Forex Trading Course

How Currency Pairs Work

In forex, currencies are always traded in pairs. When you buy one currency, you simultaneously sell another. The first currency is called the base currency, and the second is the quote currency.

For example, in EUR/USD = 1.1000, you would need $1.10 to buy €1.00.

Types of Currency Pairs

• Major Pairs: Include USD and are the most liquid (EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD, USD/CAD, NZD/USD)
• Cross Pairs (Minors): Don't include USD but contain other major currencies (EUR/GBP, EUR/JPY, GBP/JPY)
• Exotic Pairs: Pair a major currency with a currency from an emerging economy (USD/TRY, EUR/ZAR, GBP/SGD)

The OTC Market Structure

Forex is an Over-The-Counter (OTC) market, meaning there's no centralized exchange. Instead, trading happens directly between parties through electronic networks. This decentralized structure is what allows the market to operate 24/5.

USD Dominance

The US Dollar is involved in approximately 85% of all forex transactions. This dominance is due to:

• The USD being the world's primary reserve currency
• Most international commodities priced in dollars
• The strength and stability of the US economy
• Global trade settlements often conducted in USD

Market Sessions

• Sydney Session: 5:00 PM – 2:00 AM EST
• Tokyo Session: 7:00 PM – 4:00 AM EST
• London Session: 3:00 AM – 12:00 PM EST
• New York Session: 8:00 AM – 5:00 PM EST

The most volatile and liquid periods occur when sessions overlap, particularly London-New York overlap (8:00 AM – 12:00 PM EST).

Different Methods of Forex Trading

There are several ways to participate in the foreign exchange market, each with its own characteristics, advantages, and considerations:

1. Spot Market (Most Common for Retail Traders)

• Direct exchange of currencies at current market prices
• Settlement typically occurs within two business days (T+2)
• Most accessible for individual traders through retail brokers
• Offers high liquidity and tight spreads on major pairs

2. Currency Futures

• Standardized contracts to buy/sell currencies at a future date
• Traded on regulated exchanges (CME, ICE)
• Fixed contract sizes and expiration dates
• Popular with institutional traders and hedgers

3. Currency Options

• Contracts giving the right (not obligation) to buy/sell at a specific price
• Used for hedging and speculative strategies
• Limited risk for option buyers (maximum loss is premium paid)
• More complex strategies available (straddles, strangles, spreads)

4. Currency ETFs

• Exchange-traded funds that track currency movements
• Trade like stocks on regular exchanges
• Good for longer-term currency exposure
• Examples: FXE (Euro), FXY (Yen), UUP (US Dollar Index)

Key Trading Concepts

• Bid Price: The price at which you can SELL the base currency
• Ask Price: The price at which you can BUY the base currency
• Spread: The difference between bid and ask prices (broker's profit)
• Slippage: The difference between expected and executed price

Choosing a Trading Method

Consider these factors when deciding how to participate:

• Your capital size and risk tolerance
• Time horizon (short-term vs. long-term)
• Level of expertise and available time for analysis
• Regulatory protections important to you

The Basics of Position Direction

In forex trading, you can profit from both rising and falling markets. Understanding long and short positions is fundamental to forex trading.

Going Long (Buy)

When you "go long" or "buy" a currency pair, you are:

• Buying the base currency (first currency in the pair)
• Selling the quote currency (second currency in the pair)
• Expecting the base currency to strengthen against the quote currency
• Profiting when the exchange rate increases

Example: Going long EUR/USD at 1.1000 means you buy Euros and sell Dollars. If EUR/USD rises to 1.1100, you profit.

Going Short (Sell)

When you "go short" or "sell" a currency pair, you are:

• Selling the base currency (first currency in the pair)
• Buying the quote currency (second currency in the pair)
• Expecting the base currency to weaken against the quote currency
• Profiting when the exchange rate decreases

Example: Going short EUR/USD at 1.1000 means you sell Euros and buy Dollars. If EUR/USD falls to 1.0900, you profit.

A Helpful Analogy

Think of it like trading baseball cards:

• Long: You buy a card expecting its value to increase, then sell it later at a higher price.
• Short: You borrow a card and sell it immediately. Later, you buy it back at a lower price, return it to the lender, and keep the difference.

Key Points to Remember

• Every forex trade involves simultaneously going long one currency and short another
• Your profit/loss depends on the direction the exchange rate moves
• Short selling is as common and straightforward as going long in forex
• Always consider both directions when analyzing potential trades

Practical Application

Before entering any trade, ask yourself:

• Do I expect the base currency to strengthen or weaken?
• What economic factors support my directional view?
• Where will I exit if I'm wrong (stop-loss)?
• Where will I take profits if I'm right (target)?

Understanding Pips

A pip (Percentage In Point) is the smallest standard unit of price movement in forex. For most currency pairs, a pip is the fourth decimal place (0.0001).

• Standard Pip: 0.0001 for most pairs (EUR/USD moving from 1.1000 to 1.1001 = 1 pip)
• Japanese Yen Pairs: 0.01 for JPY pairs (USD/JPY moving from 110.00 to 110.01 = 1 pip)
• Pipette: A fractional pip, which is 1/10th of a pip (0.00001 for most pairs)

Calculating Pip Value

The monetary value of a pip depends on:

• The currency pair being traded
• The size of your position (lot size)
• The exchange rate at the time

Formula: Pip Value = (One Pip / Exchange Rate) × Lot Size

Example: For EUR/USD with a standard lot (100,000 units), 1 pip = $10

Understanding Lot Sizes

Lot size determines how much currency you're trading:

• Standard Lot: 100,000 units (1 pip ≈ $10 for USD pairs)
• Mini Lot: 10,000 units (1 pip ≈ $1 for USD pairs)
• Micro Lot: 1,000 units (1 pip ≈ $0.10 for USD pairs)
• Nano Lot: 100 units (1 pip ≈ $0.01 for USD pairs)

Leverage and Margin

Leverage allows you to control a larger position with a smaller amount of capital. It's expressed as a ratio.

• 50:1 Leverage: Control $50,000 with $1,000
• 100:1 Leverage: Control $100,000 with $1,000
• 500:1 Leverage: Control $500,000 with $1,000

Margin is the amount of money required to open and maintain a leveraged position.

Formula: Required Margin = Position Size / Leverage

⚠️ The Dangers of High Leverage

Warning: While leverage can amplify profits, it equally amplifies losses. A small adverse move can wipe out your entire account.

• Higher leverage = higher risk
• You can lose more than your initial deposit
• Professional traders often use low leverage (5:1 to 10:1)
• Always use proper risk management regardless of available leverage

Understanding Spreads

The spread is the difference between the bid (sell) and ask (buy) price. This is how brokers make money.

• Tight Spreads: Major pairs typically have spreads of 0.5-2 pips
• Wide Spreads: Exotic pairs can have spreads of 10+ pips
• Variable Spreads: Can widen during volatile market conditions or news events

Technical Analysis Fundamentals

Technical analysis involves studying historical price data and chart patterns to predict future price movements.

Key Technical Concepts

• Support and Resistance: Price levels where the market historically finds buying (support) or selling (resistance) pressure
• Trend Lines: Lines connecting highs or lows to identify market direction
• Moving Averages: Smooth out price data to identify trends (SMA, EMA)
• Candlestick Patterns: Visual representations of price action that can signal reversals or continuations

Popular Technical Indicators

• RSI (Relative Strength Index): Measures overbought/oversold conditions (0-100 scale)
• MACD: Shows relationship between two moving averages
• Bollinger Bands: Measures volatility with upper and lower bands
• Fibonacci Retracements: Identifies potential support/resistance levels

Fundamental Analysis

Fundamental analysis examines economic factors that influence currency values:

• Interest Rates: Higher rates typically strengthen a currency
• GDP Growth: Strong economic growth is bullish for a currency
• Inflation: Affects purchasing power and central bank policy
• Employment Data: Indicates economic health
• Trade Balance: Exports vs imports affect currency demand
• Political Stability: Uncertainty can weaken a currency

Risk Management Strategies

• The 1% Rule: Never risk more than 1-2% of your account on a single trade
• Stop-Loss Orders: Automatically exit losing positions at predetermined levels
• Take-Profit Orders: Lock in gains at target levels
• Risk-Reward Ratio: Aim for at least 1:2 or 1:3 risk-reward on trades
• Position Sizing: Calculate lot size based on your stop-loss distance and risk tolerance

Building a Trading Plan

A successful trading plan should include:

• Your trading goals and time commitment
• Specific entry and exit criteria
• Risk management rules
• Which currency pairs you'll trade
• Trading sessions and times
• Rules for reviewing and adjusting your strategy

Common Mistakes to Avoid

• Overtrading: Taking too many trades without proper setups
• Overleveraging: Using too much leverage relative to account size
• No Stop-Loss: Trading without defined risk limits
• Revenge Trading: Trying to recover losses with impulsive trades
• Ignoring the News: Not being aware of major economic events