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The Ultimate Beginners Forex Guide

  1. What is the Foreign Exchange Market
  2. Who Are the Market participants?
  3. What is a pip in forex
  4. Margin & leverage
  5. Candlesticks
  6. Types of analysis


What Is Forex?


The Forex, also known as the Forex Exchange Market, is a globalized market. Buyers & sellers, commercial entities, speculators and multinational companies come together via a decentralized exchange. According to the BIS, the daily turnover is 6.6 trillion. Yes, trillion with a T! This is up from 5.1 trillion 3 years ago!


A decentralized exchange(OTC market) is a market where there is no single location where orders are routed through. Whereas the futures or stock market has an exchange where the prices are routed or quoted through. 


Stock Exchanges

  • NYSE
  • NASDAQ
  • CSE
  • BSE

Futures Exchanges

  • CME
  • CBOT
  • NYMEX


In Forex Markets, retail traders are getting quoted from their broker/ECN.  These Electronic Communication Networks are attached to a liquidity provider and that’s where they receive prices from. Liquidity providers are connected to the interbank network. 


Liquidity provider --> Broker/ECN -->YOU


Who Are The Market Participants? 

The majority of the Forex market is composed of Central Banks, Sovereign wealth funds, hedge funds, institutional investors, multinational companies and last but not least, retail traders! Each participant has different objectives using the market.

What are these reasons?

  • Hedging currency risk
  • Interest rate risk
  • Speculation
  • Portfolio diversification. 

Multinational companies are affected by a currency's appreciation/depreciation. For instance, an appreciating dollar will hurt companies who are making income and transactions overseas. Take a look at what Apple CEO Tim Cook said about revenue growth , "Our results would have been even stronger, absent fierce foreign exchange volatility."




What Causes Forex Markets To Move?

Currency markets are global markets and many catalysts influence how these markets move. 

What are some of these market movers?


  • Central Banks
  • Capital Flows
  • Speculators
  • Growth Forecasts
  • Economic indicators


 Market participants make investment & trading decisions based on fundamental data and macroeconomic events going on around the world. 


Perilous times affect the markets negatively. You will see investors & traders, corporations, hedgers react accordingly to this data. Check out an Impressive in depth breakdown of the Forex market movers.


The asset, Forex, lives all around us in the world and has real life implications. You have all shopped at businesses who have been affected positively or negatively from currency fluctuations and have used the Forex market. 



How Do Traders Assess Markets?

There are two main types of analysis when it comes to understanding where a currency could be headed. The two are:

  • Fundamental
  • Technical Analysis

Fundamental Analysis is the understanding of macroeconomics and how it correlates to asset classes. Traders assess economic data, political/Geo-political issues, capital flows, and central bank actions to find intrinsic value in the market.

Technical Analysis uses candlestick patterns, trend lines, support & resistance, and chart patterns. 

When getting into trading, you'll experience these 2 different types of analysis. One type of trading will instantly help you scale in your trading business. It's the only way traders see value in the market. Our experts discuss the brilliant reasons why THIS is the way to trade


Candle sticks and Charts

You are working your way towards having a colossal amount of basic Forex knowledge and resources to help you as you progress. 

A price chart is a visual representation of where prices have been(historical) and where prices are currently. To assist you in reading price, you can analyze candlesticks. 

Candlesticks show you where prices opened, closed and the high & low for that particular time frame.





Traders also use a line chart which is exactly as it sounds. A line chart will display only the close price for the time frame. 

Line charts go off the closing price for that time frame!



Margin and Leverage

Margin and leverage are vital topics when it comes to trading. Using leverage properly can be extremely rewarding.

Leverage can also be extremely detrimental to your portfolio if you are over leveraged.



Lets jump deeper into what the two are!

Leverage is the use of borrowed money in hopes to increase profits. When you’re on leverage you have more capital to trade with than your initial deposit. 

Sounds brilliant, right? Well it’s also a double edge sword. With reward, comes just as much risk!

Many brokers offer different leverages. 

  • 25:1
  • 50:1
  • 100:1
  • 500:1
  • It can go all the way to 1000:1


The format XX:1 implies that for every $1 the broker will provide you xx amount. For example:

50:1 leverage would imply that for every $1 in your portfolio, your broker will provide you with $50 of trading capital. If you deposited $5,000 into your portfolio you would have $250,000 in buying power. 

Margin is a deposit to open a trading position which must be available inside your broker.  Margin is expressed as a percent and the more margin you put down, the less leveraged you are.  

When you’re using leverage, you must put a “down payment” to open a position, A.K.A Margin.

Imagine you were at the bank getting a loan for a dream house. You would be required to put a deposit down on the house. Margin in Forex is identical, but with FX you get the deposit back after you close the position!

The more margin you put down, the less leveraged your position is.

Currency Pairs

A currency pair is exactly as it sounds. Its two currencies weighted against each other. By weighing a currency against another, markets get a better understanding of the strength or weakness of that currency. 

The only way to assess the strength/weakness of a currency is to compare it to another. An issue when it comes to pairs is the counter party risk involved

When you are looking at a currency pair, you will see xxx/xxx. On the left side you will have the Base currency and on the right you have the Quote.

The base currency is ALWAYS equivalent to 1

The quote currency is quoting you how much it will take to get you one unit of the base. 

Price interest point, or Pip, is how traders profit Forex trading. A pip is equal to 1/100th of a 1%(one one-hundredth of a percent). 




What Is a Pip In Forex?

Price interest point, or Pip, is how traders profit Forex trading. A pip is equal to 1/100th of a 1%(one one-hundredth of a percent).


The smallest way to measure the movement of a currency pair is called a pipette. To make it easy, let's just focus on pip.


Its important to note that 1 pip is different for whatever the quote currency is. For pairs with jpy in them, one pip is equal to .01 or the second decimal place. The rest of the pairs have pips equal to .0001.


Depending on your position sizing, the amount of pips will determine your profit. The more a currency moves and goes in your direction, the bigger your profit will be. 


Position sizing & Lot Size

Now we are getting to the money! In Forex Trading you place lot sizes which determine how much you will make per pip. In stocks you buy shares, but in Forex you are buying lots. A lot is equal to a specific amount of currency.

If you buy/sell a standard lot of the Eur/usd, you’re buying/selling 100,000 units of the base currency. 2 standard lots is equal to 200,000.

If you don’t have leverage, you wouldn’t be able to control 100k units of currency. Unless you had at least 100k in your portfolio




Brokers In the Forex Industry

To be able to place positions, you will need to find a reliable broker. Hundreds of brokers saturate the FX market and can be overwhelming. 


Many entice naive individuals with high leverage, bonuses and minimum deposits.


It’s important to understand what a broker is and how they operate.


A broker can be thought of as an intermediary that allows you to buy & sell foreign currency. They provide liquidity to markets to facilitate trade to retail Forex traders. They are essentially connecting you to the inter bank network. 


A quality broker is regulated by quality rating agencies, has superb customer service, liquidity providers and team!


If you can’t search LinkedIn and see the brokers team(CEO, analysts, sales, customer support), It is best to avoid them. We have a deep relationship with Blueberry markets due to their legitimacy and experience in the Forex industry. This is an amazing example of full transparency when it comes to brokers. Dean Hyde is the managing director at BBM and you can even go check out his LinkedIn. You should be able to do this with the broker you are using.



Why? LinkedIn adds a sense of credibility and shows the broker is a legitimate business, with good practices. It’s full transparency! You can see Apple, Coca Cola, BMW, and Facebook CEO’s and team. Why wouldn't you want to see your brokers? Especially since you’re trusting them with your hard earned money.

Conclusion

Forex trading requires a lot of actionable education and guidance to truly see profitability. The guide has given you giant boost in the right direction with the basics and external resources. Take this information and use it as you continue your journey in Forex. Our blogs attached in the guide will also be of great assistance since we will be going more in depth about important topics.


Posted 
April 12, 2020
 in 
Forex Basics

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