Forex and CFD trading explained – Tips and advice for beginners

                        Bid and Ask price            Leverage            Market Hours            CFD            Where do we trade Forex & CFD

Forex market is the largest and most liquid market in the world, daily there are currencies traded in the worth of 5,3 trillion of dollars. Forex market is a place where all banks, businesses, governments, investors, and traders meet in order to trade currencies. Approximately 15% of this trading volume perform 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 can take place anywhere in the world, but the biggest trading 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, the USD plays a role. When it comes to currency pairs, the most traded one is EUR/USD.

How can a simple trade look like

Let’s say that you decide to 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. That is why you decide to buy euro in the worth of 1000 USD and you hope/pray that the value of euro will go up and that you will make a profit from the reverse sale, for example, 1 200 USD. This particular trade is called “long position”. Conversely, if a trader wants to make money on a downturn of the euro he has to create a “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 currencies are quoted in pairs (base + quote currency) and they consist of two different prices: the bid price and the ask price. The bid price (sell) is lower than the ask (buy) price. The bid price represents the minimum price which your broker is willing to sell you a currency. The ask price represents the maximum price that your broker is willing to pay for a currency.

spread

The difference between the bid and 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 ask price is 1,1352 and one trader goes to a short position when the bid 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 lower is the spread, that’s why EUR/USD spread is usually only about 2 pips.

Leverage – Simply explained

Leverage is a very difficult, yet crucial tool that should every forex trader master. It can help you to drive your profits to the havens, if you can correctly predict the future direction of a currency. But at the same time, it can also destroy your beloved capital rather swiftly (if you predict the direction incorrectly). Forex traders can use usually up to 1:300 leverage, but lower or no leverage can be also, of course, used. To show how leverage works, please follow the next example: Let’s say that you trade the currency pair EUR/USD and you predict that euro will decline (short position). For this position, you use a margin worth of 1 000 Eur and leverage 1:50. This will allow you to trade with funds in the worth of 50 000 Eur. Since the currency pair EUR/USD is quoted to four places after the decimal, each “pip” is 0.01% of the “whole price”. Based on the invested amount after leverage (50 000 Eur), each pip is worth of 5 dollars. (If your margin would be 10 000 Eur and you used the same leverage, each pip would worth 50 dollars).

Things you need to know before you start 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 standardized 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 CFDs – 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.

The Difference between CFD and Forex

The difference between Forex and CFD is very often misunderstood even tho it is very plain. With CFD we can trade shares, commodities, indices, options and ETFs and Forex. Yes, that is right also FX. Which means that there is no difference between them, as forex belongs under the CFD category.

forex-trading

Where to trade Forex and CFDs

You can start trading Forex and CFDs either on your computer or on your smart device. Appropriate software or web-based platform will be provided to you by the broker free of charge. You can choose from many and many brokers, where you can trade both forex and CFDs, personally, my favorite is Plus500. This broker has a great reputation among traders, is overseen by the regulatory body CySEC and has one of the most user-friendly platforms out there. 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 the minimum deposit of $100.

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I learned early that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. I’ve never forgotten that

Jesse Livermore
Sales & Marketing, Alien Ltd.