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Introduction to Forex

WHAT IS FOREX TRADING?


What is Forex Trading?
Foreign Exchange is the domain in
which the exchange of money between
two countries takes place at a mutually
agreed rate.

Traders can profit on the movement of


the value of one currency compared to
another.
Forex Participants
Institutional Investors
Forex Participants
Central Banks
Forex Participants
Exporters and Importers
Forex Participants
Retail Investors
8 Major Currencies
Country Currency Abbreviation Symbol

United States Dollar USD $

Eurozone Euro EUR

Japan Yen JPY

United Kingdom Pound GBP

Australia Dollar AUD $

Switzerland Franc CHF Fr

Canada Dollar CAD $

New Zealand Dollar NZD $


Currency Pairs
Exchange Rate: Currencies are traded in pairs

EUR USD
TERMS CURRENCY
1.3387
EXCHANGE RATE
BASE CURRENCY

1 Euro or EUR
buys 1.3387 US Dollars or USD
Currency Pairs
Major Pairs
Currency pairs that involved the USD, which are the most
commonly traded in the forex market.

EUR/U USD/JP GBP/U USD/C USD/C AUD/U NZD/U


SD Y SD HF AD SD SD

Minor Pairs / Cross Pairs


Currency pairs that are commonly traded but do not
involve the USD

EUR/C EUR/G GBP/C GBP/N AUD/JP AUD/N CAD/C


HF BP AD ZD Y ZD HF
Currency Pairs
Exotic Pairs
These pairs are not commonly traded and are generally
only offered by specialist FX companies.

Pair Countries
EUR / TRY Euro / Turkish Lira
USD / HKD US Dollar / Hong Kong Dollar
USD / SGD US Dollar / Singapore Dollar
Terms in Trading
Long (long position)
The purchase of a currency with the expectation that it
will rise in value

Short (short position)


The sale of a currency with the expectation that it will fall
in value

Swaps
often referred to as Rollover Interest, are charged when
holding onto a position overnight due to the difference in
interest rates between the base currency and the quote
currency.
Terms in Trading
Leverage
is a facility offered by the broker, to help the trader trade
large amounts while only holding a small amount of capital
compared to what you are trading
Your capital $1,000
Your leverage 1:100
Your trading amount $100,000

Margin
is the amount of money required in your account to
maintain your market positions, in order to cover some or
all of the credit risk associated with borrowing money on
leverage.
Terms in Trading
Margin Call
Is a level set by your broker that defines a minimum amount of
money required to trade in the market. When your account's
value falls below this level, you will be asked to deposit additional
money to maintain your positions. Alternatively you can close
some of your positions to reduce your required margin.

Stop Out
In the event you are unable to top up your account after hitting
Margin Call, a Stop Out may occur if your account value
depreciates to the Stop Out level. Once your account falls below
the Stop Out level, your positions will be automatically closed to
prevent further loss to your capital.
Pips and Profit
Pips
A pip is the 4th decimal place in the currency value.
Most pairs go out to 4 decimal places, but there are some
exceptions like Japanese Yen pairs (they go out to 2 decimal
places).

EUR
BASE CURRENCY
USD
TERMS
CURRENCY
1.2242
EXCHANGE RATE
Pips and Profit
Profit
A pip is the 4th decimal place in the currency value.
Most pairs go out to 4 decimal places, but there are some
exceptions like Japanese Yen pairs (they go out to 2 decimal
places).

You bought EUR/USD 1.3214


You sold EUR/USD 1.3228
You made 1.3228 - 1.3214 = 14 pips
You traded 1 standard lot = 100,000
units
1 pip in EUR/USD = $10
Your profit is 14 pips x $10 = 140 USD
Calculating Profits and
Losses ( BUY)
EUR/USD EUR/USD
Buy Standard Lot Buy Standard Lot
1.3000 1.3015 1.3000 1.2990
15 pips 10 pips
15 x $10 = $150 10 x $10 = -$100
Calculating Profits and
Losses ( SELL)
GBP/USD GBP/USD
Sell Standard Lot Sell Standard Lot
1.5000 1.5030 1.5000 1.4950
30 pips 50 pips
30 x $10 = -$300 50 x $10 = $500
Cost of Trading
Spread

With all trading , there is a cost for entering in and out of


positions you have in the market. In forex you are charged the
difference between the bid and ask price. This is called the
spread.

EUR/ USD Bid: 1.3241


Ask 1.3243
The spread is currently in 2 pips
Your trade will cost 2 pips
Different Types of Lot
Lot is similar to trade size

Standard Lot ( volume: 1.00 )


0.0001 x 100,000 = $10
Mini Lot ( volume: 0.10 )
0.0001 x 10,000 = $1
Micro Lot ( volume: 0.01)
0.0001 x 1,000 = 10 cents
Two-way market potential:
EUR/USD
1 HOUR CHART
ENTRY
(SELL) at
1.2366

123 pips
20 hours

123 pips x $10=


$1,230
EXIT (BUY)
at 1.2243
EUR/USD
5 min chart
EXIT
(SELL) at
1.2274

14 pips x $10=
$140 14 pips
50 mins

ENTRY
(BUY) at
1.2260
Entering your Trade
Market Order / Instant Execution
An order which is made immediately through the MT4
platform. This gives you the best available price in the
market for whatever position you are taking.

Pending Order
An order which can be placed to be executed at a specific
price.
Exiting your Trade
Market Order
Closing an order immediately which was made previously through
the MT4 platform.

Take Profit
An order which you can put on a trade after you have placed it,
which allows your trade to automatically close once it hits a
certain price in the market that is favourable to you.

Stop Loss
This order exists to protect against losses accumulating out of a
comfortable range. If the currency pair moves against you, a stop
loss order can be used to automatically close your trade at a
specified price and limit your losses.
What makes FX superior?
Forex Equities / Bond Markets
24-hour trading During the exchanges business hours
Typically no commission on trades and Commission paid on every trade
very tight spreads executed

Fast execution of orders, with 99.9% of Execution of order takes place only
orders filledwithin seconds when there is a willing buyer
High liquidity at all times, as proven Liquidity depends on market
during the global financial crisis sentiment
Ability to profit from a rising or falling Only can profit from a rising market
market
Lower margin requirements Higher margin requirements with
Equities and Bonds
Leverage of 1:50, 1:100 , 1:200 , 1:500 Very low leverage in Equities
No middle man involved, hence lower High transaction costs in comparison
transaction costs
Trading Fundamentally
Economic Factors

Political conditions

Market Psychology

War/ Terrorism

Natural Calamities
Conclusion
Trading forex is a highly dynamic
exercise, where there is a strong need
to understand the technical aspect of
trading, as well as to be aware and
constantly updated about political
conditions, economic factors and
market psychology