The Forex Market The foreign exchange market is the “place” where currencies are traded. Currency exchanges are important to everyone all over the world whether they realize it or not. Any produce purchased and brought into the country whether it is a piece of cheese or a car, currencies are exchanged during foreign exchange and business. The huge demand for foreign exchange is the reason why the forex market is the largest, most liquid financial market in the world. From 1997 to the end of 2000, daily trading volume from forex trading has surged from 5 billion to 1.5 trillion dollars. Despite this unbelievable growth, the foreign exchange market continues to grow at a phenomenal rate. No other financial market has demonstrated this stellar growth in volume. One unique aspect of this international market is that there is no central marketplace for forex trading. Instead, trade is conducted electronically over-the-counter (OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centres of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney – across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly. Forex trading is truly one of the best businesses in the world and one of the most profitable, and once you get it right it gives you everything you could wish for. You can run your business from anywhere in the world, as long as you have a laptop/desktop and an internet connection you are ready to make money. Not only will your broker open and close trades with little to no commission they let you have control of large sums of money with little initial investment. You have no office space to rent, no employees to pay and no one to answer to. Yes, forex trading is the ultimate job and there is nothing else quite like it in the world. Forex is the world’s largest and most liquid trading market. Even though it has been somewhat of a loosely guarded secret, every day more and more investors are turning to the all-electronic world of Forex trading for income and investment because of its numerous benefits & advantages over traditional trading vehicles, like stocks, bonds and commodities. When you get this business right, Forex trading can be as easy as picking money up off the floor. Others in the industry have also said “Forex trading is like having an ATM machine on your own computer.” While both of these statements are very possible it is important to keep level headed and not let the pursuit of wealth get in the way of realistic goals. As you will soon discover forex trading is all about discipline and consistency. What FOREX traders do is much less risky than trading currencies on the futures market, much more profitable, and a lot easier than trading stocks and equities. Forex provides the modern day trader with a much better and simpler alternative than stocks. First of all, there are only a few major currencies to trade; the U.S. Dollar, Japanese Yen, Euro, British Pound, and Swiss Franc are the most popular. A stock trader has to choose from a group of tens of thousands of stocks. This increases the complexity of selecting what to trade. Let’s carry on and have a look at the major currency pairs. Currency Pairs Each currency is paired against another, we make money by predicting whether that currency will gain or lose value against the one it’s paired with. Examples are

AUD/USD

EUR/USD

GBP/JPY

GBP/USD

NZD/USD

USD/CAD

USD/CHF

USD/JPY

EUR/PJY

and a whole lot of them. The first currency in the pair is the base currency. The second currency in the pair is labeled quote or counter currency. Such a quotation depicts how many units of the counter currency are needed to buy one unit of the base currency. Currency pairs are normally denoted in the format: (base currency) / (counter currency) e.g AUD/USD As seen above.

For example the quotation EUR/USD 1.2500 means that one euro is exchanged for 1.25 US dollar. If the quote moves from EUR/USD 1.2500 to EUR/USD 1.2510, the euro is getting stronger and the dollar weaker because you are paying more of USD (dollars) for 1 EUR. On the other hand if the EUR/USD quote moves from 1.2500 to 1.2490 the euro is getting weaker while the dollar is getting stronger because you are paying less USD for 1 EUR.

Pips

A pip is the last decimal place in a quoted price. For instance, if the EUR/JPY moves from 108.15 to 108.16 it has moved 1 pip. Each currency pair will have a different pip value (for instance, the USD/JPY is quoted to the hundredths as 1.30). To obtain the value of a pip for a currency pair, their are 2 formulas. In the case where the USD is quoted first, divide the pip value by the exchange rate and multiply by lot size (pip value = (pip / exchange rate) * lot size) USD/JPY (.01 / 119.80) x 100,000 USD = $8.34 per pip In the case where the USD is quoted 2nd, determine the value of the pip in the foreign currency, and then apply the exchange rate. But you don’t need all that as it is done automatically for you. So don’t crack your brain.

Stops & Stop hunting

Stops are orders set to close your positions if the trade goes against you by the amount of pips you stipulate. I want to take a minute to talk about stops as this is something I see many traders struggling with all the time. You may have heard of stop hunting, it is not a myth, it actually happens although usually not to the extremes many traders talk about. Many of the retail brokers that require only a small deposit to open an account are often not giving you direct access to the forex market as the positions you are trading are too small. Instead they take the other side of the position themselves because it is a fact that the majority of traders lose money overall and the brokers are playing this to their advantage. So you make your small mini lot trade and the broker takes the other side at their dealing desk, you place your stop which the broker can see on their platform and you go about your business. Now it is important that I point out the broker is not targeting your position, there will be thousands of positions with stops in the same place and as price comes within 5 pips or so the broker may manipulate the data feed by 5 pips to take out all these stops. So how do we avoid being at the mercy of the broker? We trade longer term charts and avoid all the stressful day trading systems out there that require small stops. Different traders use stops in different ways, some use stops as protection against a sudden market crash and some don’t use them at all due to suspicion that brokers try to take them out. I personally believe a trade should have a stop placed at a point that gives the trade room to breath and if the trade did go beyond that point, there would be no question that the trade was no longer valid. This is the approach I take with my forex trading and it has served me well, I have a max pip stop I am willing to risk and I do not allow myself to move this stop once it is placed. Many traders fail to realize that trades will not immediately go in your direction all the time, they need breathing space. As soon as I began giving my trades more breathing space I saw my win percentage go through the roof. It’s the whipsaws that get many traders out of the market just before price heads off in the anticipated direction, especially if you are trying to trade the small intraday time frames. The systems presented in this course are designed to give price plenty of breathing space while still allowing us to get a good risk reward ratio on our trading positions. This eliminates the broker trying to take us out and also gives our trades room to move.

Leverage and Lots

Lots

This is the amount invested per trade. It may also be referred to as contract size. The standard size for a lot is $100,000. In the last few years a mini lot size has been introduced of $10,000. Currency spot prices change in pips, which are the smallest increment of that currency. Because these increments are tiny it is desirable to trade large amounts to get larger returns.

Leverage

Leverage is one of the reasons many traders come into the forex market and the reason many traders leave without any money left in their account, many brokers including my own offer up to 200:1 leverage. With leverage of 200:1 you have control of 200 times the money in your account. If you have $1000 in your account you can buy $200,000 using a leverage of 200:1. We will not be using anything remotely like that in this course. High leverage is a killer and can wipe out your account in one trade. Later in the money management section of this manual we will be discussing how to control your risk on each trade so that if the worst case situation happens you can withstand a huge amount of losses without losing your account. Again I DO NOT use high leverage and if you want to survive and build wealth in this business neither should you.I will advice you use 1:100

An early word of caution: Leverage is a double edged sword that can result in high profits or high losses.

Money Management

When I say to many traders “my average risk per trade is about 80 pips” they go white with fear, “surely that is too much risk” they say. Before we go any further I want you to understand no matter if you have a 50 pip stop or a 200 pip stop your risk should never change, you should never risk more than 5% of your account on any one trade and I recommend if you can, try to keep it at 2%. I understand a lot of you may have small trading accounts and you are eager to build it faster so you may want to use 5% until your account grows larger and then reduce your risk. Everyone seems to be talking about money management in the trading world yet very few people put it into practice to make their account grow safely. Everyone’s goal when it comes to trading forex is to make money, but people have different circumstances and different starting capital. Unfortunately most new traders have very low starting capital and very big goals which are not in line with reality. Starting with an account of $1,000 you can not expect to be able to make a living straight away, you must have a little patience and grow your trading account to a stage where you can withdraw a pay check for yourself and still leave some profits for your account to grow slowly. This is the stage many new traders lose patience and over leverage their account resulting in account destruction. You may be surprised how fast your account will grow with slow steady gains on an ongoing basis and compounding your profits.

Risk Calculation

Brokers now offer micro lots which enable us to accurately use a certain percentage of our account on each trade, a micro lot is 0.10c a pip giving us far more flexibility especially for smaller accounts. Let’s run through a quick example using a random $5,436 account. We spot a setup on the EUR/USD and require a 60 pip stop to give our trade plenty of breathing room and get the stop behind the recent resistance level. To find 2% of our account we….. Divide $5436 by 100 then times by 2 = $108.72 which is 2% of the account size. So we can risk $108.72 on this trade, now we need to find out what position size to place on this trade. $108.72 divide by 60 pip stop = $1.81 To find the number of micro lots we divide $1.81 by 0.10c = 18 micro lots. To summarise placing 18 micro lots on this trade, risking 60 pips will risk exactly 2% of our trading account. On the next trade you will calculate this all over again using the new balance on your trading account, if your trade was a success then your new risk will be slightly higher that the previous one. This is how we rapidly build our trading accounts compounding profits and using them to create even more profits. Money management is not only about what to risk on each trade. That alone will not save your bacon if you are a trading maniac who must be involved in the market no matter what. What ever size your trading account is treat it like gold, if you are at all unsure of a trade then skip it, like bus’s there will always be another one along soon enough. You must not feel the need to trade, I very often do not trade Mondays which only leaves 4 days a week to look for setups yet I still turn profit and the more patient I become, the smoother my equity line increases and the more wealth I build.

Risk/Reward Ratio

Risk/reward ratio is very important when trading over a long period of time. Many new traders coming into the forex market fall into the trap of refusing to let their winning trades run. Lets have a look of how that will affect them over time. Trader 1 Risks $100 and takes profit at $25 giving him a risk reward of 4:1 this means that in order for him to break even in the long run he must achieve 80% winning trades. Trader 2 Risks $100 and takes profit at $100 giving him a risk reward of 1:1 this means that in order for him to break even in the long run he must achieve 50% winning trades. Trader 3 Risks $100 and takes profit at $200 giving him a risk reward of 1:2 this means that in order for him to break even in the long run he must only achieve 33% winning trades. Trader 4 Risks $100 and takes profit at $300 giving him a risk reward of 1:3 this means that in order for him to break even in the long run he must only achieve 25% winning trades. Now who do you think is going to succeed in the long run? Surely it is far easier for traders 3 & 4 as they have less pressure to achieve a high win % in order to make money. Are you beginning to see how important this is? Never open a trade if you do not anticipate your trade to gain you at least the same amount as you risked, I prefer to try and go for twice or three times the amount I risk while always moving my stop to break even as soon as I can. We shall deal with Bid, Ask and Spread when we have started the practical lessons, just so you get a grasp.

REQUIREMENTS FOR TRADING

Below is a list of things needed to start currency trading.

1. Learn how the market works. Profitable forex trading requires good knowledge and skills. One needs to understand how to read quotes, place trades, stop losses… All with be treated with diagrammatic illustrations on this site, so just stick to this site as we take you there.

2. A forex trading system/strategies. Many online brokers allow you to open practice accounts before trading with real money. This allows you to develop and test forex trading systems/strategies, You can then pick the best one , that allows you to place more profitable trades. You should develop a trading strategy that works otherwise you will not make profit in forex trading. Not to worry you will learn one or two here. You will be armed with sound knowledge on this site so that you succeed in this market gracefully.

3. An online broker. In order for us to trade the forex market we are required to have a broker. A broker is an individual or firm that acts as the middle man between buyer and seller trading in the forex market. The foreign exchange market is quite similar to the equity markets, except that the majority of forex brokers do not charge a commission. Forex brokers are usually tied to large banks or lending institutions this is because of the huge sums of money traded in the foreign exchange markets. To trade forex, you will need to open an account with a retail broker. Their are several factors to consider when evaluating which broker meets your needs. In the United States a broker should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) and a NFA member. The CFTC and NFA were made to protect the public against fraud, manipulation, and abusive trade practices. Look for responsive firms with a clean regulatory history, several years of experience, and a positive reputation. The NFA recommends you read “Trading in the Retail Off-Exchange Foreign Currency Market” before becoming a forex trader.

i Regulation

o Is the broker regulated? If so, by who? What protections does that regulator offer? Do NOT trade or give money to a non-regulated broker

o Check history and complaints with the NFA at www.nfa.futures.org/basicnet/ or call (800) 621-3570 o Are funds insured against fraud and bankruptcy?

ii Trading Account

o What is the minimum opening balance?

o Do you earn interest on unused equity (the margin available discussed earlier)?

o What is the initial and maintenance margins on the currencies you want to trade?

iii Execution

o How fast is execution?

o How fast are they to the answer phones and emails?

iv Hidden Areas That Weigh Down A Trader

o How tight is the spread (the difference between bid and ask prices at time of trade)?

o What are the commissions?

v Trading Platform

o How reliable is the software?

o How many currency pairs are available?

o Real time currency quotes

o Any special features

o Web based

o Mobile device access

vi Broker.

o How many years of experience o What styles / systems do they use (eg scalping)?

o What is the brokers reputation (Did you Google the names of the brokerage and broker?)

o What is their track record for the last 5 years, last 3 years, last year, and last month? The CFTC lists 9 tips to avoid fraudulent brokers

1. Stay away from opportunities that seem too good to be true.

2. Avoid any company that predicts or guarantees large profits.

3. Stay Away From Companies That Promise Little or No Financial Risk .

4. Don’t Trade on Margin Unless You Understand What It Means.

5. Question Firms That Claim To Trade in the “Interbank Market” (see above).

6. Be Wary of Sending or Transferring Cash on the Internet, By Mail or Otherwise .

7. Currency Scams Often Target Members of Ethnic Minorities.

8. Be Sure You Get the Company’s Performance Track Record.

9. Don’t Deal With Anyone Who Won’t Give You His Background Don’t just open an account with any broker; carry out a thorough check on your intended broker. A good way to start is via Google, type the name of the broker and the review before clicking on Google search e.g. Alpari uk review.

4 Internet ready computer.

5 Charting Software

In recent years all online brokers have begun to offer their own free charting software built into their trading platform to study the movements of a currency pair, some are good and some leave a lot to be desired. For many years I have used the same broker through Meta Trader 4 charting platform. Meta Trader 4 (or MT4 for short) is used by hundreds of forex brokers, it allows you to access your broker account right from the platform making it easy for you to adjust and track open positions as well as plotting currency movements on multiple charts. Meta Trader 4 also allows you to use custom indicators and alerts, giving you more freedom to do things you enjoy and leaving Meta Trader to alert you when a trade setup occurs. Another great feature of MT4 is if you have a smart phone you can download the platform onto your mobile phone allowing you to check trades and adjust positions on the go, sometimes vital for a trader on the go. I use alpari uk as my broker through the MT4 platform. They have been very reliable for me using the trading techniques presented in this manual No matter which broker you choose you will find someone who claims “they are not an honest broker,” this is simply due to the fact that when people loose at forex (especially newbie’s) they naturally must find something to blame it on. In my experience if you are trading 4 hour charts and above, you have far less to worry about. Traders trying to scalp the forex market on the 1 minute charts are the ones who tend to get the bad end of the stick very often due to the nature of their rapid buying and selling of currencies. Now that you’ve acquainted yourself with forex trading basics, move on to the practical class section where you will learn, how to open a demo account and place your first order before moving on. Forex trading school is dedicated to seeing you advance from a mere novice to a pro. In Our next class we shall learn how to download, install trading terminal, open a demo account, place and close our first trade.