Forex For Beginners INT

Forex for
Beginners
Trading guide

Forex for BeginnersTrading Guide - Free Ebook
This article is provided for general information and educational purposes only. Any opinions, analyses,
prices or other content does not constitute investment advice or recommendation. Any research has not
been prepared in accordance with legal requirements required to promote the independence of
investment research and as such is considered to be a marketing communication. XTB will accept no
liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly
or indirectly for use of or reliance on such information. Please be aware that information and research
based on historical data or performance does not guarantee future performance or results.
Contracts for Difference ("CFDs") are leveraged products and carry a significant risk of loss to your
capital, as prices may move rapidly against you and you may be required to make further payments to
keep any trades open. These products are not suitable for all clients, therefore please ensure you fully
understand the risks and seek independent advice.
Publication by XTB Ltd.

Forex – also known as the foreign exchange market – is the largest trading market in the world.
The daily volume of transactions in currencies is estimated to exceed $5 trillion. Forex trading
takes place 24 hours a day, five days a week. Put simply, forex is the exchange of one currency for
another at an agreed price. It’s a decentralised market where the world’s currencies are traded as
an over the counter (OTC) market, which means that trades are fast, cheap, and are completed
without the supervision of an exchange.
Essentially, forex trading is the act of speculating on the movement of exchange prices by buying
one currency while simultaneously selling another. Currency values rise (appreciate) and fall
(depreciate) against each other due to a number of economic, geopolitical and technical factors.
Forex is a globally traded market, open 24 hours a day, five days a week (Monday to Friday). It
follows the sun around the earth, opening on Monday morning in Wellington, New Zealand, before
progressing to the Asian markets in Tokyo and Singapore. Next, it moves to London before
closing on Friday evening in New York. Even when the market is closed from Friday to Sunday,
there is always something happening that will take its toll on various currencies by the open on
Monday.
Forex is the world’s most traded market with an average turnover in excess of around $5 trillion a
day. This means that currency prices are constantly fluctuating in value against each other,
creating multiple trading opportunities for investors to take advantage of. It is rare that any two
currencies will be identical to one another in value, and it's also rare that any two currencies will
maintain the same relative value for more than a short period of time.

Fundamentals of
forex trading
You may not even know, but you’ve probably been a part of the FX market at least once in your
lifetime. Let’s say you’re planning a holiday to the United States and you need to change your
spending money from pounds sterling (GBP) into US dollars (USD).
On Monday, you find a local currency exchange and see that the exchange rate for GBP/USD is
$1.45. This means that for every pound you exchange, you’ll get $1.45 in return. You spend £100
to get $145.
However, you pass the same currency exchange a few weeks later and notice that the latest
exchange rate for GBP/USD is now $1.60. Your £100 would now get $160 – an extra $15 – had
you known to wait for the pound’s rise in value against the dollar.
Currency exchange rates are fluctuating all the time for a variety of factors, such as the strength
of a country’s economy. What forex traders seek to do is profit on these fluctuations by
speculating whether prices will rise or fall. All forex pairs are quoted in terms of one currency
versus another. Each currency pair has a ‘base’, which is the first denoted currency, and a
‘counter’, which is the second denoted currency.
Each currency could strengthen (appreciate) or weaken (depreciate). As there are two currencies
in each pair, there are essentially four variables you are speculating on when it comes to forex
trading.
If you believe the value of a currency will rise against another, you go long or ‘buy’ that currency. If
you believe the value of a currency will fall against another, you go short or ‘sell’ that currency.
So for example, if you felt the USD would strengthen (appreciate) against the JPY, you’d go long
or buy the USD/JPY forex pair. You’d also buy if you felt the JPY would weaken (depreciate)
against the USD. Alternatively, if you felt the JPY would strengthen against the USD or the USD
would weaken against the JPY, you’d sell or go short USD/JPY. Because of all these factors, the
forex market gives you endless possibilities every day, hour, even on a minute-to-minute basis.

Basic terms and vocabulary
Before we move on with the topic of trading, we should focus on some important terms that are
used in the world of trading. Trading the markets can seem extremely daunting and complicated
when you first start out. With a large amount of information easily accessible online, as well as
ever-increasing ways to interpret charts, data and fast-moving markets, it’s easy to be
overwhelmed or succumb to the fear of the unknown. One of the best things to keep in mind then
is simplicity. Let’s begin step by step with simple terms and definitions that will be used in your
trading journey.
Leverage
Leverage allows you to gain a large exposure to a market for a relatively small initial deposit.
Whenever you see a percentage like 5% or 10:1 when referring to initial deposit, this is the amount
of leverage available in this market.
Let’s explain by comparing it with traditional trading. For example, if you wanted to purchase
10,000 shares of Barclays and its share price is 280p, your total investment costs £28,000 - not
including the commission or other fees your broker would charge for the transaction.
With CFD trading, however, you only need a small percentage of the total trade value to open the
position and maintain the same level of exposure. Let’s suppose that XTB gives you 5:1 (or 20%)
leverage on Barclays shares, so you would only need to deposit an initial £5,600 to trade the same
amount.
If Barclays shares rise 10% to 308p, the value of the position is now £30,800. So with an initial
deposit of just £5,600, this CFD trade has made a profit of £2,800. That’s a 50% return on your
investment, compared to just a 10% return if the shares were bought physically.
If Barclays shares decline 10% to 252p, the value of the position is £25,200. So, with an initial
deposit of just £5,600, this CFD trade has made a loss of £2,800. That’s a -50% loss on your
investment, compared to just a -10% loss if the shares were bought physically.

The benefits of leverage:
● Leverage can enable you to get the most out of your investment funds by being able to
trade large positions and committing just a fraction of the trade value as an initial deposit.
● You can also take much larger positions than you would otherwise be able to with
physical purchases.
● Your returns as a proportion of your initial investment can be much greater.
● Make your capital go further by trading a range of different assets.
The risks of leverage:
● Just like your gains can be magnified, so can be your potential losses.
● If the market goes against your positions, you could lose all your account funds, so it is
important to understand how to manage your level of risk when trading.
● In the world of retail FX & CFD trading, use of leverage is key.
Pips
A pip stands for ‘percentage in points’.
A pip is the smallest price change that a market can make. Pip size changes across most
markets.
For example, you’ll notice that most currencies are priced to four decimal places - meaning that
GBPUSD moving from 1.2545 to 1.2546 is a movement of one pip. However, one pip in the
USDJPY pair is equivalent to a move in price of 0.01, as that particular pair is only priced to two
decimal places.
You can determine how much you gain or lose per pip using lot size to set the volume of your
trade. For example, a 1 lot transaction on the EURUSD gives a pip value of £7.62.
What this means is that if the market moves in your favour by 10 pips, you would generate a profit
of £76.20 (7.62 x 10). Equally, however, if the market moved against you by 10 pips, then you
would generate a loss of £76.20 (7.62 x 10). It is very important to know the pip value before
opening a transaction on the market to fully understand the size of your potential profit orloss.
Bid and ask
When trading financial markets, you are provided with two prices: the a
sk (buy) price and the b
id
(sell) price.
The bid price is always lower than the ask price, and the difference between the ask and bid price
is called the spread, which is also one of the costs of opening a position on any market.
As an example, if the market window on your trading platform quotes EURUSD at
1.13956/1.13967, then this would mean that the bid price is 1.13956 and the ask price is 1.13967.
When going long or ‘buying’ on a specific instrument, your position will be opened on the ask price
and closed on the bid price. On the other hand, when you go short or ‘sell’ your position will be
opened on the bid price and closed on the ask.
Spread
The spread on financial markets is the difference between the buy (ask) price of an instrument
and the sell (bid) price of an instrument. When placing a trade on the market, the spread is also
the m
ain cost of the position. The tighter the spread, the lower the cost of trading. The wider the
spread, the more it costs. You can also view the spread as the minimum distance the market has
to move in your favour before you could start earning a profit.
For example, let’s say our EURUSD market is quoted with a buy price of 1.0984 and a sell price of
1.0983, so the spread is calculated by subtracting 1.0983 from 1.0984 - giving a total spread of
0.0001 or 1 pip. Once you’ve placed a trade on the EURUSD market, and the market moves at
least 1 pip in your favour, that’s when your position can begin generating profits. This is also the
reason that when you first place the trade, you’ll start off making a loss.
How to understand the cost of spread with xStation
If you’re using MT4, you would need to calculate the monetary value of the spread manually. One
of xStation’s functionalities however is an advanced trading calculator, which instantly
determines the cost of the spread depending on your transaction size.
Risk management
Risk management is one of the key concepts to long-term success on the financial markets - it’s
also one of the most overlooked or underrated aspects of trading. But why is risk management so
important, and how can you implement it in your own strategies?
You could be the most talented trader in the world, with a natural eye for opportunities, and still
blow your account with one bad call without proper risk management. No matter how good you
are, or how experienced you are, you’re still going to incur losses. Even the best traders in the
world suffer losing trades - it’s part and parcel of trading. That’s why risk management is so
important to your trading. Let’s focus on two important tools used in risk management.
Stop Loss
Experienced traders will testify that one of the keys to achieving success on financial markets
over the long term is prudent risk management. Utilising a stop loss is one of the most popular
ways for a trader to manage their risk, around the clock.
What is a Stop Loss order?
A stop loss is a type of c

losing order, allowing the trader to specify a specific level in the market
where if prices were to hit, the trade would be closed out by our systems automatically, typically
for a loss. This is where the name Stop Loss originates from, because the order effectively stops
your losses.
How does a Stop Loss order work in practice?
Let’s take a look at the example above. The trader has opened a long position on EURUSD in
expectation that it will increase in value above 1.13961, which is shown by the first line. You’ll
notice a second line below that, which is a Stop Loss set at 1.13160. This means that if the
market falls beneath this level, the trader’s position will be automatically closed at a loss - and
therefore the trader is protected from any additional price moves lower. A Stop Loss helps to
manage your risk and keep your losses to an acceptable and controlled minimum amount.
Whilst stop loss orders are one of the best ways to ensure your risk is managed and potential
losses are kept to acceptable levels, they don’t provide 100% security.
Stop losses are free to use, and they protect your account against adverse market moves, but
please be aware that they cannot guarantee your position every time. If the market becomes
suddenly volatile and gaps beyond your stop level (jumps from one price to the next without
trading at the levels in between), it’s possible your position could be closed at a worse level than
rice slippage.
requested. This is known as p
Take Profit
A take profit order is an order that closes your trade once it reaches a certain level of profit. When
your take profit order is hit on a trade, the trade is closed at the current market value. Although it
halts any further advance in profit, it guarantees a specific profit after a level has been hit.
How does a Take Profit order work in practice?
Let’s take a look at the previously mentioned example. The trader has opened a short position on
EURUSD in expectation that it will decrease in value below 1.13941, which is shown by the first
line. You’ll notice a line below that, which is a Take Profit set at 1.12549. This means that if the
market falls towards this level, the trader’s position will be automatically closed at a profit - and
therefore the trader is protected from any additional price moves higher. However, it also halts
any further advance in profit if the market falls further. The specific profit will be taken from the
table and the position will be closed.
Elements of a successful trading strategy
A winning strategy normally consists of three crucial elements:
● A trading system with an edge: the consistent application of the rules which govern a
particular strategy, such as specific entry and exit points or always trading in the direction
of the prevailing trend. Maybe you use simple moving averages to help identify a new
trend as early as possible, and a stochastic indicator to help determine if it’s safe to enter
a trade after a moving crossover. You could also use the RSI as an extra confirmation that
helps determine the strength of a trend. Whatever it is, your trading strategy needs to be
unique to you - after all, you’re the one using it - and then applied to your trades.
● Controlling your emotions: if you’ve tested your strategy on both demo and real accounts,
you may notice a difference in results. This is because when real funds are involved,
psychology plays a key part. Emotions like fear, greed, or excitement can stop you from
sticking to your plan, creating potentially negative results. As a general rule, it’s considered
good practice to let your profits run and cut your losses early. Keeping your emotions in
check and sticking to your trading plan can help with this.
● Money management: a crucial part of your strategy that specifies the size of the position,
the amount of leverage used and any Stop Losses and Take Profit levels. Good money
management is a vital part of trading successfully over the long term. It helps to maximise
any profits, while minimising any losses. It also prevents from taking too much risk.
As you can see, proper consideration of these elements will play a strong role in your ability to
trade successfully. If you’re only using two out of three elements above, sooner or later you may
experience a setback that could have been avoided. One of the keys to trading is staying ‘alive’ for
as long as you can.
So, what elements make up good money management? Let’s have a look at some techniques
that can help control your risk:
● The size of your position

● Hedging - taking multiple positions at once in opposing markets

● Trading during certain hours
● Stop Losses and Take Profit levels
● Knowing when to take losses
Let's look at an example where one of these elements is being largely ignored. In this example,
let’s say your account funds are $10,000 and you sell EUR/USD with a trade size of 2.5 lots and a
leverage of 30:1. You decide not to put a stop loss on this trade.
You are utilising most of your account funds in this one position ($8333.33), giving yourself little
leeway for any negative price movement. Every pip move would result in a profit or loss of $25,
without a stop loss order.
Let’s see what happens next. Some data is released and markets react by strengthening the euro,
which rallies over 100 pips against the USD. This move puts the trade in a loss of $2,500 in a
matter of minutes, which is a quarter of your funds, and leaves only a part of your money to
rebuild your account. Before you can decide what your next move will be - whether to cut your
losses, add a stop loss to prevent further losses, or reduce the position size - another move of 50
pips against you occurs, meaning you incur a further loss of $1,250. That’s a total loss of $3,750
for a 150 pip move against you. This trade is a clear example of a position that uses no stop
losses, and how this kind of trading could be dangerous to your account.
How to analyse the market
The two most common types of analysis when it comes to the financial markets are t echnical
and f undamental analysis.
Fundamental
analysis

Unlike technical analysts, who focus predominantly on price action, trends and patterns to help
pinpoint where prices may head to next, fundamental analysts consider all available data to help
them to determine the relative value of a market. They then look for discrepancies between the
current market price and their own valuation to spot trading opportunities.
Let’s imagine you want to buy a car. You’ve seen one you like for $10,000, but you don’t know
whether this is a fair price. So you’ll research around on the internet, ask other people their
opinion, compare it to the prices offered at various car dealerships, and do general background
research to assess whether the price is ‘fair’ and whether the car is worth the money.
What you’d be doing in this scenario is essentially fundamental analysis - you take into account all
the fundamental factors in play to decide if the price reflects the real value of the asset.
Searching for clues
Fundamental analysts use an array of available data, including corporate earnings reports,
geopolitical events, central bank policy, environmental factors and more to help them with their
analysis. They search for clues as to the market’s direction in the future.
Such clues can often be found in macroeconomic data, which is why knowing when important
data is released is so important to fundamental traders. The markets tend to focus on potentially
crucial macroeconomic readings that could affect the market and provide volatility.
Here are some examples of macroeconomic data releases and why they can have an impact on
financial markets:
● Inflation - Inflation is the rate at which the general level of prices for goods and services is
rising. Central banks attempt to limit inflation, and avoid deflation, in order to keep their
respective country’s economy running smoothly. They do this by hiking interest rates. For
example, when central banks announce a rate hike, this could lead to an appreciation in its
respective currency.
● Unemployment - Data from labour markets, such as the US non-farm payrolls, can be
highly influential in the financial markets and can spark volatility in indices and forex. The
employment report is released on the first Friday of every month, and represents the total
number of paid US workers of any business. This market can be very sensitive to this type
of data, because of its importance in identifying the rate of economic growth and inflation.
Just to set some examples, if the non-farm payroll is increasing, this could be interpreted
as a good indication that the economy is growing. If increases in the non-farm payroll
occur quickly, this could indicate that inflation could be increased. If the payrolls come in
below expectations, FX traders could potentially sell USD in anticipation of a weakening
currency. If it beats expectations, the value of the US dollar may increase.
● GDP - Gross Domestic Product is a measure of all goods and services produced in a
specific period. Central bankers and investors look at GDP growth to see if the economy is
getting stronger. As the economy rises, companies generate higher profits and people
earn more, which could potentially lead to a rising stock market and a stronger currency.
The way in which macroeconomic releases can affect the market depends strongly on the
market’s expectations. Generally speaking, the bigger the difference between expectations and
reality, the bigger the reaction could be. If a market expects a central bank to hike interest rates
and the bank does so, the reaction could be ‘priced in’ and it’s business as usual. When a release
takes the market by surprise, however, that’s when major volatility can be sparked.
You can keep informed of all fundamental data releases with our comprehensive economic
calendar. The effect on the market highly depends on the comparison between the actual reading
of a macroeconomic reading and the market expectations, where the bigger the difference, the
bigger the effect on the market. You can keep informed of fundamental data releases with our
comprehensive economic calendar. Each announcement is categorised as either High, Medium,
or Low, in terms of its impact and potential to spark market volatility.

Technical
analysis

While fundamental analysis focuses on the economic information of a company, commodity or
currency, technical analysis focuses on the chart to predict potential future price movements.
As one of the most popular methods used today by traders to help identify trading opportunities,
there are three principles of technical analysis:
1. The market discounts everything

2. Prices move in trends
3. History repeats itself

Prices move in trends
In technical analysis, price movements are believed to follow trends. This means that after a trend
has been established, the future price movement is considered more likely to be in the same
direction as the trend than to be against it. Most technical trading strategies are based on this
concept.
Source: xStation 5
History repeats itself
The cornerstone of technical analysis is the belief that history tends to repeat itself. For example,
if the EURUSD rose ahead of the FED’s meetings, a trader will buy the pair ahead of the next
interest rates decision in the United States. As such, technical analysts utilise historic price data
to help them forecast where prices are likely to head to next. This is where support and resistance
levels come in.
Charts tend to form shapes that have occurred historically and the analysis of past patterns helps
technical analysts to predict potential future market movements. This principle focuses on the
technical analyst’s belief that trading is highly connected to probability and the analysis of
historical shapes gives the analyst advantage before opening a trade. These shapes are known as
price patterns:

Source: xStation 5
Forecasting the future
Technical analysis is the practice of forecasting potential future price movements based on the
examination of past price movements. Technical analysts believe that if the US Dollar was on the
rise recently, it may gain further in the future because it is in an upward trend. There are many
different techniques to identify trends, but much like weather forecasting, the results of technical
analysis do not cover all possible eventualities. Instead, technical analysis can help investors
anticipate what is likely to happen with prices over time.

This article is provided for general information and educational purposes only. Any opinions, analyses,
prices or other content does not constitute investment advice or recommendation. Any research has not
been prepared in accordance with legal requirements required to promote the independence of
investment research and as such is considered to be a marketing communication. XTB will accept no
liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly
or indirectly for use of or reliance on such information. Please be aware that information and research
based on historical data or performance does not guarantee future performance or results.
Contracts for Difference ("CFDs") are leveraged products and carry a significant risk of loss to your
capital, as prices may move rapidly against you and you may be required to make further payments to
keep any trades open. These products are not suitable for all clients, therefore please ensure you fully
understand the risks and seek independent advice.
Publication by XTB Ltd.

Forex For Beginners INT

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Forex For Beginners INT

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Publication by XTB Ltd.

Basic terms and vocabulary

The benefits of leverage:

The risks of leverage:

A pip stands for ‘percentage in points’.

Bid and ask

How to understand the cost of spread with xStation

What is a Stop Loss order?

A stop loss is a type of c

How does a Stop Loss order work in practice?

How does a Take Profit order work in practice?

Elements of a successful trading strategy

A winning strategy normally consists of three crucial elements:

● The size of your position

● Hedging - taking multiple positions at once in opposing markets

How to analyse the market

Searching for clues

1. The market discounts everything

Prices move in trends

History repeats itself

Forecasting the future

Publication by XTB Ltd.

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