Fx for Beginners eBook

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Disclaimers

Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.

There is considerable exposure to risk in any foreign exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of a currency pair.

Forex and CFD trading is leveraged, meaning that a small price movement in your favour can result in a high return on the deposit requirement placed for the bet, but a small price movement against you may result in substantial losses. This could result in being required to deposit additional funds to maintain your position. If you fail to meet any margin requirement, your position may be liquidated and you will be responsible for any resulting losses. To manage exposure, employ risk–reducing strategies such as ‘stop–loss’ or ‘limit’ orders. It is important to note that when trading, increasing your leverage will increase your risk. Additionally, contingent orders are not guaranteed and will not always necessarily minimise your risk. Contracts for Difference (CFDs) are not available to US residents.

Any opinions, news, research, analysis, prices, or other information contained in this book are provided as general market commentary, and do not constitute investment advice. QuestradeFX is not liable for any loss or damage, including without limitation, any loss of profi t, which may arise directly or indirectly from use of or reliance on such information. QuestradeFX has taken reasonable measures to ensure the accuracy of the information in this book.


FOREX TRADING FOR BEGINNERS

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FOREX TRADING FOR BEGINNERS

TABLE OF CONTENTS

INTRODUCTION TO FOREX 1

WHAT IS FOREX? 2

LAYING THE GROUNDWORK 3

PLACING THE TRADE 9

ANALYSING THE MARKET 16

DEVELOPING A STRATEGY 19

AVOIDING COMMON MISTAKES 21

GLOSSARY OF TRADING TERMS 24


CHAPTER 1: INTRODUCTION TO FOREX 1FOREX TRADING FOR BEGINNERS

INTRODUCTION TO FOREX

You’ve already made your fi rst Forex trade...sort of

You’re heading to Australia for two week’s holiday. Along with your swimmers and sunscreen, chances are you also brought along some cash to exchange into Australian Dollars upon arrival. You stop at the currency exchange window, hand over £500, and get back $1,000. But then you end up using your charge card for all the Fosters, Rugby League games, and other Aussie treats—you still have the $1,000 at the end of the week. You decide that you might as well exchange those dollars back into pounds before heading home, and you fully expect to receive your £500 back. But you don’t! The man at the window hands you back £600. Why?

Well, it seems that during the time you were enjoying the beach in Australia, the exchange rate between the British Pound and the Aussie Dollar changed. When you arrived, the rate for the GBP / AUD was 0.5000, or $1,000 was equal to £500. By the time you left, the British Pound had decreased in value and the Australian Dollar had increased. The rate was 0.6000, or $1000 was equal to £600. So the weakened GBP caused you to gain £100 in the exchange. On the other hand, this same move would have meant a loss for your Australian counterpart who was traveling—and exchanging money—in the opposite direction.

In its simplest form, this is what foreign exchange trading, or Forex, is all about.

CHAPTER 1


CHAPTER 2: WHAT IS FOREX? 2FOREX TRADING FOR BEGINNERS

The foreign exchange market, or Forex for short, is a worldwide network of currency trading. Much like the stock markets trade stocks, the Forex market provides for the trading of world currencies. Traders all over the world take part by buying and selling currencies at all times of the day, attempting to benefi t from the ever–changing exchange rates. For the most part, Forex is a speculators market. Approximately 90% of all daily transactions are speculative in nature, while hedgers and foreign trade account for the remainder.

Because the Forex market’s foundation is the exchange rate between global currencies, its traders are found all over the world. The uniqueness of this market’s global reach provides for characteristics not seen in other markets. Chief among these, the Forex market is open 24 hours a day, from Sunday 10 p.m. GMT to Friday 10 p.m. GMT; it is even open on most holidays. The availability of an “always open” market is a big factor in drawing in traders, who can essentially trade whenever time permits. This is much different than other markets, where strict hours dictate when trading can occur.

The Forex trading week begins on Sunday at approximately 10 p.m. GMT, about the same time that a normal business week is getting underway in New Zealand, Australia, and Japan. The market then stays open all week, 24 hours a day, until Friday afternoon at 10 p.m. GMT, when New York traders exit their offi ces for the weekend. In this six–day period we witness a never–ending cycle of market sessions following the sun around the world from Sydney to Tokyo to Dubai to Moscow to London and fi nally New York.

With such a global reach, the Forex market attracts a lot of attention from traders around the world. Due to the number of active traders, the Forex market is the most traded market in the world. It is not uncommon to see worldwide daily Forex volume exceed $3 trillion. This high liquidity provides specifi c benefi ts. It allows the market to absorb large institutional transactions without signifi cantly affecting prices, creating a more level playing fi eld for large and small traders.

WHAT IS FOREX?CHAPTER 2

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With QuestradeFX, traders can trade 40+ currency pairs.

CHAPTER 3: LAYING THE GROUNDWORK 3FOREX TRADING FOR BEGINNERS

Introduction to Currency Pairs

Just as the name implies, a Forex trade involves an exchange of foreign currencies. More specifi cally, when a trade is executed, a simultaneous purchase and sale are made. For example, if you wanted to exchange US Dollars for British Pounds, you would be buying British Pounds by selling US Dollars. Thus, every Forex transaction involves a pair of currencies, so when deciding which pair to trade, you must think not only about which currency to buy or sell, but what currency to do so against. For every currency that goes up in value, there is another currency that is going down.

Most Forex traders—especially new ones—typically narrow their scope and trade one or more of what are considered to be the “Major Currency Pairs”, which are shown on the following table.

LAYING THE GROUNDWORKCHAPTER 3

http://www.questrade.com/trading/forex_margin.aspx

http://www.questrade.com/trading/forex_trading.aspx



The fi rst thing you might notice is that the US Dollar appears in each pair. While no longer the most valuable currency in the world, the US Dollar still occupies a powerful place in the global economy and is the primary currency of international trade. Trading in the major currency pairs accounts for nearly 75% of all Forex transactions.

Pairs that do not contain the US Dollar are referred to as “Cross Currency Pairs”, or crosses. The most actively traded crosses are listed below.

MAJOR CURRENCY PAIRS

CROSS CURRENCY PAIRS

SYMBOL NAME NICKNAME

EUR / USD Euro–Dollar Euro

USD / JPY Dollar–Yen Yen

GBP / USD Sterling–Dollar Sterling or Cable

USD / CHF Dollar–Swiss Swissy

AUD / USD Australian–Dollar Aussie

USD / CAD Dollar–Canada Loonie

NZD / USD New Zealand–Dollar Kiwi

SYMBOL NAME

EUR / CHF Euro–Swiss

EUR / GBP Euro–Sterling

EUR / JPY Euro–Yen

GBP / JPY Sterling–Yen

AUD / JPY Aussie–Yen

NZD / JPY Kiwi–Yen



Anatomy of a Currency Pair

Currency pairs are written using the ISO abbreviations of the world currencies. For example, the Euro / US Dollar pair is written EUR / USD. The order in which the currencies appear in the pair is fi xed and cannot be changed. When the pairs were formalised, the historically stronger currency would always be displayed fi rst. It is this fi rst currency in the pair that is referred to as the base currency. The second currency is known as the counter currency.

The base currency is important to traders. It is the actionable currency in the pair; the currency that is actually being bought or sold. The base currency is also the denomination of the face value of the trade. If you buy 10,000 EUR / USD, you’ve bought 10,000 EUR and sold the equivalent amount of USD. The counter currency is the denomination of any profi t or loss on a trade.

The Long and Short of It

Buying and selling are the core actions for all trading. Traders also refer to these actions by the terms “Long” and “Short”. When a new position is established through buying, a trader is said to have an open long position, or the trader has gone long. Conversely, when a trader establishes a new position through a sale, the trader has opened a short position, or has gone short.

The concept of going short can be confusing to many new traders. How do you sell something that you don’t own? In Forex trading, it is important to remember that in every trade there are two transactions taking place. In instances where a trader goes long EUR / USD, the trader is actually buying EUR and selling USD. When a trader goes short EUR / USD, they are actually doing the opposite—selling EUR and buying USD.

Why would a trader want to go short? A trader goes short a currency when he believes it will fall in value. The trader’s goal is to sell at a higher price and close the position by buying the currency back at a lower rate (the difference in the prices would be the profi t). The ease in which Forex traders can go long or short allows the potential to benefi t from any market condition, whether bullish or bearish.

EUR / USDbase counter


The QuestradeFX AdvantageQuestradeFX provides traders with precision pricing through fractional quotes. With fractional pricing, QuestradeFX real–time executable prices are in more precise 0.1 pip increments. This extra digit of preci¬sion allows traders to take advantage of smaller price movements.

The QuestradeFX AdvantageTraders can trade on spreads as low as 1 to 2 pips on the most widely traded currency pairs at QuestradeFX.


Reading Currency Quotes

A currency quote is the most fundamental piece of information that a Forex trader has. Always changing, a currency quote represents the exchange rate of two currencies at a given point in time. It is based on this information that all trading decisions are ultimately derived, and it is through the quotes’ constant fl ux that the Forex market exists.

A currency quote defi nes the value of a currency. It shows how much of the counter currency is equal to one of the base currency. Like quotes for other fi nancial instruments, a currency quote is comprised of two prices. The fi rst price, called the bid, is the price at which the currency can be sold. The second price, called the ask or offer, is the price at which the currency can be bought.

The difference between the bid and the ask price is referred to as the spread. Depending on the account type, the spread may be static or fl oating. Regardless of whether it’s static or fl oating, the spread will vary depending on the currency pair being traded and overall market conditions.

What is a pip?

Similar to the stocks that move up and down cent by cent, currencies move by fractions of a cent called pips. A pip, or percentage in point, represents the smallest price change that a given exchange rate can make. Since most currencies are priced to the fourth decimal, a pip is usually the equivalent of 1 / 100th of one cent. The exception is for the Yen, which is priced to the seconddecimal. The following example will help illustrate currency price movements in pips.

1.2838 / 1.2843Bid Ask

http://www.questrade.com/trading/forex_pricing.aspx


The QuestradeFX AdvantageWith its Pip & Margin Calculator, Questrade has made the process of manually determining pip value a thing of the past. An online tool accessible directly from the QuestradeFX Pro trading platform, the Pip & Margin Calculator quickly computes the pip value for all currency pairs instantly with the click of a button.


Let’s say that the EUR / USD is trading at 1.3946. If the rate moves to 1.3947, it has gone up by 1 pip. Now let’s say that from 1.3947, the EUR / USD goes to 1.3900. In this case, the EUR / USD has gone down 47 pips. If USD / JPY goes from 96.10 to 96.25, it has gone up 15 pips. If it goes from 96.10 to 95.10, USD / JPY has gone down 100 pips.

In addition to being used to track price movement, pips can also be used to track performance—specifi cally, profi t and loss. Forex traders will usually tabulate winners and losers based on the number of pips gained or lost (i.e. a 100 pip gain or a 25 pip loss). Using the previous example, if a trader had gone long, or bought, at 1.3150 and the rate went up to 1.3155, the trader would have been up 5 pips on the trade. Alternatively, if the trader had gone long at 1.3150 and the currency moved to 1.3100, the trader would have been down 50 pips.

At some point, a trader will want to know what the profi t or loss equates to in an actual monetary amount. To do so, the trader will have to determine the value of a pip, which is dependent on a few factors: namely, the currency pair being traded and the amount being traded.

The calculation for determining pip value is pretty straightforward. Below are the steps in this process, using EUR / USD as an example.

• First, note the face value of the position (in this case 1 standard lot =100,000 of EUR / USD). If the rate is 1.3150, meaning that one of the base (Euro) is equal to 1.3150 of the counter (USD), then 1 standard lot (100,000 Euro) is equal to $131,500 USD (1.3150 x 100,000).

• If the rate were to move up 1 pip to 1.3151, then 1 standard lot would be worth $131,510. A 1 pip move increased the value $10, thus for 1 standard lot of EUR / USD, each pip is worth $10.

• For currency pairs that do not contain the US Dollar, the calculation will have one extra step: converting the value into US Dollars.


The QuestradeFX Advantage At QuestradeFX available margin is automatically calculated for you in real time and displayed in an easy to read Margin Monitor.


Using leverage allows a trader to magnify their trading capital, which in turn allows the trader to open and hold larger positions with the hopes of increasing potential profi ts. It is important to note, however, that as much as leverage can aid in magnifying profi ts, it can just as easily magnify potential losses. Thus, it is crucial that a trader understands the concept of leverage and implements some form of risk management into their trading strategies.

It is very important for a trader to know exactly what the margin requirement is for any and all positions being considered. Use the Pip and Margin Calculator on the trading platform to work this out.

Similar to pip values, margin requirements will vary depending on the currency pair being traded and the leverage being employed.

What is Margin?

Margin refers to the amount of a trader’s capital that is necessary to open and hold a trading position. The necessary amount of margin—or the margin requirement—depends on the currency pair being traded, the amount being traded, and the leverage being used.

http://www.questrade.com/trading/forex_margin.aspx


CHAPTER 4: PLACING A CURRENCY TRADE 9FOREX TRADING FOR BEGINNERS

Careful analysis of the market will ultimately play the critical role in trading success (full discussion of this later). However, it is equally important for new Forex traders to understand the mechanics of actually executing a currency trade. The thought process for a typical Forex trade is as follows: First, careful analysis on the market is performed. Then, from this analysis, the trader decides which currency pair to trade. Next, the trader decides whether to go long or short, and what size position to take on.

In Forex trading, currencies are traded in units called “lots”. Depending on the account type, traders can trade standard lots or mini lots. A standard lot is comprised of 100,000 of the base currency, while a mini lot is comprised of 10,000. For example, if a trader decides to open a 1 million Euro position, they may do so by trading 10 standard lots or 100 mini lots.

Once a trader knows what they want to trade and how much, the next step is executing the trade and establishing an open position. There are several ways that a trader can enter the market. The quickest method is simply entering “at market”—buying or selling at the current market price. This is what traders typically do when they want to get into a position right away. (See the illustration below.)

PLACING A CURRENCY TRADECHAPTER 4

The dealing panels from the QuestradeFX trading platform show the current bid (the price at which you can sell) and offer (the price at which you can buy) for each of the currency pairs. A trader can buy or sell into a position with a simple click of the mouse.



Often, however, a trader might want to establish a position at a price other than the current market price. In these situations, traders enter the market using a variety of order types. Orders allow a trader to specify a price at which they would like to enter the market, along with an expiration directive for how long the order should remain active. Orders may not necessarily limit losses, but they do allow traders to step away from the market without missing potential entries and exits, and can be an important tool for managing risk. The type of order used is usually dictated by the desired entry price, and can include limit orders, stop loss orders, and othercontingent orders (each of these is described below).

Limit Order

A limit order is one of the most commonly used entry order types. Traders use limit orders to enter the market at a more advantageous price than the current market price. For example, if a trader would like to go long EUR / USD but wants to buy at a price that is a little cheaper than the current rate (say it’s currently 1.3150), the trader can enter a limit order to buy EUR / USD at a price that is less than the current price (i.e. 1.3125). When the market touches 1.3125, the order is triggered and a new long position is established. Limit orders are commonly used to enter long positions at the bottom of a trading range, or to enter a short position at the top of a range.

Limit orders can also be used to exit the market when used as an associated order. An associ–ated order is an order that is part of an open position and is typically used to close the position at a predetermined rate. When used in this capacity, the limit order is used to set a level at which to take profi t. For this reason, it is sometimes referred to as a take profi t order. When the market touches a predetermined rate, the order is triggered and the open position is closed and any unrealised profi t becomes realised.



Stop Loss Order

While everyone loves a good deal, there will be times when traders look to enter the market at prices that may seem less advantageous. In these instances, a trader is usually looking for confi rmation of a move up or down before establishing a position. In this kind of situation, a stop order (also known as a stop loss order) is used. For example:

• A trader has been watching the EUR / USD for a few days and notices that it is stuck in a range, trading up and down between 1.3140 and 1.3175.

• Currently it is at the lower end of the range (1.3150), but the trader believes that if it can break out of the range to the upside, it may continue upward for some time.

• The trader sets a stop order to buy the EUR / USD at a price of 1.3180.

• When the market touches 1.3180, which is above the current range, a new long position will be established.

Much like the limit order, stop loss orders can also be used as an associated order to exit the market or close open positions. In this capacity, the stop loss order acts to limit potential losses. Traders will usually set the stop loss at a level in which the trader has reached their maximum risk tolerance for that specifi c position. Stop loss orders serve as an invaluable tool in risk management because they allow a trader to more or less predetermine their risk of loss.

Contingent Orders

In addition to simple orders, such as limits and stop losses, Forex traders can use more complex orders called contingent orders. As the name implies, contingent orders contain multiple orders that are reliant upon the execution of one or more of the contained orders.

The fi rst type of contingent order is called an “If, then” order. “If, then” orders allow a trader to defi ne both a price at which to enter the market, as well as a price at which to exit the market if the entry order is executed. This order type is typically used by a trader who knows his risk tolerance, but is unsure of the reward desired.



For example: In the order illustrated above, the trader is saying, “If the EUR / USD touches 95.000, buy 1 lot, then attach a stop loss order to exit at 94.500”. Using an “If, then” order in this way allows the trader to predetermine their risk on the trade. In an “If, then” trade, the associated order can be either a limit order or a stop order, allowing you to either set a take profi t level (limit) or downside protection (stop loss), but not both.

One kind of contingent order is the “One Cancel Other” order (or OCO), which allows a trader to create two distinct orders. With an OCO order, at the moment one of the orders is executed, the other order is automatically cancelled and it vanishes. Typically, an OCO order is used by a trader who is confi dent that a big move is imminent, but is unsure as to what direction the move will be in.

A sample “If, then” order being entered on the QuestradeFX trading platform.



For example: In the order illustrated above, the trader has set two entry orders. One order will enter a long USD / CHF position at 1.1680, in anticipation of a breakout to the upside. The other order will enter a short USD / CHF position at 1.1600, in anticipation of a breakout to the downside. When the USD / CHF broke to the downside, the trader was entered short at 1.1600, while the order to enter at 1.1680 was automatically cancelled.

The fi nal kind of contingent order is an order that combines elements of both the “If, then” and the “OCO” orders. This order is creatively known as the “If, then OCO”. Similar to the “If, then” order, the “If, then OCO” order allows a trader to set both an entry order and two exit orders, all at the same time. Many traders use “If, then OCO” orders as a way of getting in and out of the market without having to physically monitor the market and open positions all day.

A sample “OCO” order being entered on the QuestradeFX trading platform



For example: In the order illustrated above, the “If, then OCO” order shows a trader looking to enter a long EUR / USD position at 1.3175. Once the entry order is executed, both of the exit orders become active. The limit order will close the position at 1.3200 for a profi t of 25 pips, while the stop loss will close the position at 1.3150 for a loss of 25 pips.

Using an “If, then OCO” can help a trader stick to a plan of attack for a particular trade. To use this order type, a trader must have an idea of not only where they would like to enter the market, but also where to exit (whether at a profi t or loss).

A sample “If, then OCO” order being entered on the QuestradeFX trading platform.



Exiting the market

As demonstrated above, the various order types provide a convenient and effective way to not only enter the market, but also exit. In addition to using orders, open positions can be closed in other ways. The most direct way of doing so is by manually liquidating an open position.

A trader can also close a position by performing an inverse transaction. For example, if a trader buys 1 lot of EUR / USD, the position can be closed by selling 1 lot of EUR / USD. With this method, it is paramount that the trader sells the correct amount. If too many lots are sold, the trader will inadvertently create a new short position.

The fi nal method of closing a position is referred to as dealer or broker liquidation, which is when the broker / dealer closes the position rather than the trader doing so. In these instances, some or all of a trader’s open positions are closed by the Forex dealer as the result of the trader falling below the margin requirement. (As stated previously, the margin requirement represents the amount of capital required to open and hold a position.) Because dealer liquidation can be an inconvenience, a trader should always be aware of the margin requirement and set stop losses in an attempt to avoid getting to the point of liquidation.

To quickly illustrate an example of when dealer liquidation may occur, consider a trader with an account balance of $1,500 USD. If this trader decides to buy 1 standard lot of EUR / USD, the margin requirement for the position would be $1,315. This means that the trader’s available margin would be $185 ($1,500 – $1,315 = $185). If the trader incurs any loss on the position that exceeds $185, the trader will have fallen below the margin requirement and the EUR / USD position may be closed, or liquidated, by the dealer.


CHAPTER 5: ANALYSING THE MARKET 16FOREX TRADING FOR BEGINNERS

Before most traders “push the button” to execute a trade, they’ve usually established a carefully thought–out trading plan or strategy. Typically, a trading decision is reached after thorough research and analysis of the market. While there are a number of ways to gather information about currencies and the markets in general, most methods can be categorised into two distinct methods: fundamental analysis and technical analysis. Traders will usually lean towards one method or the other, but a combination of both types of analysis can prove quite useful.

Fundamental Analysis

In Forex, fundamental analysis is defi ned as a method of evaluating a currency by attempting to measure its intrinsic value through an examination of economic, fi nancial, and other qualitative and quantitative factors. In other words, a fundamental trader will look at economic conditions around the world to see how they may affect the value of a nation’s currency. To get an understanding of the world’s economies, fundamental traders will monitor recurring releases of economic data and interest rate decisions. Economic data, or indicators, are available from nearly every country and economic zone, and can be a major factor in market direction upon release.

While there are numerous reports and data for each country and economic zone, economic data seems to have a higher impact on the major currencies. Typically, the most important data reports focus on the following economic areas.

ANALYSING THE MARKETCHAPTER 5



KEY ECONOMIC AREAS

Technical Analysis

Unlike fundamental analysis, technical analysis does not try to measure a currency’s intrinsic value. Instead, a technical trader evaluates a currency pair by examining statistics generated by the market, namely past prices and price levels. To help make sense of these statistics, a technical trader relies heavily on price charts. It is from these charts that a technical trader defi nes levels, trends, and patterns. Trading decisions and trading opportunities are ultimately found “in the charts.”

Although there are several methods of technical analysis, one of the most common and important methods involves the use of signifi cant price levels called support and resistance. Learning how to defi ne these levels can greatly benefi t a new trader, and serves as an excellent fi rst step into the world of technical analysis.

A support level is defi ned as a price level at which a currency pair has had diffi culty falling below, and is generally thought of as a level at which many traders will be willing to buy a currency. A currency will commonly fall to the support level and pause before ultimately making its next move. Many traders will look to buy a currency at the support level, as they believe the currency will then receive a “bounce” to a higher level.

NAME COUNTRY FREQUENCY

UK Unemployment UK Monthly

Non–Farm Payrolls USFirst Friday of every month at

1:30 p.m. GMT

German IFO Index Germany Monthly

Gross Domestic Product (GDP) US / UK / Germany Quarterly

Retail Sales US / UK Monthly

PMI UK / China / Germany Monthly

Trade US Quarterly

Consumer Price Index (CPI) US / UK / Eurozone Monthly

FOMC Meeting US Every 6 weeks

ECB / BOE Meeting UK / Eurozone Monthly



The opposite of support, resistance is defi ned as a price level at which a currency pair has had diffi culty rising above. Typically, a currency will rise to the resistance level, pause, and then retrace downward somewhat. Traders will often look to establish a short position around resistance with the hopes that the currency will fall back down.

Used together, support and resistance can help a trader identify new trading opportunities in many situations and across multiple timeframes. When defi ned on the same chart, support and resistance levels can create a channel where a currency spends time simply bouncing from one level to the other. The currency might touch these levels many times, and the length of time in which it remains in the channel can be quite long. When a channel is found, traders may look to buy on at support and sell on resistance and vice versa.

A sample chart showing areas of support and resistance on the QuestradeFX trading platform.


CHAPTER 6: DEVELOPING A STRATEGY 19FOREX TRADING FOR BEGINNERS

An important step for all Forex traders is taking the time to develop a sound trading strategy. This takes time and patience, as well as a lot of trial and error, and no strategy is foolproof. To begin developing a strategy, a number of questions must be addressed, including:

• Risk level: First, a trader must defi ne their risk—they must know whether they are willing to take on a great deal of risk with the hopes of a big reward, or are more comfortable with minimal risk and smaller rewards.

• Trading time: Next, a trader needs to decide how much time they want to devote to Forex trading, and what time of day they will be trading. A trader’s personal life is part of determining a suitable strategy because, for example, a trader who has one hour a day to trade will not be a candidate for a day trading strategy. And the time of day most trading will take place infl uences the currency pairs traded—for example, a trader who mostly trades after 12 a.m. GMT may see more trading opportunities in the Yen pairs since the Asian market session will be underway.

• Currency choice: A trader must also know which currencies they will be trading. Most new traders choose one or two of the major currencies as a start. Narrowing the focus to a select number of currencies greatly enhances a trader’s ability to stay abreast of relevant news and price levels for the chosen currencies.

• Analysis type: Finally, a trader needs to decide whether to use technical or fundamental analysis, or a combination of both. It’s a good idea to become familiar with the elements of both forms of analysis, but realise that it is impossible to become an expert overnight. Focusing on one technical indicator at a time, or one economic report, can help build confi dence and profi ciency.

DEVELOPING A STRATEGYCHAPTER 6


The QuestradeFX AdvantageSo traders can safely develop and test strategies in a risk–free environment, QuestradeFX offers practice accounts to all traders.

CHAPTER 6: DEVELOPING A STRATEGY 20FOREX TRADING FOR BEGINNERS

Regardless of the strategy they ultimately formulate, traders who have a plan usually enhance the likelihood of success more so than traders who dive in blindly.


CHAPTER 7: AVOIDING COMMON MISTAKES 21FOREX TRADING FOR BEGINNERS

Becoming a more experienced Forex trader involves a lot of trial and error. Mistakes will be made and lessons will be learned. Below are a few of the areas in which new traders commonly make mistakes. Avoiding mistakes is not a cut and dry process, but increasing your awareness of the potential trouble spots is a big step in the right direction.

Controlling Emotion

If you’ve ever placed a real trade or have faced a big decision in life, it should come as no surprise that emotion plays a big part in determining what to do—including when to buy or sell. While it is nearly impossible to remove emotion entirely from trading decisions, a lot can be done to control it. Controlling emotion allows for a clearer picture of the task at hand. It will also allow for a more thorough analysis of the trade from all sides and may help provide the discipline necessary to stick with your trading plan.

An easy way to help control emotion is to get in the habit of thoroughly planning an entire trade—its entry and its exit—BEFORE entering a trade. Going with a gut feeling is very easy to do, but often leads to a different type of feeling: pain. Knowing exactly what the plan is beforehand allows a trader to place trades with conviction, to be fi rm with an exit strategy, and to stay consistent with their risk tolerance.

A simple way to prepare for a trade ahead of time is to keep a trader’s journal, which can be as basic as a notebook kept near the computer where trades are planned out. A journal entry would contain the entry price, exit prices (both limits and stop losses), and a reason for making the trade. After the trade has been recorded in the journal, then it is placed for real. Once the trade has been executed and closed, you should record the result in the journal. This seemingly mundane record–keeping makes it easier to see what has worked and what has not, so that going forward you can attempt to mimic the successful trades and avoid the unsuccessful ones.

AVOIDING COMMON MISTAKESCHAPTER 7


CHAPTER 7: AVOIDING COMMON MISTAKES 22FOREX TRADING FOR BEGINNERS

Understand margin and leverage

Another common mistake new traders make is trading without a true understanding of margin and leverage. By reading this book, you have already taken the fi rst step to avoiding this mistake. It is of upmost importance to know what the margin requirement is for each new position opened. Always be sure to provide ample cushion for open positions by having suffi cient available margin at all times.

Trading with no more than 10% of your account balance is a good start in providing such a cushion. Many new uneducated traders will often use upwards of 90% of their available margin on one position. These traders are often doomed for failure, as even the smallest move against will cause the account to fall below the margin requirement and cause a dealer liquidation. The Forex market is constantly fl uctuating. Leaving suffi cient available margin allows you to weather the small showers while waiting for the sunny days.

Trading is not a race

It’s not necessary to go for the gusto on every trade. When planning trades, think about reward to risk ratios. Reward to risk ratios represent the ratio of the number of pips a trader is looking to profi t versus the number of pips they are risking. Ideally, the ratio should be greater than 1. For example, a trader who sets a limit order 100 pips from entry and a stop loss 50 pips from entry is employing a 2 to 1 reward to risk ratio (100 / 50). This is an example of a good reward to risk ratio and could represent a pretty good trade. An example of a not so good reward to risk ratio would be a trader who sets a limit order 100 pips from entry and a stop loss 500 pips from entry (1 to 5). This trader is taking on way too much risk.

Think of trading as a business and treat it as one. A CEO who pays £100,000 for a chance to make £10,000 will probably be chastised. On the other hand, however, a CEO who earmarks £10,000 for a chance to make £100,000 will probably be commended. This is a good mentality to keep in mind when trading. After all, in business and in trading the goal is the same: to make money.

After doing your research and analysis and fi nalising your strategy, start trading slowly. There is no shame in trading a single mini lot. Setting tight stops and looking to take small profi ts will allow you to progress at a slow pace and learn through both your winning trades and the losing ones.

The Forex market is a market unlike any other. It’s sheer size and global reach provides opportunities for traders around the clock and brings world news, economics, and socio–political events right into the trading room. Forex traders see the world differently. A Forex trader will wait for a weak Yen before booking that trip to Tokyo. They will wait for a weak Pound before buying a Saville Row bespoke suit. Welcome to the world of Forex trading, and good luck.


APPENDIX B: TRADING GLOSSARY 23FOREX TRADING FOR BEGINNERS

AAccrual – The apportionment of premiums and discounts on forward exchange transactions that relate directly to deposit swap (Interest Arbitrage) deals , over the period of each deal.

Adjustment – Offi cial action normally by either change in the internal economic policies to correct a payment imbalance or in the offi cial currency rate or. Adjustment – Offi cial action nor¬mally by either change in the internal economic policies to correct a payment imbalance or in the offi cial cur–rency rate or.

Appreciation – A currency is said to ‘appreciate’ when it strengthens in price in response to market demand.

Arbitrage – The purchase or sale of an instrument and simultaneous taking of an equal and opposite position in a related market, in order to take advantage of small price differentials between markets.

Ask (Offer) Price – The price at which the market is prepared to sell a specifi c Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can buy the base currency. In the quotation, it is shown on the right side of the quotation. For example, in the quote USD / CHF 1.4527 / 32, the ask price is 1.4532; meaning you can buy one US dollar for 1.4532 Swiss francs.

At Best – An order given to buy or sell at the best rate that can be obtained.

At or Better – An order to deal at a specifi c rate or better if possible.

TRADING GLOSSARYAPPENDIX B



BBalance of Trade – The value of a country’s exports minus its imports.

Bar Chart – A type of chart which consists of four signifi cant points: the high and the low prices, which form the vertical bar, the opening price, which is marked with a little horizontal line to the left of the bar, and the closing price, which is marked with a little horizontal line of the right of the bar.

Base Currency – The fi rst currency in a Currency Pair. It shows how much the base currency is worth as measured against the second currency. For example, if the USD / CHF rate equals 1.6215 then one USD is worth CHF 1.6215 In the FX markets, the US Dollar is normally considered the ‘base’ currency for quotes, meaning that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

Bear Market – A market distinguished by declining prices.

Bid Price – The bid is the price at which the market is prepared to buy a specifi c Currency in a Foreign Exchange Contract or Cross Currency Contract. At this price, the trader can sell the base currency. It is shown on the left side of the quotation. For example, in the quote USD / CHF 1.4527 / 32, the bid price is 1.4527; meaning you can sell one US dollar for 1.4527 Swiss francs.

Bid / Ask Spread – The difference between the bid and offer price.

Big Figure – The fi rst two or three digits of a foreign exchange price or rate. Examples: If the USD / JPY bid / ask is 115.27 / 32, the big fi gure is 115. On a EUR / USD price of 1.2855 / 58 the big fi gure is 1.28. The big fi gure is often omitted in dealer quotes. The EUR / USD price of 1.2855 / 58 would be verbally quoted as “55 / 58”.

Book – In a professional trading environment, a ‘book’ is the summary of a trader’s or desk’s total positions.

Broker – An individual or fi rm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

Bretton Woods Agreement of 1944 – An agreement that established fi xed foreign exchange rates for major currencies, provided for central bank intervention in the currency markets, and pegged the price of gold at US $35 per ounce. The agreement lasted until 1971, when President Nixon overturned the Bretton Woods agreement and established a fl oating exchange rate for the major currencies.



British Retail Consortium (BRC) Shop Price Index – Measures the rate of infl ation at various surveyed retailers. This index only looks at price changes in goods purchased in retail outlets.

Bull Market – A market distinguished by rising prices.

CCable – Trader jargon referring to the Sterling / US Dollar exchange rate. So called because the rate was originally transmitted via a transatlantic cable beginning in the mid 1800’s.

Canadian Ivey Purchasing Managers (CIPM) Index – A monthly gauge of Canadian business sentiment issued by the Richard Ivey Business School.

Candlestick Chart – A chart that indicates the trading range for period using a series of candlesticks, where the body of the candlestick represents the opening and closing price and the wicks represent the high and low price of the period.

Carry Trade – Refers to the simultaneous selling of a currency with a low interest rate, while purchasing currencies with higher interest rates. Examples are the JPY crosses such as GBP / JPY and NZD / JPY.

Cash Market – The market in the actual fi nancial instrument on which a futures or options contract is based a.k.a. Spot.

Central Bank – A government or quasi–governmental organisation that manages a country’s monetary policy. For example, the US central bank is the Federal Reserve, and the German central bank is the Bundesbank.

Chartist – An individual who uses charts and graphs and interprets historical data to fi nd trends and predict future movements. Also referred to as Technical Trader.

Cleared Funds – Funds that are freely available, sent in to settle a trade.

Closed Position – Exposures in Foreign Currencies that no longer exist. The process to close a position is to sell or buy a certain amount of currency to offset an equal amount of the open position. This will ‘square’ the postion.

Clearing – The process of settling a trade.

Collateral – Something given to secure a loan or as a guarantee of performance.



Commission – A transaction fee charged by a broker.

Confi rmation – A document exchanged by counterparts to a transaction that states the terms of said transaction.

Construction Spending – Measures the amount of spending towards new construction, released monthly by the U.S. Department of Commerce’s Census Bureau.

Contract – The standard unit of trading.

Counter Currency – The second listed Currency in a Currency Pair.

Counterparty – One of the participants in a fi nancial transaction.

Country Risk – Risk associated with a cross–border transaction, including but not limited to legal and political conditions.

Cross Currency Pairs – A pair of currencies that does not include the U.S. dollar. For example: EUR / JPY or GBP / CHF.

Currency symbols – A three–letter appreviation for a particular currency. For example, EUR (Euro), USD (US Dollar), and GBP (Great British Pound).

Currency – Any form of money issued by a government or central bank and used as legal tender and a basis for trade.

Currency Pair – The two currencies that make up a foreign exchange rate. For example, EUR / USDCurrency Risk – the probability of an adverse change in exchange rates.

Current Account – The difference between a nation’s total exports of goods, services and transfers, and its total imports of them. Current account balance calculations exclude transactions in fi nancial assets and liabilities.

DDay Trader – Speculators who take positions in commodities which are then liquidated prior to the close of the same trading day.



Dealer – An individual or fi rm that acts as a principal or counterpart to a transaction. Principals take one side of a position, hoping to earn a spread (profi t) by closing out the position in a subsequent trade with another party. In contrast, a broker is an individual or fi rm that acts as an intermediary, putting together buyers and sellers for a fee or commission.

Defi cit – A negative balance of trade or payments.

Delivery – An FX trade where both sides make and take actual delivery of the currencies traded.

Depreciation – A fall in the value of a currency due to market forces.

Derivative – A contract that changes in value in relation to the price movements of a related or underlying security, future or other physical instrument. An Option is the most common derivative instrument.

Devaluation – The deliberate downward adjustment of a currency’s price, normally by offi cial government policy.

Discount Rate – Interest rate that an eligible depository institution is charged to borrow short–term funds directly from the Federal Reserve Bank.

EEconomic Indicator – A statistic that indicates current economic growth and stability. Common indicators include employment rates, Gross Domestic Product (GDP), infl ation, retail sales, etc.

End Of Day Order (EOD) – An order to buy or sell at a specifi ed price. This order remains open until the end of the trading day which is 5 p.m. ET.

European Monetary Union (EMU) – The successor to the European Monetary System, the combination of European Union member states into cohesive economic system, most notably represented with the adoption of the euro as the national currency of participating members.

EURO – the currency of the European Monetary Union (EMU). A replacement for the European Currency Unit (ECU).

European Central Bank (ECB) – the Central Bank for the European Monetary Union.



FFederal Reserve (Fed) – The Central Bank of the United States.

First In First Out (FIFO) – Open positions are closed according to the FIFO accounting rule. All positions opened within a particular currency pair are liquidated in the order in which they were originally opened.

Flat / square – Dealer jargon used to describe a position that has been completely closed, e.g. you bought $500,000 then sold $500,000, thereby creating a neutral (fl at) position.

Foreign Exchange – (Forex, FX) – the simultaneous buying of one currency and selling of another.

Forward – The pre–specifi ed exchange rate for a foreign exchange contract settling at some agreed future date, based upon the interest rate differential between the two currencies involved.

Forward Points – The pips added to or subtracted from the current spot exchange rate to calculate a forward price.

Fundamental Analysis – Analysis of economic and political information with the objective of determining future movements in a fi nancial market.

Futures Contract – An obligation to exchange a good or instrument at a set price on a future date. The primary difference between a Future and a Forward is that Futures are typically traded over an exchange (Exchange–Traded Contacts – ETC), versus forwards, which are considered Over The Counter (OTC) contracts. An OTC is any contract NOT traded on an exchange.

FX – Foreign Exchange.

GG7 – The seven leading industrial countries, being US , Germany, Japan, France, UK, Canada, Italy.

Going Long – The purchase of a stock, commodity, or currency for investment or speculation.

Going Short – The selling of a currency or instrument not owned by the seller.

Gold Certifi cate – A certifi cate of ownership that gold investors use to purchase and sell the commodity instead of dealing with transfer and storage of the physical gold itself.



Gold Contract – The standard unit of trading gold is one contract which is equal to 10 troy ounces.

Good ‘Til Cancelled Order (GTC) – An order to buy or sell at a specifi ed price. This order remains open until fi lled or until the client canceled.

HHedge – A position or combination of positions that reduces the risk of your primary position.

“Hit the bid” – Selling at the current bid price.

IInfl ation – An economic condition whereby prices for consumer goods rise, eroding purchasing power.

Initial Margin – The initial deposit of collateral required to enter into a position as a guarantee on future performance.

Interbank Rates – The Foreign Exchange rates at which large international banks quote other large international banks.

Intervention – Action by a central bank to effect the value of its currency by entering the market. Concerted intervention refers to action by a number of central banks to control exchange rates.

Introducing Broker – A person or corporate entity which introduces accounts to QuestradeFX for a fee.

KKiwi – Slang for the New Zealand dollar.



LLeverage – Also called margin. The ratio of the amount used in a transaction to the required security deposit.

Limit order – An order with restrictions on the maximum price to be paid or the minimum price to be received. As an example, if the current price of USD / YEN is 117.00 / 05, then a limit order to buy USD would be at a price below 102. (ie 116.50)

Liquidation – The closing of an existing position through the execution of an offsetting transaction.

Liquidity – The ability of a market to accept large transaction with minimal to no impact on price stability.

Long position – A position that appreciates in value if market prices increase. When the base currency in the pair is bought, the position is said to be long.

Lot – A unit to measure the amount of the deal. The value of the deal always corresponds to an integer number of lots.

MMargin – The required equity that an investor must deposit to collateralise a position.

Margin Call – A request from a broker or dealer for additional funds or other collateral to guarantee performance on a position that has moved against the customer.

Market Risk – Exposure to changes in market prices.

Mark–to–Market – Process of re–evaluating all open positions with the current market prices. These new values then determine margin requirements.

Maturity – The date for settlement or expiry of a fi nancial instrument.



NNet Position – The amount of currency bought or sold which have not yet been offset by opposite transactions.

OOffer (ask) – The rate at which a dealer is willing to sell a currency. See Ask (offer) price

Offsetting transaction – A trade with which serves to cancel or offset some or all of the market risk of an open position.

One Cancels the Other Order (OCO) – A designation for two orders (a stop loss and a limit) whereby when one part of the two orders is executed the other is automatically cancelled.

Open order – An active order that will be executed if a market moves to its designated price. Normally associated with Good ‘til Cancelled Orders.

Open position – An active trade with corresponding unrealised P&L, which has not been offset by an equal and opposite deal.

Over the Counter (OTC) – Used to describe any transaction that is not conducted over an exchange.

Overnight Position – A trade that remains open after the 5 p.m. ET daily close.

Order – An instruction to execute a trade at a specifi ed rate.

PPips – The smallest unit of price for any foreign currency. Digits added to or subtracted from the fourth decimal place, i.e. 0.0001. Also called Points.

Political Risk – Exposure to changes in governmental policy which will have an adverse effect on an investor’s position.

Position – The netted total holdings of a given currency.



Premium – In the currency markets, describes the amount by which the forward or futures price exceed the spot price.

Price Transparency – Describes quotes to which every market participant has equal access.

Profi t / Loss or “P / L” or Gain / Loss – The actual “realised” gain or loss resulting from trading activities on Closed Positions, plus the theoretical “unrealised” gain or loss on Open Positions that have been Mark–to–Market.

QQuote – An indicative market price, normally used for information purposes only.

RRally – A recovery in price after a period of decline.

Range – The difference between the highest and lowest price of a future recorded during a given trading session.

Rate – The price of one currency in terms of another, typically used for dealing purposes or other time period.

Resistance – A term used in technical analysis indicating a specifi c price level above which prices will have diffi culty moving.

Retail Sales – Measures the monthly retail sales of all goods and services sold by retailers based on a sampling of variety of different types and sizes. This data gives a look into consumer spending behavior, which is a key determinant of growth in all major economies.

Revaluation – An increase in the exchange rate for a currency as a result of central bank intervention or other policy action. Opposite of Devaluation.

Risk – Exposure to uncertain change, most often used with a negative connotation of adverse change.

Risk Management – the employment of fi nancial analysis and trading techniques to reduce and / or control exposure to various types of risk.



Roll–Over – A rollover is the simultaneous closing of an open position for today’s value date and the opening of the same position for the next day’s value date at a price refl ecting the interest rate differential between the two currencies.

The spot forex market is traded on a two–day value date. For example, for trades executed on Monday, the value date is Wednesday. However, if a position is opened on Monday and held overnight (remains open after 1700 ET), the value date is now Thursday. The exception is a position opened and held overnight on Wednesday. The normal value date would be Saturday; because banks are closed on Saturday the value date is actually the following Monday. Due to the weekend, positions held overnight on Wednesday incur or earn an extra two days of interest. Trades with a value date that falls on a holiday will also incur or earn additional interest.

Round trip – Buying and selling of a specifi ed amount of currency.

SShort Position – An investment position that benefi ts from a decline in market price. When the base currency in the pair is sold, the position is said to be short.

Simple Moving Average (SMA) – A simple average of a pre – defi ned amount of price bars. For example, a 50 period Daily chart SMA is the average closing price of the previous 50 daily closing bars. Any time interval can be applied here.

Spot Price – The current market price. Settlement of spot transactions usually occurs within two business days.

Spread – The difference between the bid and offer prices.

Square – Purchase and sales are in balance and thus the dealer has no open position.

Sterling – slang for British Pound.

Stop Loss Order – Order type whereby an open position is automatically liquidated at a specifi c price. Often used to minimise exposure to losses if the market moves against an investor’sposition.

Support Levels – A price level in technical analysis that may act as a fl oor in a price decline.

Swap – A currency swap is the simultaneous sale and purchase of the same amount of a given currency at a forward exchange rate.



Swissy – Market slang for USD / CHF currency pair.

TTechnical Analysis – An effort to forecast prices by analysing market data, i.e. historical price trends and averages, volumes, open interest, etc.

Tick – A minimum change in price, up or down.

Transaction Cost – the cost of buying or selling a fi nancial instrument.

Transaction Date – The date on which a trade occurs.

Turnover – The total money value of all executed transactions in a given time period; volume.

Two–Way Price – When both a bid and offer rate is quoted for a FX transaction.

UUnrealised Gain / Loss – The theoretical gain or loss on Open Positions valued at current market rates. Unrealised Gains’ Losses become Profi ts / Losses when position is closed.

VValue Date – The date on which counterparts to a fi nancial transaction agree to settle their respective obligations, i.e., exchanging payments. For spot currency transactions, the value date is normally two business days forward. Also known as maturity date.

The VIX or Volatility Index – Shows the market’s expectation of 30 – day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. The VIX is a widely used measure of market risk and is often referred to as the “investor fear gauge”.

Volatility – A statistical measure of a market’s price movements over time.



WWhipsaw – slang for a highly volatile market where a sharp price movement is quickly followed by a sharp reversal.

YYard – Slang for a billion.


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