Forex

Forex Trading

What Makes Forex Trading So Popular?

Forex trading has become one of the most popular trading markets available. It has far eclipsed trading in stocks, options and many other trading vehicles. Its popularity is due to both its simplicity and the fact that it has now been made available to retail traders. That means traders just like you can have access to this over-the-counter market.

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This has been made possible by way of online trading platforms and online brokers just like AvaTrade. Online Forex trading allows traders to open positions for themselves and trade on an intraday basis. E.g. Open and close a position the very same day. If a trader decides to roll his trades over to the next day, he will pay a fee called a rollover.

The Basics of Online FX Trading

You will come across a currency pair like the EUR/USD. The EUR value is quoted against the current price of the US dollar. If the EUR price rises against the dollar, then the dollar price is sinking. The reverse is also true.

Quite simply, your goal is to BUY this pair low and SELL high (ideally for a profit, although sometimes losses occur). You can also SELL low and then BUY high (this is called shorting the currency pair).

Many factors will move this price, these include geopolitical events, fundamental news events, data releases like inflation and consumer data and even speeches by Presidents and members of the Fed.

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How Much to Trade Forex?

Generally, the cost restrictions that formerly applied to traders, are no longer a barrier. For instance, when you open a trading account with AvaTrade, and you decide to trade Forex, you will not pay commissions and you only need $100 to open your real account.

Apart from this, the only charge you will pay is called the spread. This represents the difference between the BID and ASK price. This is the price the broker gives you for buying or selling an asset. The difference between the two prices is the spread and it is quoted in pips. At the time of writing, 1 euro was worth 1.18234 dollars.  If the BID price is 1.18234 and the ASK price is 1.18237, the difference here is 0.00003. This is a 3 pip spread and this is in effect the transaction cost you will pay the broker for the service they provide.

So Why Trade Forex?

There are many benefits to trading Forex. Here are just a few:

  • No middleman – Forex is an over the counter market (OTC). This means that you are directly connected to the market, so you can trade without the interference of a third party.
  • Leverage – With a small amount of funds, you can use the facility of leverage to multiply the value of your capital. That means if you use leverage of 200:1 your $100 becomes worth $2000 and gives you  much greater exposure to the market. The purpose of leverage is to increase your rewards, but remember it can be a double-edged sword as it can increase your risks too.
  • Liquidity- The Forex market is highly liquid, meaning you can trade what you like when the relevant market is open.
  • Low barriers to entry – As mentioned, you can start trading with AvaTrade for just $100. That means it is an excellent way for new traders to get a feel of the market without committing large sums.
  • Demo trading account – You can practice trading with a virtual account up to $100K! This gives you full access to the platforms we offer, including the popular MT4, the MT5, AvaTradeGO and our Options platform. You can also test out your manual trading strategies with a demo account and back-test your automated trading strategies.
  • Low Transaction Costs – You will usually pay a spread (as we mentioned above) when you open a trade position in the market. Spreads are usually less than 0.1% under normal market conditions and represent the only trading costs you will be expected to pay. There are no brokerage fees, or custodial fees.

Market Sessions

There is always a market open throughout the working week. We start with the Asian session and then move on to the US session, followed by the European Sessions. Unlike when trading stocks CFDs, the market session doesn’t matter as you can trade any currency pair in any of the available sessions. Markets are closed on the weekend though (unless you decide to trade cryptocurrencies).

Stocks vs Forex

  • When trading Forex, rather than buying the underlying asset, as you would with stocks, you are speculating on whether the price of the asset will rise or fall. Will the EUR/USD rise or fall?
  • With Forex you can go long or short, that means when the asset price is rising you would BUY it and SELL it once it has risen enough to give the trader a price differential in the form of profit. Alternatively, when the price of the currency pair is falling, you can first SELL it and then BUY it later when the price rises. That is known as going short.

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Foreign Exchange Trading Guide

How To Trade Forex

First think you need to do, is to open a forex trading account.

Forex trading or foreign exchange trading is more or less like trading in any other market. The basic mechanism of any market is the exchange of one product for another product eg. You go into a shop and you buy a product, you exchange that product for cash. For the Forex market however, the product that we are dealing with is money rather than services or goods.

Participants in the Forex market trade one type of currency for another, with the anticipation that the value of one currency will rise or fall relative to the other currency. So, how is it possible for a person to profit from trading in currencies?

Let’s say for example, that a factory in the United States wants to buy a piece of machinery from China, costing 2 million Yuan. In order to pay for the machinery, the factory will first need to convert U.S dollars to Yuan. Assuming that the exchange rate for the U.S dollar to Yuan is $1 to 6.80, this means the factory in the U.S will need to convert $294,117.64 (2,000,000/6.80) in order to get 2 million Yuan. Supposing from the time the factory in the U.S places the order for the machinery to the time of making the actual payment, the exchange rate of the Yuan drops to 6.95 for $1, this means instead of paying $294,117.64, the factory now only has to pay $287.769.78 (2,000,000/6.95) achieving a saving of $6,347.86. For a Forex trader, the $6,347.86 will represent his profit from trading in currencies. 

From the above example, we can see how the differences in exchange rates can potentially generate profitable opportunities. Nevertheless, in order for one to be able to take advantage of such opportunities, it is crucial you are able to read and understand Forex quotes. 

Understanding Forex Quotes

Understanding Forex quotes is one of the cornerstones of Forex trading. Forex quotes are denoted in pairs such as EUR/USD or USD/JPY. The first currency in the quote is known as the base currency, while the second currency is known as the counter currency. In our examples above, for the first quote, the euro is the base currency while the USD is the counter currency.

For the second example quote, the USD is the base currency, while the Yen is the counter currency. The relative value of the currencies depicted in a Forex quote is based on the amount of counter currency to one unit of the base currency. For example, if the EUR/USD quote is 1.1500, this means that to exchange 1 euro, you will need $1.1500 US dollar. 

Ask, Bid and Spreads in Forex Trading

Nowadays, Forex can be traded on online trading platforms such as those provided by AvaTrade. Forex quotes on these platforms are typically quoted with two prices. For example, the EUR/USD will be quoted in the following manner: 1.1500/1.1505. The first price is called the “Bid” price (1.1500), while the second price is called the “Ask” price (1.1505). It should be noted that the Ask price will always be higher compared to the Bid price. 

So what is the difference between the Ask price and Bid Price? The Ask price is the price which a broker or bank is willing to exchange the base currency for the counter currency. In our EUR/USD example above, it is 1.1505. In other words, you need to pay 1.1505 for one euro. On the other hand, the Bid price is the price which a broker is willing to purchase the euro for. With reference to our example above, the broker will offer you 1.500 for each euro transacted. 

As for the difference between the Ask and Bid price, this is known as the spread. For our example, the spread is five pips (1.1505 – 1.1500). This spread is the margin which brokers earn when transacting Forex trades on your behalf. Usually, the spread is lower when a currency pair is frequently traded. Less frequently traded pairs or exotic pairs as they are often known will have a higher spread. 

Often, you will find that the spreads depicted on most online trading platforms are variable. This means they will fluctuate depending on market conditions. Generally, spreads are lower when liquidity is high and higher when the liquidity is low. 

Considering Profitability By Looking At Pips And Lot Sizes

The objective of all Forex traders is to maximise profitability and minimise losses. In order to do that, it is necessary to take into consideration pips and lot sizes. A pip is the acronym for “point in percentage”. It depicts the minimum movement which prices can move in Forex. Most Forex quotes are quoted up to 4 decimal points. Hence a pip in a Forex quote represents 0.0001 movement in the exchange rate. Nevertheless, it should be noted that the quote for the Japanese Yen pairs are different as they are typically only quoted up to 2 decimal points. Hence, a pip for Japanese yen pairs is only 0.01. As such, the value of one’s profitability or losses can be ascertained by the quantum of the pip movement.  

In addition to pip movements, lot sizes also need to be taken into consideration when determining the quantum of one’s profits or losses. A trading lot is the amount of the currency that a Forex trader will trade. The size of each standard lot is equivalent to 100,000 units of a currency. To purchase one standard lot of the GBP/USD currency will cost $100,000. Fortunately, due to the availability of leverage, a trader does not have to fork out the full amount in order to trade in a standard lot. Apart from a standard lot, there are other popular lot sizes, such as a mini lot (10,000 units) and micro lot (1,000 units). The value of a pip for a standard lot where the USD is the counter currency is fixed at $10. Thus, if the price of a currency pair moves by 20 pips, this is equivalent to a value of $200 (20 pips x $10).

Forex Trading Order Types

Transactions in the Forex market are executed in the form of trading order types, such as market orders, pending orders and stop loss/take profit orders. 

Market Orders

Market orders are transactions which are executed at the current market price. This can be either an order to purchase or sell a currency pair. Hence, if the EUR/USD rate is 1.1500 and you decided to invest in a lot at the current price, you are said to have executed a market order.

  • Pending Orders
    Unlike market orders, pending orders are orders to execute a transaction at a specified level in the future. The broker will only execute the trade once the conditions specified in the pending orders are met. There are two main types of pending order, namely limit orders and stop orders. Limit orders are used when better trading conditions are expected; for example, when you want your buy orders to be filled at a lower price than the present price. Stop orders, on the other hand, are used when you expect the prevailing market conditions to continue into the future. For example, in a down-trending market, you can use a stop sell order to ensure that you sell at a lower price than the current price. 
  • Stop Loss/Take Profit Orders
    These are trading orders to your broker to liquidate your market position at a specified price. A stop-loss order is triggered when the adverse market conditions cause prices to reach a specified level. The order is triggered so as to limit your trading losses. Take profit orders, on the other hand, let you close your position at a specified price point when market conditions are moving in your favour, enabling you to lock profits in.

Market Analyses for Forex Trading

Apart from understanding the different types of trading orders that you can use to execute your trades, it is also important to understand the “why” and “when” to place your trades in order to maximise your profitability. Forex traders can conduct two main types of market analyses to determine the “why” and “when” prices in the market will move in their favour. The two primary analyses for them to rely on are:

  • Fundamental Analysis
  • Technical Analysis

Fundamental Analysis

With fundamental analysis, a trader will take a macro view of the economic factors that can affect the price of an asset. Some of these factors include the interest rate imposed by the Central bank, political situation, climatic situation, unemployment level, inflation level and the Gross Domestic Product (GDP) of a country. The primary objective of fundamental analysis is to look at the fair or intrinsic value of an asset. For a fundamentalist, an asset price will always settle at its intrinsic or fair value in the long term. So, trading opportunities will arise when the price of an asset deviates from its intrinsic value. 

Technical Analysis

Technical analysis revolves around studying historical price data in order to determine an asset’s possible future price movements. A technical analyst believes that history will repeat itself and so, he will try to discern patterns in the price movements of an asset that will help to indicate any arising trading opportunities. As opposed to a fundamental analyst, the technical analyst believes that all the underlying factors of an asset are already reflected in its price. In other words, price movements are not random but patterned. A technical analyst relies on two key tools to help him makes his determination. They include the following:

  • Forex Price Charts
    Price charts are considered the foundation of technical analysis. The three main types of price charts which technical analysis is built upon are line charts, tick charts and candlestick charts. Line charts are great for smoothing out the price movements to let traders have an overall view of the price action of an asset. Tick charts, on the other hand, are ideal for viewing the price movements of an asset in the short term period. Among the most popular charts utilised by technical analysts is the candlestick chart. This is because candlestick charts offer more detailed information as compared to other types of charts. 
  • Technical Indicators
    Technical indicators, also known as economic indicators,  are mathematical calculations that assist traders in analysing price behaviours. Technical indicators consist of two main categories, lagging and leading indicators. Lagging indicators are used to provide confirmation forex signals after the occurrence of a price movement. Leading indicators are used to indicate trading opportunities before the price movements has occurred. There are different types that Forex traders can use to help them analyse trends, volatility, price momentum and market cycles. 

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Money Management Skills

Apart from being able to identify trading opportunities, it is equally important for a Forex trader to be able to manage his capital resources. In fact, this skill is critical for the long-term success of a trader. Two keys things that a Forex trader has to consider when making a trade are Risk Per Trade and the Risk/Reward Ratio.

  • Risk Per Trade
    When evaluating the risk per trade, you are essentially defining the maximum risk that you will undertake for that trade. By doing so, you avoid situations where an adverse market movement could potentially wipe out all your investment capital. Normally since Forex traders are trading on leverage, they are recommended not to risk more than 5% of their capital on a single trade. 
  • Risk/Reward Ratio
    The risk-reward ratio is used to calculate the potential profit against every dollar invested. For example, if the risk/reward ratio is 1:3, the trader expects to earn $3 for every $1 invested. 

Apart from these tools, there are also numerous money management tools which traders can employ in order to help them manage their trading risks better. Having good money risk management strategy not only helps to control your trading risks but also helps you to promote capital growth over the medium and long term period. 

Trading Psychology

When we talk about trading psychology, we are referring to the mindset of traders when trading the financial markets. Because we are dealing with real money, most people will find it difficult to emotionally detach themselves from it. Invariably, they will let their emotional state influence their trading decisions and usually with negative results.

As human beings, we all experience a range of different emotions during different circumstances. Likewise, during trading, many traders will feel different emotions such as euphoria, fear, greed and overconfidence. Letting one succumb to these emotional states can result in making bad trading decisions such as holding on to a market position despite accumulating losses in that position. In order to overcome emotional trading, it is critical that you come up with a trading plan and stick to it despite everything else. 

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Foremost of all, it is important to have the right broker when beginning your online trading endeavours. While there are literally thousands of online Forex brokers to choose from on the internet, the right broker must, however, be able to fulfil certain key criterion. 

  • International Regulations
    In any industry, regulations serve as a safeguard to protect us against untrustworthy and unreliable players. Likewise, in the online Forex trading industry, it is important to deal with a broker which is properly regulated. Regulations help to ensure transparency in pricing, the safety of deposited funds and proper settlement in the event of a dispute arising. Ideally, the broker’s regulatory framework should cover its operations on a global scale. In the case of AvaTrade, we are extremely highly regulated across multiple jurisdictions in six different continents, with high positive reviews, which should provide you with peace of mind when trading. 
  • Spreads Which Are Competitive
    As spreads represent the single largest trading cost for a trader, it is only natural that you look for a broker with competitive spreads. The lower the spreads, the higher the profitability that you can potentially achieve, bearing in mind the potential to bring losses too. With AvaTrade, you will be able to access a large pool of liquidity providers as the broker has teamed up with numerous major providers in the industry to ensure that you will get competitive spreads whenever you trade.
  • Conducive Trading Environment
    As a well-established broker, AvaTrade is able to able to offer traders a trading environment that is conducive towards a profitable trading venture. With AvaTrade, traders are permitted to scalp, conduct short selling and hedge their trades. Apart from Forex, traders at AvaTrade will also have opportunities to trade and diversify their portfolio with different asset classes such as commodities, cryptocurrencies, market indices and stocks. 
  • Choice of Trading Platforms
    At AvaTrade, you get a selection of different trading platforms to suit your preference. There is the trusted and reliable MT4 platform for those who want a more involved trading experience. Alternatively, you can choose from the MT5 platform, our proprietary WebTrader, AvaOptions and AvaTradeGo trading platforms. In short, there is something for everyone at AvaTrade
  • Comprehensive Trading Resources
    AvaTrade has also provided its clients with unimpeded access to the well-stocked educational library. Here beginner trades will have the resources and materials which they need to improve their trading skills. Other resources which AvaTrade also provide clients include automated trading solutions such as ZuluTrade and DupliTrade and now AvaSocial. There is also an economic calendar, which you can refer to for scheduled important economic events and Trading Central integrated into the platforms.
  • Customer Support
    At AvaTrade, the needs of the traders are always attended to promptly, as we understand that the customer always comes first. As a client of AvaTrade, you can access customer support through various channels such as YouTube, Facebook or Twitter. In addition, the support service is available in different languages. 

Steps for opening a real account at AvaTrade

Opening a real trading account at AvaTrade is as simple as it gets. It is a 3-step process and only takes a minute to complete.

  • Step 1:
    Go to AvaTrade’s homepage and look for the “Register Now” button which is located at the top right-hand corner of the homepage. 
  • Step 2:
    Fill up the registration form that appears in the popup window after clicking the “Register Now” button. 
  • Step 3:
    Upon signing up, your login details will be sent to you through your email. Verify your account as per instructed in the email. After verification, you will be able to deposit funds and start trading immediately.
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Downloading the MT4 trading platform

In order to trade the Forex market, you will also need an online trading platform to conduct your trading activities with. To download the MT4 trading platform, simply follow the steps described below:

  • Step 1:
    Click on the MT4 trading platform download link here
  • Step 2:
    Click on the avafx.exe file to run the file.
  • Step 3:
    Use your login credentials to log on to the trading platform
  • Step 4:
    Start trading 

Trading Capital Requirements at AvaTrade

AvaTrade has made their trading platforms easily accessible to traders from all over the world by imposing only a low minimum deposit. The minimum amount which traders can start trading with is just $/€/£100. For traders based in Australia, they can start their trading activities with a mere $100 Australian dollars. Deposits of funds can be conveniently transferred through debit/credit cards, wire transfer or eWallets. 

Currency Pairs Explained

When trading in Forex, we will be dealing with currency pairs where the value of one currency is quoted relative to another currency. Forex currency pairs can be grouped into three groups, Majors, Minors and Exotics.

  • Major Pairs
    Majors are the most widely traded currency pairs around the globe, and they boast of massive liquidity. Another defining feature of majors is the fact that they have very low spreads. Among the majors, the EUR/USD is the most widely traded. This is followed by USD/JPY, GBP/USD and USD/CHF. Majors all feature the USD in their pairs.
  • Minor Pairs
    Also dubbed as Cross pairs, minors cover the currencies of the main economies (excluding the USA) around the world. Some examples include the EUR/GBP, EUR/JPY, GBP/JPY and CHF/JPY. They are all the majors except for the USD crossed.
  • Exotics
    This group of Forex pairs consist of a currency pair that includes a major currency that is paired with a less frequently traded currency or the currency of an emerging economy. Examples of these include the USD/TRY and EUR/SGD.

Although it is possible to trade with any type of currency pairs, beginners are always recommended to stick with just majors and minors until their trading skills have improved. 

Opening a Market Position

On the MT4 trading platform, there three ways to open a market position i.e. through the Order Window, Chart Trading and One-Click trading.

  • Order Window
    To call up the order window, you need to first double-click on the asset that you wish to trade located on the market watch tab. Once the Order window has popped up, simply fill in the trading parameters then click Buy or Sell after completing the trading parameters. 
  • Chart Trading
    For chart trading, right-click on the asset’s chart window that you want to trade then select “Trading”. Next, set your trading parameters and start trading. 
  • One Click Trading
    To use the one-click trading feature, click on “Tools” in the main menu. In “FX Options” in the Trade section, you will find the one-click trading feature. With this feature, you will be able to execute your trading decisions with only one click. 

Leveraging in Forex Trading

Leveraging in Forex trading entails borrowing the broker’s capital to command a larger market position than is possible with one’s limited capital. By doing so, a trader hopes to earn a larger profit despite trading with a smaller amount of capital. While leveraging has its upside, it also has a downside.

While the main purpose is to increase one’s return, leveraging also has the potential to exponentially increase your trading losses. As such, traders are always recommended to only use a reasonable level of leverage and not overextend themselves. In addition, to manage their trading risks better, traders should also always use appropriate risk management tools such as stop-loss orders to close their position automatically when faced with a losing market position. 

Developing a Solid Trading Strategy

As mentioned earlier in our trading psychology section, a good trading strategy is needed if you ever want to be successful in online Forex trading. A good trading strategy must cover the following areas:

  • Trading Timeframe
  • Trading Methodology
  • Rules to follow
  • Risk Management
  • Tryout and Optimisation

Trading Timeframe

Before you start trading, you need to first decide what timeframe you want to trade. Do you wish to be a day trader and scalp, or do you wish to trade for the short and medium-term? The timeframes that you trade will determine the charts that you will use. Scalpers and day traders will use charts with shorter timeframe such as one minute, 5 minutes and 30 minutes. Short term and medium-term traders, on the other hand, will use charts with a longer timeframe, such as one based on daily or weekly price movements. 

Trading Methodology

Next, decide if you wish to trade the markets using technical analysis or fundamental analysis. As discussed before, technical analysts use historical price data to determine possible future price movements. Fundamentalists, on the other hand, rely on studying the factors that can affect the intrinsic value of an asset. 

Rules to Follow

This section essentially has to do with self-discipline. Because we can get worked up emotionally when trading, it is best to write down the conditions that you will trade with and stick by them. This can be the number of hours traded, the number of trade entries and exits, stop loss levels and take profit levels.   

Risk Management

All trading activities will involve risks. The same goes for Forex trading. Therefore it is essential that you manage your trading risks properly so you can maximise your profit potential. Risk management includes managing the amount that you will invest in each trade, the type of asset that you will trade with and the number of positions that you will have open at any single time. 

Tryouts and Optimisation

Once you have developed your trading strategy, it is essential to test it out and iron out any kinks that you might find before actually implementing it in the real world. At AvaTrade, the broker offers free demo accounts that can be used for testing out your trading strategy without any real risk. 

Forex Frequently Asked Questions

  • What is Automated or Robot Trading?

    Automated or robot trading involves the use of software to execute Forex trades based on predefined parameters programmed into the software. The main advantage of using this software to trade is to remove the element of emotions from trading hence making the trades more objectively based.

     
  • What are Expert Advisors (EAs)?

    Expert Advisors are programming scripts that are used to automate trading on the MetaTrader 4 and Metatrader 5 trading platforms.

     
  • How do I use an Economic Calendar?

    The economic calendar shows the date which major economic data are released to the public. These data have the potential to move market prices due to their significance in measuring the economic performance of an economy. The dates which this information are published is when the markets tend to be more active.

     
  • What is Fundamental Analysis?

    Fundamental analysis involves the study of factors which can affect the price of an asset. These factors can be economic-based, geopolitical or climatic.

     
  • What is Technical Analysis?

    Technical analysis is the study of historical price data of an asset to determine its possible future price movements.

     
  • What is Stop Loss Order?

    Stop-loss orders are trading instructions to a broker to close a market position when the price reaches its maximum loss level as defined by the trader.

     
  • What is Take Profit Order?

    A take profit order works in the opposite manner of a stop-loss order. Instead of minimising losses, a take profit order is executed on the platform when the price of the asset has reached a predetermined level. This is to lock in the profits which the trader has achieved.

     
  • Trading in The Short Term and Long Term

    Short term trading refers to trading in timeframes that range from minutes, hours and days. For long term trading, the timeframes can stretch from weeks, months and even years.

     

Withdrawals in AvaTrade

At AvaTrade, you can only withdraw your funds using the same method that you used to deposit your funds. With debit/credit card withdrawals, you can withdraw up to 200% of the amount deposited. For amounts greater than 200%, an alternative method such as wire transfer can be used to withdraw to your bank account. 

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