If you are undertaking this training course, you are probably familiar with forex (or other types) of trading. For that reason, in this post, I do not intend to use scientific terms or relay the content of the economics textbooks.
Let’s get something clear right out of the gate: Trading = speculation.
Online trading = speculation made via the Internet while using specialized technical means (trading platform, broker, and exchange infrastructure).
Forex trading = speculation with CFD contracts for various assets (I’ll talk about the CFD concept a bit later).
Stock trading = speculation with equity instruments, including stocks, futures, options, and so on.
Commodity trading = speculation with physical goods, when you bought a product at one place at a low price and sold it at another place at a greater cost. I will not discuss the commodity trading business in this training; I mention it just to make an example in order to understand the logic.
Where does the money come from when you trade forex (or something else)?
If you set out to start trading forex, it is important that you understand that your earnings come from the difference between a financial instrument’s purchase price and its sale price (CFD contracts, in our case).
- Buy and then sell at a more expensive price => Profit
- Sell and then buy at a cheaper price => Profit
- Buy and then sell at a cheaper price => Loss
- Sell and then buy at a more expensive price => Loss
At this point, we will introduce some new terminology to describe the types of positions you can open: long positions and short positions. These terms will appear in the lessons that follow.
When we buy an asset and expect the costs increase in order to sell for a profit, we open a long position.
When we sell an asset and expect the costs decrease in order to buy for a profit, we open a short position.
What is the best way to sell and buy forex?
This is the most popular newcomer’s question in the first lesson. Yes, this is possible in the trading world. I see two ways to quickly explain this phenomenon to a newcomer:
- It’s important that you learn to think not in «buy» and «sell» terms, but «opened a long position» and «opened a short position.» Read the definitions above three times and commit them to memory.
- Although this may be painful for traders to hear, it’s necessary to draw a parallel with the rates. We do not buy an asset, but rather make a bet for the price increase while engaging in online trading. Likewise, we do not sell the asset, we make a bet for the price decrease.
If anything up to this point is not clear, please leave a comment below so that I can answer any questions that may arise.
What is the right way to choose a trading tool?
Traditionally, we value each trading tool for online trading based on several parameters. The biggest one is liquidity. Liquidity is the ability to buy or sell an asset at any time.
Allow me to elaborate: Let’s suppose you want to buy the shares of one little-known third-tier company for a million dollars. The current share price is $50q. You have an opportunity to buy 20,000 shares at the current price for a million dollars.
In reality, however, the sellers on the exchange may only be ready to sell you just 100 shares at the current price, another 150 at a price of $50.50, another 100 for $51, and so on. The result is that if you try to buy 20,0000 shares at market price, your total position will be opened at a rate that is higher than the quotes you see might initially indicate.
This means that the asset’s liquidity was not sufficient to meet your needs.
There are the tools at the same time where the sellers and buyers who are ready to buy and sell large volumes at current prices are present. Such an asset will be considered more liquid.
Volatility is an indicator which characterizes how prone a price is to swings in price in either direction. Compare the following two charts:
The first chart shows a price which is situated at approximately the same level throughout the day. The trading opportunities are limited since large movements are absent.
The second chart shows a large movement. A trader has an opportunity to earn at a price change if he enters the market at the right time.
Thus, in the first case we are dealing with low volatility, in the second one — with high volatility. We are interested in the most volatile assets, first of all.
Predictability may not be the most obvious factor, but, with experiencer, you come to know what to expect from certain assets. Tools exist which make it easy to find technical patterns or patterns that are started by market events (fundamentals). Other instruments are much more difficult to analyze—their prices fluctuations are more or less random.
At the same time, the second tool type is usually better suited for long-term investment. It often happens that fluctuations during a day are similar to chaos, and a daily graphic shows clear trends when looking a month or a year dynamics.
Syncing up Times
The schedule of trading sessions is one of the most common forex questions on social networks. You should know that most transactions in a certain instrument are carried out in a strictly defined working period, when sellers and buyers converge and make transactions. Most often, we focus on the exchanges’ schedule. For example, it’s necessary to track American stocks during the New York Stock Exchange’s working hours. The largest euro-dollar currency pair movements reliably occur during the European trading session.
- Asian: 23:00 — 9:00 GMT
- European: 6:00 — 16:00 GMT
- American: 13:00 — 23:00 GMT
- Pacific: 20:00 — 7:00 GMT
These time are in GMT. Be sure to convert them to your time zone!
We will discuss this point in detail when we talk about risk management. In general, this applies less to forex, but, if you have a limited budget, it makes no sense to choose the most expensive assets. The 1 lot cost can be 1, 50, 150 dollars or something like that. The main reason for this is that you will not be able to comply with reasonable risk management rules if you risk the whole deposit in each transaction just because you do not have enough free funds for it.
Market Participants and What Forex Brokers Lie About
First it’s necessary to understand what exactly we are going to speculate on in order to engage in a trade. We do not need to learn the history, activities, background, financial statements and Apple’s board of directors in order to buy or sell its shares, but it is necessary to understand what the shares actually are.
This is necessary at least to be aware of the fees and other costs you will incur during the trading process. Quite often, it happens that a trader who made 100 trades, having earned $100, realizes that he paid $100 or more in fees to the stock exchange or broker while he analyzes his reports at the end of the month.
So, let’s see what most traders trade, which tools are used by the market participants, and what features can be found on the way.
Shares that are traded on stock exchanges have a price which is changing constantly. Traders earn money based on changes of this price. Sometimes, the shares have the longest chain of market participants, which leads to significant expenses for the trader.
Perhaps I should clarify the reason that I’m bringing up expenses in the very first lesson. In reality, your approach to trading depends on your expenses. For example, scalping, which we’ll discuss in one of the following lessons, means making quick trades and getting a small profit. Traders should make sure that their transaction costs are minimal if they choose to scalp!
As an exercise, try to solve the puzzle with the following conditions:
- You make 50% of profitable trades and 50% unprofitable ones.
- You earn on average 7 points (I’ll tell about what this concept later, now it’s not so important) for each profitable transaction and you lose 5 points for each unprofitable trade.
Is your strategy profitable?
Of course, the answer is yes. Uncomplicated counting confirms that you are in a positive territory by 2 points after 1 profitable trade and 1 losing trade. The strategy is profitable on the whole since we have the same profitable and unprofitable trades number.
Now we’ll add the third condition to the puzzle:
- You are charged a 2 point fee for each trade.
What happens? Now, each profitable trade you are in positive territory by 5 points, not 7. You are in the negative territory in each losing trade by 7 points, not by 5 ones.
Expenses can make the seemingly profitable strategy unprofitable!
Now to turn to the shares. Traditionally, this instrument has been and remains an investment. The companies release shares on the exchange while allowing the market participants to buy them and, in addition to earning income on the difference between purchase and sale costs, they regularly pay dividends, which are calculated depending on the company’s financial results for the reporting period in order to raise additional capital.
Online trading is carried out via an exchange, which a trader accesses through a broker. Previously, this used to mean a real, live person. Now, though, it happens through the global trading infrastructure. Today, almost everyone has the opportunity to buy and sell shares on the stock exchange: large funds, small companies, speculators, private investors. In addition, the exchange is supported by a large infrastructure, a clearing system (which bring the seller and the buyer together within the asset or contract purchase and sale), and «market makers» who support the asset liquidity and do not allow the price to slide hundreds of points in different directions, and so on.
Shares have ceased to be purely an investment tool due to brokers who give customers an opportunity to trade with a leverage (we will discuss leverage in the following lessons).
The point is a trader has an opportunity to buy or sell more than his trade deposit balance allows due to increased risks. Almost all instruments that you can trade via a broker are subject to leverage.
Traders have the opportunity to open enormous positions thanks to huge Leverage in the forex market, where the basic contract value is huge (1 lot of most currency pairs equates to $100,000). The Leverage disadvantage is every item now costs several times more, and a small market movement is enough for the trader to lose his entire deposit.
Thus far, we have smoothly approached the concept of forex.
What is Forex?
Brokers and training companies tell tales that say that forex is a market which includes the world’s largest banks, financial institutions, and funds making the currency transactions. A trader is offered to take part in this. Foreign Exchange?
In fact, the forex market doesn’t exist. At least, not a centralized one, such as a stock exchange, where sellers and buyers are brought together. Of course, you will not have to trade with any banks. But this doesn’t mean you shouldn’t participate in this market. On the contrary—it’s worth do it.
I talk about aspects of the key brokers’ work in one of the following manuals in detail (you do not have to buy anything, everything is free, just read it patiently).
Now I will tell you in detail about what is traded on the forex markets.
What is a CFD?
Formally, a CFD is a «contract for difference»—an agreement between two parties about transferring the asset cost difference to each other at the transaction’s start or end.
I try to simplify all terms as much as possible. It is enough to know that CFD is a financial instrument which allows for betting on an asset’s price growth or fall.
Thus, a broker has an opportunity to create CFD for any asset whose price is interesting to speculate with.
This is neither good nor bad.
An important point to emphasize is that your broker is your contractor according to the contract. That is, you get money when you make a winning trade. When you make a losing trade, your broker gets money.
Unfortunately, such a system is not used only by forex brokers. Alas, some companies that provide clients with the access to the exchange sometimes can be seen to «overlap» customers’ trades with their own money while opening opposite positions on the exchange. Thus, when a novice trader loses money, a broker can assign it.
Fortunately, today the market is much more civilized than in the early 2000s. Even if a broker, but not an abstract seller or buyer is the trade’s counterparty, it does not mean he will manipulate prices and force the trader to lose money. This is not needed—in fact, according to statistics, most traders lose their money in the financial markets.
Today, the most popular are CFDs for the following assets types:
- Currency pairs
These pair include the three «majors,» which are the most commonly traded: EUR/USD, GBP/USD, USD/JPY. Each currency pair quotation is the rate of one of the world currencies (euro, pound, and yen) to the dollar rate. We’ll discuss the quotations in detail in the next lesson. There are several dozen other currency pairs in addition to three main ones which can be divided into 2 types: dollar-linked (for example, USD/CAD or USD/CHF), as well as those not pegged to the dollar (for example, EUR/CAD).
Brent and WTI oil are the most popular here. A contract for natural gas is a bit less popular among traders, although the interest quickly returns at moments of interesting macroeconomic events associated with this asset.
3. Crypto Assets
Recently, crypto is one of the most interesting instruments. Crypto assets hav a frenzied volatility. Today, Bitcoin, Ethereum and Litecoin are the most popular cryptocurrencies represented by forex brokers. Nevertheless, a new currency may appear at any time, and I’m sure brokers will quickly adopt it.
The key advantage in trading such instruments through a forex broker is the ability to open both long and short positions. Thus, it is easy to earn on a profit after a sharp increase—most traders use it. Of course, this applies to both cryptocurrency contracts and all other instruments.
Forex brokers allow you to earn on the changing stock prices of the world’s largest companies. Of course, the choice is usually not so clear as at NYSE, where thousands of companies are represented. Typically, brokers choose the most popular companies: Apple, Google, Microsoft, General Motors, etc.
The stock index is the securities market state indicator calculated in a certain way based on the most liquid ordinary shares or bonds.
For example, the DAX index, which is calculated on German companies’ basket price basis, is a German stock market indicator. The situation is similar with the French CAS, American S&P, Brazilian Bovespa and so on.
Forex traders rarely trade these instruments. It’s useful to keep index graphics in front of the eyes in a separate trading platform window, though. We’ll discuss the way to to use it in the market analytics section.
To sum up, we can see a trader actually gets 24/7 access to the most relevant financial instruments from around the world and the opportunity to earn money on their changing prices while trading via a forex broker.
WHAT ARE FUTURES AND OPTIONS?
This lesson training will not cover the futures and options topics in detail. Nevertheless, it’s necessary to have a general idea. Futures don’t differ much from a CFD contract, which is offered by forex brokers. The main essence for a trader is that futures are an exchange tool. This imposes certain restrictions. For example, limits the trading leverage (the maximum trading leverage of exchange brokers is several times lower than forex brokers). In addition, the futures liquidity is provided by the participants of the exchange, which also makes a significant contribution to the trading process.
The option is one of the most difficult things to understand among traditional exchange instruments. It will suit people who are inclined to build mathematical models, have good spatial thinking, and love to count—if you are among them, learn more about exchange options!
WHY IS IT NECESSARY FOR A NEWCOMER TO CHOOSE FOREX MARKET?
To conclude, I will tell you the reason a newcomer should start with forex and why I still trade through a forex broker even though I am an experienced trader. Here are a few basic reasons:
First, a trader shouldn’t care what he’s trading. Derivative financial instruments (derivatives)m, which, in essence, include both futures and CFD contracts, are essentially the same. The ultimate goal is to buy low, sell high and vice versa — to sell high, then to buy low. A trader is guided by several basic parameters when choosing an instrument, which I will describe in detail in one of the following lessons.
Secondly, forex is the easiest way to start trading. In my opinion, trading platforms are one of the key advantages which novice traders never think of. Metatrader is a real miracle compared to some platforms for trading on the stock exchange—it has a clear interface, excellent speed, and a convenient mobile version. All forex brokers give customers the same program, while many stock brokers often make their own, which often leads to terrible technical difficulties.
Third, forex has a very low entry threshold. In fact, a trader has an opportunity to trade on a demo account for any amount of time until he is ready to risk real money. $100 is quite enough to start, while the same amount is hardly enough to open a position on an exchange.
Well, are you tired? This was the first, introductory lesson of my training. Once again, I do not sell anything on this site. I don’t have paid lessons and closed sections. All I would like share with the novice traders is presented in 20 lessons. Just take the time to carefully read the lessons in order while making all the calculations and exercises that I present to learn the material.
MAIN ARTICLE CONCLUSIONS
- Easy start, opportunity to understand and learn to trade for free, ability to quickly disperse the deposit, ability to choose any from a huge number of different trading tools, the opportunity to do everything without leaving your house: open an account, trade, and deduce profits are the main forex market advantages for newcomers.
- Trading instruments are exchange and over-the-counter. Forex refers to over-the-counter one.
- Each market has its own fees and costs. These costs can significantly affect the trading system and general effectiveness.
- Forex market allows you to open both long and short positions on any asset. This means you have an opportunity to earn on both price rises and falls.
- You do not trade with banks or investment funds in forex marke — you trade with your broker. But there is nothing wrong with that.