WHAT IS FOREX? Forex is the exchange of one country’s currency for another country’s currency. Now you’ve probably done some forex yourself without even realizing. You may have taken a trip to another country and exchanged your country’s money for that country’s money. That is an example of forex! It’s also known as “foreign exchange”. Now forex is something that practically never stops moving. Forex is traded 5 days a week from Monday to Friday in the foreign exchange markets.
HOW FOREX IS TRADED Forex trading is mostly traded through brokers. A broker is a middle man connecting you the trader to the liquidity providers (the markets). Brokers ensure that when you make the decision to buy or sell they forward your trade request to the markets. If it’s accepted, you’re in the trade!
• Forex is traded by buying or selling your country’s currency for another. If you look at a chart and decorate it with some artwork (analysis – using rectangles, lines etc. to determine the next or future direction) and you believe that specific market will sell and you press the sell button, congratulations you just traded forex (same goes for buys). • You need a broker (connects you to the markets) • You need MetaTrader 4 or 5 (used to manage and place trades from your phone/pc) most brokers support MetaTrader, it’s a mobile application. • You need TradingView, it’s a platform widely used to analyze charts, view charts etc.
WHAT IS A BROKER? A broker is a middle man who acts as a bridge between you and the global markets. When you place a trade the broker sends them to the markets or they keep them in-house (they don’t send your trades to the markets – liquidity providers) they just trade against you. If you buy they sell, it then becomes a hide and seek game where the winner takes all while the loser loses their money.
HOW FOREX IS TRADED Forex trading is mostly traded through brokers. A broker is a middle man connecting you the trader to the liquidity providers (the markets). Brokers ensure that when you make the decision to buy or sell they forward your trade request to the markets. If it’s accepted, you’re in the trade!
• A book broker, sends your trades to the markets (makes money through commissions and spread) • B book broker, keeps your trades in house and trades against you!
WHAT IS A LOT? We’ve noticed that many traders over complicate the explanation of a ‘lot’. Let’s simplify it. When you bet on an online platform you get to choose how much you want to risk, just like betting. In forex trading you’re allowed to set the price you want to risk but lots are calculated differently. Lots start from 0.01 on a standard account and can go up until 500 lots. Higher lots require more money, lower lots are good for smaller accounts.
• Let’s say we as FOREXLAMB have a $100 account, we’ll try to use reasonable lots for example a 0.05-0.08 lot on a trade because it’s somehow suitable for the account size. • $10 account? 0.01 is what we’d use. • A lot is the amount you choose to risk, stop losses are essential to help protect your account from even more losses.
WHO TRADES FOREX? Banks, institutional traders, hedge funds and retail traders (you, us). Now please note that we the retail traders have no impact nor say when it comes to moving the markets. The big boys get to make that decision. They control where price goes to next and where it doesn’t go to! The big boys are banks, institutional traders, hedge funds etc. We the retail traders are small fish. We do not have enough trading capital to influence the market to move in our desired directions. What we’re doing when we’re trading is capitalizing and earning off of moves created by the big boys. They’re also called “the 1%”. At FOREXLAMB we call you the retail trader the 1% as well, simply because you are learning something most people are afraid of trying out. Maybe you’ll be the next big trader and end up working for a bank and end up trading their capital. No one knows.
TRADING TERMS If you hear someone saying “I’m bullish” that means they want to buy. If they say “I’m bearish” it means they want to sell. • Bulls, these are buyers (market goes up) • Bears, the sellers (market goes down) • Paper trading, demo account • SL (stoploss), a feature which you set at a certain price to protect your trading account from more losses. • TP (take profit), a feature you set at a certain price on your account to automatically close winnings (profits) for you. • PnL – profit and loss • Margin – it’s like having $200. With the $200 you can only afford to buy 30 hotdogs. You buy 15 but then when you try to buy the 16th one the man selling hotdogs tells you that your stomach can’t take anymore hotdogs. But if you cool off and wait for the ones you ate already to settle down you may buy more. • Equity – your balance plus running profits (open trades, money you’re making at any given moment) or your balance minus running loss. We’ll keep the terms short so you don’t lose your attention span. More will be findable throughout this course.
TYPES OF ACCOUNTS These are the types of accounts which are important to understand: • Demo account, not real. Every trade taken on this account is 100% risk free! It’s pure paper trading. • Real account, think of your banking app. You may open savings accounts through your banking profile and the money you have in your bank account is your money. That means if you lose any of it, you lose your actual money. That’s how real (live accounts) work in forex. Trades executed from live accounts are real trades, profits made can be withdrawn and losses can lead to you losing all your money if you don’t set stop losses. • Prop firm account, an account you buy from a company making more funds available to you but are non-withdrawable. Account sizes range from $2.5k, $5k, $10k, $15k, $20k till $200k with most prop firms. For example, a $5k account can cost you $59. “But why is it so cheap when I’m getting a $5k account in return?” The answer is simple. They have certain rules in place such as daily risk amounts, profit targets, max losses on the accounts etc. You have to follow the rules they set. You’ll first get a demo account after buying your account from them. Then you have to prove to the prop firm that you know how to trade by making 10% of the $5k account for example which is about $500 in profit. A live, funded account will be awarded to you with a certificate of achievement if you reach the $500 profit target without issues. Then any profits made on the account after the challenge stage (the stage where you had to prove yourself) you can keep up to 80% of the money while they keep 20% or 10%. Additionally to add on to types of accounts, there are also micro and standard accounts. • Micro, small account allows for small deposits like $5. Lots start from 0.10 (0.10 on a micro account is similar to 0.01 on a standard account). • Standard, most used account type. Generally allows any type of deposit from $10. Lots start from 0.01.
LEVERAGE What is it? Leverage is simply power to trade more contracts or open more trades. It enables traders to open more trades on any account type. Leverage is adjustable to your preference so the higher the leverage the more trades you can open. But remember with great power comes great responsibility. High leverage can lead to you losing your money fast. Leverage usually starts from 1:100 and can go up to 1:3000 or 1:Unlimited on most brokers. On prop firms the leverage you’ll usually find is 1:30. 1:100 leverage, this is the minimum on most brokers, usually safer to trade on. 1:500 leverage, standard leverage. 1:1000 leverage, a bit risky. 1:1500 leverage, anything at or over this leverage can be highly risky. 1:Unlimited leverage, allows you to open unlimited trades but the downside to this is that you do not get a warning that you’re about to lose your money. It just happens. Your trading account balance can go from $200 to $0 in seconds! Another thing you may notice when trading on a live account especially if you blow your account (lose all your money) is that your balance can be in the negatives. This is normal. The broker you choose will usually just cover the negative balance and reset your balance back to 0. In case this happens it would be wise to wait for the broker to cover the negative balance first before funding or depositing again. We unfortunately cannot recommend an amount of leverage you should use on your trading account. The choice remains solely upon yourself.
MARGIN AND MARGIN CALL • What is margin? Margin refers to the strain your account gets to take. It’s kind of like leverage but it is a measurement of the percentage of trades opened and trades you can still open. If it turns red (usually when trading using MetaTrader platform) that means you are at risk of a margin call and it’s mostly not a good idea to add or open more trades when your margin is red. Depending on your chosen leverage some brokers won’t allow you to open more trades if your margin level is at risk of a margin call! • What is a margin call? When you’re in a losing trade your margin will turn red as your equity is getting closer and closer to $0. Remember equity is your balance plus or minus your running profits or your running loss. If your balance is $200 and you’re in a losing trade and the amount you’re losing at that point is minus $170 your balance will stay on $200 but your equity will be on $30 ($200 minus $170 loss). This may result in a margin call. To conclude when you get a margin call your trades will be closed automatically leading to you losing money.
