Foreign Exchange / Forex / FX – whatever you call it, trading two currencies without the basic knowledge is equal to gambling, where you rely on pure luck. Master the ABC’s and you’ll already be better than majority of beginner traders!
Forex Market Size
As we have mentioned in other forex school lessons, weekly turnover of the forex market is over $25 trillion. That means on any given trading day, an average of $5 trillion of currency changes hands. In Donald Trump’s words: HUUGE!
Forex trading by retail investors makes up just 5% of trading volumes. This means you must understand and accept you are a little fish in a giant ocean but that doesn’t mean you can’t chase the big sharks and make money!
Don’t forget to check out the best Forex apps for trading!
Buying (Going Long) and Selling (Going Short)
- If you think the price of a currency will increase, you will want to buy it (go long/up).
- If you think a currency’s value will decrease, then you will want to sell the currency (go short/down).
Going long is easy, you buy the asset and sell it when it’s price rise. Going short is a little more complex, but it’s taken care of without you lifting a finger. Basically, the broker or trading simulator will lend you the currency you want to sell. When the price falls, you pay the broker back at the lower price. The difference between the price that you borrowed at and the price that you pay back is your profit.
As a Forex trader, you will be going simultaneously long and short as you trade a pair. For example, long EUR/USD means you buy Euros and sell Dollars. You will make money if the chart rises, and lose money if it falls. It’s best to try out how it works in the forex game with real-time market data.
Currency Pairs Being Traded
The price of a currency pair is, essentially, a reflection of what the global market thinks the future of its economy will be, compared to another country. For example, if you are buying British Pounds against U.S. Dollar (GBP/USD), you are basically betting for the British economy. In other words, you think the British economy will grow more rapidly compared to United States. Afterwards you just have to know how to read currency pairs.
Bulls versus Bears
While bulls are known for throwing an opponent in the air, bears tend to smash them down to the ground. This is a iconic analogy in the Forex as it represents rising and falling markets. A bull market is a market that is rising in value. A bullish trader is one who believes the market will rise, thus goes long.
Pips and Pipettes
A pip is the abbreviation of the phrase “Price Interest Point”. This is the basic and most important unit of measurement in forex.
Pips are used to measure gains and losses. The cash figure that a pip actually represents will vary depending on the pip value. The pip value varies depending on the pair being traded. Luckily, all best forex brokers will calculate the pips automatically for you.
Spread
The spread is the fee that you incur when trading currency. The broker executes your trade at a slightly higher (Buy) or lower (Sell) price than the market rate, and takes the difference between the two as its fee.
Lots
The concept of a lot is the same as any grocery item that is sold in a multiple pack (like a six-pack for beer). Currencies are bought and sold in minimum size packs that are called lots. This is so that tiny amounts cannot be traded, because this would be inefficient and unprofitable for market participants.
- Standard lot – 100,000 units of the base currency
- Mini lot – 10,000 units of the base currency
- Micro lot – 1,000 units of the base currency
- Nano lot – 100 units of the base currency
Leverage
Leverage allows you to earn large profits without having to raise huge amounts of cash. U.S. maximum leverage is 1:50. In Europe, normally it is up to 1:30 due to ESMA restrictions. Without any leverage, you would need $100,000 in your account in order to trade a standard lot. With leverage of 1:100 you need just 1/100 of the amount, or $1,000 as you are lent your account size X100 by your broker. Remember, that leverage works on both sides of the trade – when you’re winning, and also when the market goes against your prediction.
If you think a currency will rise, you would buy it. This is also known as going what?
Which of these is the largest social trading community?
Selling short means that you think a currency will…?
FAQs
Essentially, it is made up of four significant highs and lows on the chart: A new prevailing trend forms at A. The market retraces at B. The initial trend resumes at C. You can trade the next correction at D.
What is the ABC pattern rule? ›
ABCD pattern rules
In the move from A to B, the market should not go beyond either A or B. In the move from B to C, the market should not go beyond either B or C. In the move from C to D, the market should not go beyond either C or D. In a bullish ABCD, point C must be lower than A and D must be lower than B.
What is 90% rule in forex? ›
The 90 rule in Forex is a commonly cited statistic that states that 90% of Forex traders lose 90% of their money in the first 90 days. This is a sobering statistic, but it is important to understand why it is true and how to avoid falling into the same trap.
What is the 5 3 1 rule in forex? ›
The numbers five, three, and one stand for: Five currency pairs to learn and trade. Three strategies to become an expert on and use with your trades. One time to trade, the same time every day.
What is the rule of 3 in forex trading? ›
The Rule of Three allows us to view the market with a new set of eyes. Spotting pull backs, trend reversals, invalid vs valid price break outs. As we won't receive privileged information, we can at least have a greater percentage to align our positions with larger institutions and trading firms.
What are the three rules of forex trading? ›
10 golden rules of forex trading
- Introduction. ...
- Rule 1: Education Is Key. ...
- Rule 2: Risk Management Is Paramount. ...
- Rule 3: Patience Is a Virtue. ...
- Rule 4: Use a Demo Account. ...
- Rule 5: Stay Informed. ...
- Rule 6: Keep Emotions in Check. ...
- Rule 7: Diversify Your Portfolio.
Once A, B, and C points (and AB, BC legs) are identified, a projection algorithm is applied to compute the Potential Completion Zone (PCZ). This PCZ area is where the ABC pattern is expected to complete and may signal a continuation of its trend in the first trend direction (AB).
What is the ABC trade setup? ›
The key components of the ABC Trading Strategy involve identifying the A, B, and C swings in the price trend. These swings represent the continuation of the ongoing trend, a potential trend invalidation, and confirmation of a trend change, respectively.
What is 123 pattern? ›
The 123-chart pattern is a three-wave formation, where every move reaches a pivot point. This is where the name of the pattern comes from, the 1-2-3 pivot points. Here is how the pattern looks like: 123 pattern works in both directions. In the first case, a bullish trend turns into a bearish one.
Is $500 enough to trade forex? ›
This forex trading style is ideal for people who dislike looking at their charts frequently and who can only trade in their free time. The very lowest you can open an account with is $500 if you wish to initiate a trade with a risk of 50 pips since you can risk $5 per trade, which is 1% of $500.
Absence of risk rewards skills
Many traders get in on bad trades. They don't understand enough about the market and just invest in believing that the market will eventually go up. That is many times not the case and one should be aware of how to treat risk vs rewards.
Can I trade forex with $100 dollars? ›
Overall, while it is possible to start trading forex with just $100, it is important for traders to approach it with caution and to have a solid understanding of the market and their own risk tolerance.
What is No 1 rule of trading? ›
Rule 1: Always Use a Trading Plan
You need a trading plan because it can assist you with making coherent trading decisions and define the boundaries of your optimal trade. A decent trading plan will assist you with avoiding making passionate decisions without giving it much thought.
Can I start forex with $5? ›
Yes, it is possible to start trading with as little as $5, but it's important to understand that trading with such a small amount presents several challenges and limitations.
What is the 30 pips a day forex strategy? ›
30-pips-a-day is a trading strategy used with the volatile currency pairs like GBP/JPY. That is because this approach requires a wide space for trading maneuvers to obtain the required profit margin. Also, volatile currencies often provide clearer market reversal points. The timeframe used in this approach is 5 min.
What does ABC stand for in money? ›
Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.
How do you trade ABC correction? ›
Simple ABC Correction: Trading Tips
Draw a trendline from E to B and extend it downward. When price closes above the trendline, buy. For aggressive traders, draw a trendline down from B along the tops and buy when price closes above it. A close above the intraday high at A (blue trendline) also works as a buy signal.
What happens after ABCD pattern? ›
The pattern is then followed by a reverse and rise in price, known as BC, which is then reversed to a bearish move (CD), completing the pattern. The D point falls below point B. Once the price completes the CD price swing, there is a reversal and an increase in the price once the price touches point D.
What is forex Type B? ›
The B book broker goes by different names such as market maker or a fixed spread broker. To explain this in simple terms, if you place a buy order, your broker will be selling to you and vice versa. Many traders are starting to doubt this type of forex brokers.
Foreign Exchange / Forex / FX – whatever you call it, trading two currencies without the basic knowledge is equal to gambling, where you rely on pure luck. Master the ABC’s and you’ll already be better than majority of beginner traders!
