Forex Primer: Trading for Gain
- Lesson 1: All you need is...
- Lesson 2: Forex lowdown
- Lesson 3: Leverage (a little help from your friends)
- Lesson 4: Orders
- Lesson 5: A beginner's guide to technical analysis
- Lesson 6: Technical indicators
- Lesson 7: Fundamental analysis
- Lesson 8: Trading psychology
- Lesson 9: A simple trading system
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History of the Market
Today’s forex market was formed in the early 1970’s. The first major step in the formation of the market was the Bretton Woods Accord, which was established after World War II to restore the world’s economic state. The Bretton Woods Accord decided that all major currencies would be pegged to the U.S. dollar, which was pegged to gold at a price of $35 per ounce. Under these standards, the major global currencies pegged to the U.S. dollar were only able to fluctuate by one percent.
The European nations sought to move away from their dependency of the dollar in the 1970’s, thus forming the Smithsonian Agreement and the European Joint Float. Each agreement was similar to the Bretton Woods Accord, but allowed a greater range of fluctuation in the currency values. However, both agreements failed, paving the way for the free-floating systems. There were no longer pegs on currencies, and therefore currencies were able to fluctuate freely.
Traders utilize these fluctuations on the forex market. By studying price changes and current events, a forex trader can buy or sell one currency against another in hopes of making a profit off of the price fluctuations.
The Forex market is a global entity. Market hours overlap one another, ensuring that there's always an open market. Traders can make trades 24 hours a day, 5 days a week. The market closes on Fridays at 21:00 GMT and reopens on Sundays at 21:00 GMT.
Here's a chart that contains the forex market hours:
A trading pair consists of a base currency and a quote currency. The first currency listed in the pair is the base currency, while the second currency is the quote currency. Traders buy or sell the base currency using the quote currency. Let's take a look at this pair:
In the trading pair above, the Euro is the base currency and the United States Dollar is the quote currency. If you are trading with the EUR/USD, you'd be purchasing or selling the Euro using the United States Dollar.
Leverage is a loan given to a trader by a broker to intensify that trader's results.
Calculating leverage is simple. All you have to do is multiply the leverage by how much you wish to trade. A leverage of 50:1 means that the broker will match every 1 dollar you trade with 50 dollars. A leverage of 20:1 means that every 1 dollar you trade will be matched by 20 dollars, etc. For example, if you sign up with Forex Club's minimal balance of $200 and trade with a leverage of 50:1, that means that you can command a position of up to ($200x50=) $10,000.
Traders can set a stop-loss and a take-profit order to automatically close a position when price rises or falls to a certain point. Stop-loss orders ensure that price won't fall or rise more than you want it to and prevents you from any further losses. Take-profit orders ensure that your position is closed when you make a certain amount of profit.
The OCO order (one cancels the other) ensures that after your position is closed all stop-loss and take-profit orders are canceled. If you have a good idea of how the market will move and wish to set another order before your position is closed, you can place an If-done order.
Additionally, there are Trailing Stop orders which adjust if price moves in your direction to lock in profits.
Spread costs are the payments traders pay to brokers to initiate each trade. The spread cost appears as the difference of the sell (also known as ask) price and the buy (also known as bid) price. Please view the example below:
The current sell price for the above currency is 1.31606, while its buy price is 1.31614. The difference between the buy and sell price is 8. The pair we're looking at is the EUR/USD. For this pair, pips, or the minimal price amount that price can move, is the amount that is located four places beyond the decimal point. When the Japanese yen currency is part of the currency pair, the pip amount is considered the amount located two points beyond the decimal.
Looking back at the example above, the difference in pips between the currency pairs is 0.8. This is the cost that you will pay to the broker. The actual amount is dependent on the amount of money you plan on trading. Please view the chart below to understand the amount of money that you pay per transaction.