Forex and CFD trading explained – Tips and advice for beginners

Forex and CFD trading explained – Tips and advice for beginners

Forex market is the largest and most liquid market in the world, daily there are currencies traded in a worth of 5,3 trillion of dollars. Forex market is a place where all the banks, businesses, governments, investors and traders meet in order to trade currencies. Approximately 15% of this trading volume performs corporations and governments that buy and sell goods and services abroad, and 85% of trades constitute investments with the aim of making a profit on currency movements. Foreign exchange market transactions are done in almost every country in the world, but the biggest volumes come from: London, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney. It should be noted that there is no central Forex market. The FX market is open 24 hours a day, 5 days a week.

trading-forex

What do we trade?

When we trade forex, we trade currencies. We can either buy them or sell them. The main currencies with the highest trading volume are: US dollar, Euro, British pound, Swiss franc and Japanese yen. In almost 90% of all FX trades, we can see US dollar. When it comes to currency pairs, the most traded one is: EUR/USD.

Trading currency pairs with leverage

Let’s say that you trade the most common currency pair – EUR/USD. And you think that euro will do for some reason better in the future than the dollar. You will pay to your broker margin (for example 100 USD) and in exchange for that you will be provided with leverage to trade with much higher capital than you have on your account (For example 50x times as much). With this new capital, you as a trader buy euro in the worth of 5000 USD and you will hope/pray that value of the euro will go up and that you will make a profit from the reverse sale, for example, 5 300 USD. This particular trade is called “long position”. Conversely, if the trader would want to make money on the downturn of the euro he would create “short position”.

*Long position – Buying the base currency and selling the quote currency
*Short position – Selling the base currency and buying the quote currency

Base and quote currency

EUR/USD – left currency (euro) is referred as the base currency. While the dollar is in this example the “quote currency”. The first currency tells us how many units we get in exchange for the second currency. In other words, how many units of the minor (quote) currency is needed to buy the base currency. For example, if the price (exchange rate) of currency pair EUR/USD is 1.3261, it means that we get 1 euro for 1.3261$.

Bid and Ask price

All forex quotes are quoted with two prices: the bid price and the ask price. In most cases, the bid price is lower than the ask price. The ask price represents the minimum price that your broker is willing to receive for the base currency. The bid price represents the maximum price that your broker is willing to pay for the quote currency.

spread

The difference between the bid and the ask price is generally known as the spread. Usually, the spread is the main source of how your broker makes money. So when one trader goes to a long position when the bid price is 1,1352 and one trader goes to a short position when the ask price is 1,354, the broker makes money from the difference between these two trades – spread (2pips). The more frequently is the currency pair traded the less is the spread, that’s why EUR/USD spread is usually only about 2 pips.

Thing you need to know before starting trading FX

What is a Pip?
Pip is the smallest moment (increase/decrease) in the exchange rate for a currency pair. For example when the currency pair EUR/USD goes from 1,3634 up to 1,3635, it is a movement of one pip. From every pip which goes by your direction you make money.

What is a LOT?
A standardised quantity of a financial instrument. When it comes to Forex it is 100 000 units of the base currency. In addition to the standard lot (100,000), there is also a mini lot (10 000) or a micro lot (1000).

When to trade Forex and CFD – Market Hours

Generally, we can trade 5 days a week 24 hours a day. The forex market can be divided into four major trading sessions: the London session (has the biggest trading volume), the Sydney session, the Tokyo session, and the New York session. Let’s look what are the open and close times for the biggest sessions in the world.

Session Open/Close GMT EDT
Sydney Open 10:00 PM 5:00 PM
Sydney Close 7:00 AM 2:00 AM
Tokyo Open Midnight 7:00 PM
Tokyo Close 9:00 AM 4:00 AM
London Open 8:00 AM 3:00 AM
London Close 5:00 PM 12:00 PM
New York Open 13:00 PM 8:00 AM
New York Close 10:00 PM 5:00 PM

 

Be aware that open and close times can be during the months of October and April different, because some countries shift to/from daylight savings time (DST). This table above is done for summer time. So when you will be in October changing your time on your watch, adjust it to this table. The open and close times are very important and to watch them is almost crucial when we want to trade profitably. It’s best to trade when the market has the biggest trading volume, this happens when more than one market is open. Therefore the busiest times are when overlaps occur.

tradiing-cfd

New York and London: between 13:00 PM – 5:00 PM GMT / 8:00 AM — 12:00 noon EDT
Sydney and Tokyo: between Midnight- 7:00 AM GMT / PM 7:00 PM — 2:00 AM EDT
London and Tokyo: between 8:00 AM – 9:00 AM GMT / 3:00 am — 4:00am EDT
How much can I earn by trading Forex?

This question cannot be truthfully answered, because for example from one trade into you invest 100 USD you can earn additional 200 USD, but you can also lose the whole investment or even more if you do not set up stop-loss. It is not clear in advance, how the trade goes. Or even when the trade ends, that’s not given, that is trader’s decision. The trader can be in a position for example for a day, or two weeks or for just 10 minutes.

How can I adjust the risk of my trades?

This can be done by using risk management tools. You can set up the automatic closing of your trades when the currency reaches certain price (in profit = take profit, or in loss = stop loss) or you can actively monitor the trade and manually close it. Both stop loss and take profit are very important tools which you should learn how to use. The stop loss makes sure that you do not lose all of your money when the market reverses against you. And the take profit is just the opposite, sometimes it’s better to close a trade when you are up, then to lose the money you so hardly earned.

Differences between CFD and Forex

CFD is very similar to forex trading, but there are still few things that are different and that need to be pointed out. For a start when we trade Forex we trade just currency pairs, we put one currency pair and we trade it against the other, and that’s it. But when it comes to CFD trading you can also except from forex currencies trade: shares, commodities, indices, options and ETFs. The second huge difference between CFD trading and forex trading is linked to how we predict the moment of underlying assets. CFD is from above all driven by supply and demand of a given underlying asset or by trend changes related with business sectors. On the other hand Forex market is primarily directed by global events (like unemployment reports and international political changes).

forex-trading

Where to trade Forex and CFD

You can start trading Forex and CFD either on your computer or on your smart device. Appropriate software or web-based platform will provide you broker for free. You can choose from many and many brokers, where you can trade both forex and CFD, personally, my favourite is Plus500. This broker has a great reputation between traders, plus the trading platform is very use to use. (One of the best broker for novice traders). If you don’t have any previous experience you can create a demo account for free, if you do have them, you can start trading with as small capital as a 100€

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