Preparation for FX Leaders Trading Course

Forex Trading Strategy Guide – a Key Point Quick Overview

1. ☑️ Glossary
2. ☑️ Introduction to the global Forex market
3. ☑️ History of Forex Trading Market
4. ☑️ What do we trade?
5. ☑️ Forex Market Structure and Size
6. ☑️ Advantages of Forex Trading
7. ☑️ Tax Implications
8. ☑️ Currencies vs. Stocks
9. ☑️ Key Forex Trading Players Reviewed
10. ☑️ The importance of opening a Forex Trading Demo Account
11. ☑️ How to open a free Demo Account

Glossary

• Forex (FX): The foreign exchange market is where you buy and sell different world currencies.
• Currency Pair: You don’t trade a single currency; you trade pairs. For example, EUR/USD means you’re trading Euros against US Dollars.
• Base Currency: This is the first currency in the pair (e.g., Euro in EUR/USD).
• Quote Currency: This is the second currency in the pair (e.g., US Dollar in EUR/USD).
• Bid Price: This is the price at which a dealer is willing to buy currency.
• Ask Price: This is the price at which a dealer is willing to sell a currency.
• Spread: The difference between the bid and ask price. It’s the cost of your trade.
• Pip: This is the smallest price movement in a currency pair. It’s usually the last decimal place.
• Lot: This is the standard unit for trading currency.
• Leverage: This lets you control a larger position with a smaller amount of money. It can amplify both profits and losses.
• Margin: This is the money you need to put up to open a trade.
• Position: This is the amount of a currency pair you owe (long) or owe (short).
• Long Position: You buy a currency pair, hoping its value will rise.
• Short Position: You sell a currency pair, hoping its value will fall.
• Profit and Loss (P&L): How much money you’ve made or lost on a trade.

Placing Your Orders

• Market Order: You buy or sell at the current market price.
• Limit Order: You set a specific price to buy or sell. The order only executes at that price or better.
• Stop-Loss Order: This automatically closes your position if the price moves against you by a certain amount. It limits your potential loss.
• Take-Profit Order: This automatically closes your position when it reaches a specific profit level.

Understanding the Market

• Fundamental Analysis: Looking at economic news and events to predict currency movements.
• Technical Analysis: Studying price charts and patterns to predict future prices.
• Support and Resistance: These are price levels where the market has previously turned around.
• Trend: The overall market direction (upward, downward, or sideways).
• Indicators: Tools like moving averages or RSI that help analyze price charts.

Managing Your Risk

• Risk: The chance of losing money.
• Risk Management: Strategies to protect your trading capital.
• Position Sizing: Deciding how much to risk on each trade.
• Stop-Loss Orders: Used to limit potential losses (as mentioned earlier).
• Take-Profit Orders: Used to secure profits (as mentioned earlier).

Other Important Terms

• Liquidity: How easily you can buy or sell a currency pair.
• Volatility: How much a currency pair’s price moves.
• Correlation: How two currency pairs move about each other.
• Diversification: Spreading your investments across different currency pairs to reduce risk.
• Hedging: Protecting an existing position from losses.
• Swap: The interest rate difference between two currencies.
• Rollover: Extending the maturity of a forex position.
• Demo Account: A practice account to learn without risking real money.

Introduction to the Global Forex Market

What is Forex?

Forex is a fancy term for trading currencies. It’s like a giant global market where people buy and sell money from different countries. Imagine a world where you can exchange dollars for pounds, euros for yen, or any other combination of currencies. That’s Forex!

Why is Forex Important?

Forex is super important because our world is connected. People travel, businesses trade, and money constantly moves between countries. Forex helps make this happen smoothly.

How Does Forex Work?

Let’s use a simple example. Imagine you’re going on vacation to Europe. It would be best if you converted your US dollars into euros to spend there. When you do this, you’re participating in Forex!

The price of one currency compared to another is called an exchange rate. For example, if you see that $1 is equal to €0.90, it means you can get 90 cents worth of euros for every dollar.

Forex is Huge! Forex is the biggest market in the world! More money is traded on Forex daily than in all the stock markets combined. It’s a massive market with lots of opportunities.

History of Forex Trading Market

Until the 1970s, the Forex market did not act like an enhanced, modern market, reacting to changes in supply and demand. From the 1970s onwards, this all changed. The market became global, and rates fluctuated in response to market forces. Over the years, the Forex market grew until it reached its current size.

Nowadays, the Forex market is so huge that no one can move it by themselves, no matter how much volume they are trading. Large institutions – such as investment banks and hedge funds – do not affect the Forex market. Even central banks have a hard time shifting their currencies.

In the past, the only real forces in the market were big commercial ones such as banks and big firms trading according to their business needs (for example, a company would hold Japanese yen if they had business activity in Japan). Today, things are different: Forex is extremely popular with private traders, both large and small. Since the late 1990s, the game’s rules have changed, thanks to the Internet revolution.

Banks, forex brokers, and financial companies now offer comfortable, simple, online forex trading platforms that let ordinary people (medium and small players) trade the Forex market for themselves.

What do we trade?

First, we need to get used to trading currencies, not physical goods, in Forex. Currencies are goods like any other, but when you trade forex online, you don’t see or touch the money until you withdraw the profit from your account. The idea behind buying currency is very simple. If you believe that a currency’s value will rise, you buy it with another currency and hold it until you no longer believe it will rise further.

Buying and Selling Currency Pairs

If you think a currency’s value will fall, you sell it. Whether you buy or sell, you exchange currencies – buying one currency and selling another (e.g., buying the dollar and selling the euro).

Understanding Forex Pairs

When you buy a forex pair, you always buy the first currency alongside the second one. This means that you are selling the second currency. For instance, if you buy USD/JPY, you are buying the dollar and selling the Yen.

It is the same when you sell a forex pair; you always sell the first currency and buy the second. (base currency (the first currency in a pair) and the quote currency (the second currency)).

Currency Pairs as Competing Teams

Currency instruments are always traded in pairs. Sometimes, they attack. Think of currency pairs as two teams competing against each other. When you trade forex, you’re betting on which team (currency) will win. You always have two currencies going head-to-head.

• One currency is trying to be stronger than the other.
• The value of one currency goes up and down compared to the other.

It’s like watching a tennis match. Sometimes, one player wins, and sometimes, the other doesn’t. In forex, this back-and-forth movement creates opportunities to make money.

Example of Currency Pair Trading

Example: If you think the US dollar (USD) will be stronger than the Euro (EUR), you will buy the USD/EUR pair. This means you’re betting on the US dollar winning against the Euro.

Symbols and Currency Pair Codes

Each instrument is indicated by a three-letter code. Three-letter codes represent currency pairs. The first three letters represent the base currency, and the following three letters represent the quote currency.

Example: EUR/USD: Euro (base currency) / US Dollar (quote currency).

Types of Currency Pairs

Currency pairs are classified into major, minor, and exotic categories based on their trading volume and market liquidity.

Major Currency Pairs

These are the 7 most traded currency pairs in the world:

• EUR/USD: Euro vs. US Dollar
• USD/JPY: US Dollar vs. Japanese Yen
• GBP/USD: British Pound vs. US Dollar
• USD/CHF: US Dollar vs. Swiss Franc
• USD/CAD: US Dollar vs. Canadian Dollar
• AUD/USD: Australian Dollar vs. US Dollar
• NZD/USD: New Zealand Dollar vs. US Dollar

Minor Currency Pairs (Crosses)

These pairs do not include the US dollar:

• EUR/GBP: Euro vs. British Pound
• EUR/JPY: Euro vs. Japanese Yen
• GBP/JPY: British Pound vs. Japanese Yen
• AUD/NZD: Australian Dollar vs. New Zealand Dollar
• EUR/CHF: Euro vs. Swiss Franc
• GBP/CAD: British Pound vs. Canadian Dollar

Exotic Currency Pairs

Exotic currency pairs, also known as emerging market currencies, involve currencies from developing economies. These pairs typically exhibit lower liquidity than major and minor pairs, meaning wider spreads and lower price transparency can occur.

• USD/ZAR: US Dollar / South African Rand
• USD/TRY: US Dollar / Turkish Lira
• USD/MXN: US Dollar / Mexican Peso
• USD/BRL: US Dollar / Brazilian Real
• USD/RUB: US Dollar / Russian Ruble

Understanding the different types of currency pairs and how they work is crucial for successful forex trading. By recognizing the dynamics of major, minor, and exotic pairs, you can make more informed decisions and develop strategies to take advantage of market opportunities.

Forex Market Structure and Size

Imagine the forex market as a vast, bustling global marketplace. Unlike a regular store with one boss making all the rules, the forex market has no single ruler. It’s a free-for-all where anyone can play!

Who’s shopping here? Everyone, from small investors to giant banks and even governments, buys and sells different world currencies. This market never sleeps; it’s open 24 hours a day, seven days a week.

What’s being sold? Mainly pairs of currencies. Think of it like trading apples for oranges. You can trade US dollars for Euros or Japanese Yen for British Pounds. Because you’re always trading two currencies at once, the total value of all currencies is double that of all the individual currencies, equalling 200%. That’s why when we talk about how much is traded, the numbers might seem a bit strange.

The US dollar is the king of this market. It’s the most popular currency, used in over 85% of all trades. The Euro, at 40%, and the Japanese Yen, at 18%, are also big players.

But there’s more to the market than these top dogs. Countries like Brazil, Turkey, and Eastern Europe are also involved, although their currencies are traded less often.

So, remember:

• The forex market is enormous and always open.
• People from all over the world buy and sell currencies.
• We trade currencies in pairs, so the total value doubles the individual values.
• The US dollar is the most important currency.

The Forex market is like a thrilling rollercoaster that never stops! It’s open 24/7, with ups and downs happening every second. Imagine a global playground where anyone can join the game, from casual players to high rollers.

With information pouring in from all corners of the world, you can ride the waves of profit potential anytime, day or night. Whether you’re a full-time trader or just looking to make some extra cash from your couch, Forex offers a world of opportunity.

Advantages of Forex Trading

There are many advantages to trading currencies.  Forex trading is like a never-sleeping, worldwide game of tag. You can play anytime, anywhere! It’s open 24/7, so you can join the fun whenever you like.

Best of all, you don’t need a huge pile of cash to start. Even a small amount can get you in the game. And guess what? There are no bosses or middlemen. You’re the captain of your trading ship!

The Forex market is so big it’s like trying to move an ocean. No one person or group can control it. It’s a fair playing field for everyone. Plus, you can buy and sell super-fast currencies without waiting around.

Ready for the exciting part? You could win big! Even small bets can lead to huge payouts. It’s like finding hidden treasure. Let’s dive deeper into how to find that treasure in the next chapter!

Tax implications

Forex trading money can be taxed. This means you must usually pay tax if you make money trading currencies. The exact rules depend on where you live.

Usually, this applies to withdrawing tax from your bank account (as it is seen as an income). However, you can move your money from one trading platform to another without tax implications. But you may be charged a withdrawal fee from the current platform where you initially started your trading

Important things to remember:

• The money you make is often taxed.
• Losses might help you pay less tax.

In addition, Keep track of everything! Write down all your trades to show the tax office.

Currencies vs. Stocks

Let’s look at the advantages of the Forex market compared to stock markets:

Note the enormous difference between Forex and stock market volumes.

While the media prefers to cover stock markets such as NASDAQ and NYSE rather than Forex these markets are tiny when compared to the Forex market (Imagine all the stock markets in the world combined. The Forex market is even bigger!

It’s like comparing a small pond to a whole ocean. Even though you hear more about stock markets on the news, the Forex market is the biggest.

Think for a moment about stocks and goods.

Let’s assume you have decided to trade stocks. The variety of stocks is so ridiculously large – on the NASDAQ alone, there are almost 4,000 companies registered; on the LSE (London Stock Exchange), there are another 2,000 companies! How do you figure out which stock to choose? You can get a headache even thinking about it!

Forex is much simpler –just a handful of the main currency pairs to choose from. (Imagine trying to choose a single candy from a huge candy store with thousands of different kinds. That’s like picking a stock to trade. There are so many companies to choose from, and deciding which one to buy can be hard.

Forex is different. It’s like choosing between a few different types of chocolate. There are fewer options, which makes it easier to focus on.)

Stock markets close every afternoon, and the Forex market is open 24/5.

There are many advantages to this, such as immediate order execution. The Forex market is also much more reactive to dramatic events than stock markets because continuous trading hours allow traders to respond instantly. There is no room for surprises or massive reactions following dramatic events outside trading hours (as can be the case with stocks).

Reactions are always in real-time, live. (Imagine a store that’s only open during the day. That’s like the stock market. You can only shop during certain hours. Now imagine a store that’s open all day and night, every day. That’s like the Forex market. You can shop anytime you want! Because the Forex market is always open, you can buy and sell things immediately without waiting.

And when something big happens, the Forex market reacts super-fast. There are no surprises because everyone knows about it at the same time.

No force can manipulate the market.

Brokers and financial companies cannot control the market by raising and reducing the commissions we have to pay to activate our positions. The bottom line is that traders do not pay fees.

Unlike other markets, no person or company can control Forex prices. This means everyone has an equal chance to make money. Brokers can’t change the rules to make it harder for you to win. It’s like playing a game where everyone follows the same rules.

As opposed to stocks, in Forex, you can also earn money in falling markets.

It is very simple – whenever the value of one currency in a pair goes down, the value of the second currency goes up! To be precise, it is also possible to make profits out of impairments in the stock market by selling and buying “Shorts” (used to capitalize on an expected decline in the security’s price), but we relate to natural market conditions without manipulations.

Remember, a constant “struggle” between the 2 currencies making up the pair. Selling one instrument means buying the other. (Think of a seesaw: When one side goes down, the other goes up. So, even if one currency loses value, you can still make money by betting on the other to win.)

It’s like trading cards. If one card loses value, the other card becomes more valuable.)

Let’s summarise the major advantages the Forex market has over the Stock market:

Key Forex Trading Players Reviewed

The Forex market is like a giant playground with many different people playing. No one person or group is in charge of the whole thing. Let’s meet the main players:

Central Banks

• Who are they? The government’s money managers.
• What do they do? Control interest rates, print money, and sometimes buy or sell currency to influence its value.
• Example: The Federal Reserve (Fed) in the United States.

Each country has its boss (central bank) in charge of money. They decide how much money is made and how much it costs to borrow, and sometimes they even buy and sell money to keep things fair. These bosses greatly impact what your money is worth compared to other countries’ money.

When there’s a big problem with money (like in 2008), the boss (central bank) can do things to help fix it, like making it cheaper to borrow money.

Benchmark Interest Rates

Here’s the updated table with benchmark interest rates as of October 14, 2024:

Commercial Banks

• Who are they? Big banks like Citibank or Bank of America.
• What do they do? Buy and sell currencies for customers, businesses, and other banks. They also make money by trading currencies themselves.
• Examples: JPMorgan Chase, Citigroup, Barclays, JP Morgan, UBS, Deutsche Bank, and BofA.

The biggest and most significant group in this category is the commercial banks. These banks set the tone in the Forex market. The amounts of capital switching hands inside the banking system (called Interbank) are astronomical! They set the exchange rates for the market’s supply and demand.

Commercial companies

• Who are they? Big banks, you know, like Chase or Barclays.
• What do they do? They take care of your money when you save it in an account. They also lend money to people and businesses. They buy and sell currencies for their customers.
• Example: If you want to buy a house, you might borrow money from a bank to pay for it.

When they do business in other countries, they buy and sell different kinds of money. For example, a big tech company might need more Euros to buy parts from Europe. When many companies do this, the price of the Euro goes up.

It’s like going to a store and suddenly finding everyone wants the same toy. The price of the toy goes up because everyone wants it!

Smart traders watch what these big companies do and make money by guessing how prices will go.

Hedge Funds

• Who are they? Companies that invest large amounts of money for themselves or others.
• What do they do? They trade currencies to make a profit. They can sometimes move the market because they trade with a lot of money.
• Example: Goldman Sachs, BlackRock.

They use people’s money to make even more money by buying and selling currencies fast. It’s like playing a video game where you must be quick and smart. They want to make a lot for those who gave them money to invest.

Retail Traders Brokers

• Who are they? Companies that connect retail traders to the Forex market.
• What do they do? Provide trading platforms, access to currency prices, and the ability to execute trades.

They make money through spreads (the difference between the buying and selling price) and sometimes commissions.

• Example: A company like Meta Trader or Interactive Brokers.

All the Forex trading companies offer trading platforms to small and medium-sized traders worldwide. They are called brokerages. There are hundreds of regulated Forex brokers, offering the possibility to trade with almost any amount of capital anywhere on the globe (as long as you have an Internet connection) without having to use the services of the banks.

Retail Traders

• Who are they? Individuals who trade currencies for profit.
• What do they do? Buy and sell currencies through online brokers.
• Example: You and me!

Private investors like you are trading Forex to create profits and a second income for themselves. This way, they can increase their capital. They take advantage of the fact that they can trade Forex anytime, even during or after work, and from anywhere.

The importance of opening a Forex Trading Demo Account

Most of our recommended trading platforms allow new traders to open a ‘Demo Account  (also called ‘  ‘Practice Account’)

A demo account is like a practice field for forex trading. It lets you try different strategies and get used to trading without risking real money.

Here’s why it’s important:

• Learn the Ropes: You can explore the trading platform, understand how orders work, and get a feel for market movements without losing money.
• Test Trading Strategies: Try different trading ideas and see what works best.
• Manage Risk: Practice managing your money and setting stop-loss and take-profit orders.
• Build Confidence: Gain experience and confidence before using real money.
• Avoid Mistakes: Learn from errors without losing money.

Even experienced traders use demo accounts to test new strategies or platforms. It’s a valuable tool for everyone. Demo trading holds zero trading risks!

We recommend you open a demo account with one of our recommended brokers and use it to practice everything you learn throughout the course before depositing your own money.  Try to see it like learning to drive a car: it is nice to have a good instructor, but until you take the wheel and practice for yourself, you still won’t know how to drive…

We recommend selecting the best and most popular brokers in the world. These brokers will allow you to open practice accounts on their platforms free of charge, and we will also guide you through the process.

 Once ready, you can open a proper account and start trading for real. Trust us, nothing is more fun and exciting than using your new knowledge to make money from suitable investments! Forex offers the highest money-making potential in the world. You need to learn how to implement it, which is why we are here!

Necessary: Take a couple of minutes and open a practice account. It will be very helpful along the way. Remember that the effort you put in now will translate into potential profits later!

How to open a free Demo Account

In Chapter 2 – First Steps in Forex Trading, we will elaborate more on “Choosing the right broker.” There, you will get a detailed explanation of how to choose the right broker for your needs, plus additional tips and recommendations. But there’s no rush! There’s still a lot of ground to cover before you open a real account.