading requires knowledge. There is so much to important factor you must consider when you want to
learn and the learning curve is very steep. As a choose a broker. And the good news is you can find
beginner Forex trader, you must be committed to out the credibility of any broker through diligent
mastering the approaches to analysing the market. research.
These are fundamental and technical analyses. Also,
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Ultimate Forex Trading Guide for Beginners
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Ultimate Forex Trading Guide for Beginners

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retirement funds, insurers, administrators, and market
infrastructures. There you have it, the Ultimate Guide to Forex Trading
for beginners. At this stage of your trading career,
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