Forex 101

Lesson 1
 What is Forex
The foreign exchange market is usually referred to as the Forex or FX market. It
is the term used to denote the financial market that offers currency exchange.
There are many financial markets across the globe, the stock market, the
commodity market and debt market are some of these financial markets. Forex is
the market for currencies. Many financial markets have an exchange, such as the
London or New York Stock Exchange. The commodity market also has various
exchanges (Chicago Mercantile Exchange, London Commodity Exchange, etc.), an
exchange being a centralized location where financial products are traded.
The Forex market has no centralized exchange, for this reason there are some
great advantages to trading Forex, including round-the-clock trading, easy
access to the financial market and lower trading costs than alternative financial
products such as stocks, shares and other publicly trading financial products.
 When is Forex Traded

Most exchanges have trading hours (a time of day

when financial products can be traded), these
trading hours are generally set according to the
local time of the exchange. The Forex market has
no centralized exchange so currencies can be
traded 24 hours a day.
 What are Forex Pairs
Currencies have no tradable value unless they are
compared to another currency. For this reason currencies
are traded in pairs, which are usually referred to as
Forex pairs or currency pairs.
Here are some examples of commonly traded Forex
pairs...
AUD/USD - Australian Dollar / US Dollar EUR/GBP -
Euro / British Pound GBP/USD - British Pound / US Dollar
USD/JPY - US Dollar / Japanese Yen
What are Trading Sessions?
Due to the 24 hour nature of the Forex markets, trading times are split into 3
manageable trading 'chunks' or trading sessions. These are generally referred to
as the Asian Session, the European Session and the US Session.
The illustration below should provide some clarification. Sometimes these
sessions are also referred to as the Sydney and Tokyo Sessions, the London
Session and the New York Session.
 Why Trade Forex
Now that you know what the Forex market is, we can
move on to some slightly deeper topics, such as why you
should trade Forex?
Forex trading allows individuals, banks, funds and other
entities to profit from price fluctuations in currency
value. You can buy a particular currency and then sell
it when the currency is stronger (worth more), the
difference in the purchase price and the sell price will
either result in a profit or loss, unless you break even.
 What are Pips
Price movements in the Forex market are usually measured by PIP
value. Pip is an acronym for Point In Percentage. It refers to a point
movement, let's look at an example...

If the GBP/USD (British Pound / US Dollar) is currently priced at

1.5810 (1 British Pound is worth 1.5810 US Dollars) and price moves up
to 1.5811, we would refer to this as an increase of 1 pip. If price then
fell to 1.5809 we would refer to this as a 2 pip decrease.
Some prices include pipettes or fractional pips, these are 1/10 of a pip.
Using the GBP/USD example from above, the GBP/ USD could be priced
at 1.58105, this includes the pipette value as well as the pip value.
 Bulls & Bears?

If a Forex pair price is increasing or has increased,

this is usually referred to a bullish price
behavior. If Forex pair price is decreasing or has
decreased, this is usually referred to a bearish
price behavior.
How to make money trading Forex
Currencies are coupled with another currency to create a Forex pair. Forex pairs appreciate
(increase in value) or depreciate (decrease in value). Profitable Forex trading is being able to
speculate these price fluctuations correctly and to buy and sell currencies accordingly.

Below are some examples of Forex pairs, you should be able to tell which Forex pairs have
appreciated or depreciated in value by using the change column (2nd from right). The change
column refers to change in value during a single day.
Forex pairs consist of a base currency (the first
currency in a pair) and a secondary currency (the
second currency in a pair). The base currency is
usually set at the value of 1, the secondary
currency is the exchange value for 1 of the base
currency. In the above illustration the AUD/USD is
priced at 0.71250 to buy, meaning that 1 Australian
Dollar (AUD) is worth 0.71250 US Dollars (USD). The
EUR/JPY is priced at 132.276 to buy, meaning that 1
Euro (EUR) is valued at 132.276 Japanese Yen (JPY).
Make money in either direction
One of the great advantages to trading Forex is that you can make profit
from a Forex pair increasing in price as well as decreasing in price. If you
believe the EUR/USD is going to rise in value, you would buy the EUR/USD. This
is called going long and involves buying Euros and selling US Dollars, as you
believe the Euro is going to strengthen against the US Dollar.
On the other hand, if you believe that the EUR/USD is going to fall in value,
you would sell the EUR/USD. This is called going short and involves selling
Euros and buying US Dollars, as you believe the Euro is going to weaken
against the US Dollar. If your prediction is correct, you could make a profit.
You can gain access to the Forex market by using a Forex broker. A Forex
broker offers Forex pairs to buy and sell and also offers other trading
features and tools that can help you make better trading decisions.
 When to buy When to sell
Being able to speculate future Forex price is one of the keys to being able to trade Forex
profitably. It is not as daunting as it may seem at first, there are a number of trading tools and
aids that help traders with their Forex price predictions...
Technical Analysis - is one of the most common ways that Forex traders analyze and predict the
Forex market. It is widely used amongst Forex traders, as well as stock and commodity traders.
Technical analysis involves studying historical price data, which is usually displayed on a price
chart. Traders that use technical analysis as part of their Forex trading usually combine price
charts with price action analysis and/or technical indicators.
Price action is studying price charts and looking for specific price patterns, levels of price
reversal and other price behavior. Technical indicators are aids displayed on price charts that
can show a trader where future price may be. This site is dedicated to Technical Analysis and
covers both Price Action Trading and Indicator Trading.
Fundamental Analysis - involves studying and predicting reports, events and news that heavily
influence the value of a currency.
How do Forex Brokers make money
Forex brokers make money through some or all of the
following; Charging a commission for each trade entered,
charging financing and interest costs for any positions held
overnight, charging for price charting packages, setting a
spread on offered Forex pairs.
Spread is the difference between the actual price of a Forex
pair and the price the broker is willing to buy or sell the
Forex pair for (on your behalf). This spread price
difference is used as a main source of revenue for some
Forex brokers.
 Types of Brokers
Spread Betting Brokers - If you are based in the UK, spread betting brokers
are one of several broker options available to you. Spread betting is one of
the most popular ways to trade forex in the UK. It is cheap and there are
several advantages, such as guaranteed stop losses and tax free profits.
Most spread betting forex brokers offer a free demo or practice account, we
suggest you open an account with Core Spreads
CFD Forex Brokers - If you are based outside the US, CFD brokers are a simple
way to trade forex. CFD brokers also offer free demo and practice accounts.

True/ECN Brokers - True brokers are those that deal directly with the Forex
Market. If you are wanting the 'real' trading experience or are based in the
US, we suggest trading with an ECN broker
 Forex Orders
There are several ways you can initiate going long
or short a Forex pair. Opening a trade at the
current price is generally referred to as a market
order. Requesting your Forex broker to open a trade
at a specific price in the future is generally
referred to as a limit order. Each trade (or position)
can also have a set take profit and stop loss,
meaning that your broker will close the trade
automatically at a specified profit or loss.
 Leverage

Leverage enables traders to hold large positions

at a minimal cost. Most Forex brokers will offer
at least 1:10 leverage, meaning that for every 1
unit of currency you fund for a position the broker
will fund 9 times that amount. Leverage allows
you to make big gains trading Forex but it can also
lead to big losses