Trading Sessions and Trading Times
Since the FX market is open 24 hours a day, Sunday to Friday, it stands to reason that there must be traders trading all over the world at different times. For example, there may be Japanese traders trading whilst the European traders sleep.
GMT = UK standard time.
During the hours from midnight GMT until 9am GMT, the majority of trading takes place in Tokyo and that session is known as the Asian Session.
During the hours from 8am GMT until 5pm GMT, the majority of trading takes place in London and that session is known as the European or London Session.
During the hours from 1pm GMT until 10pm GMT, the majority of trading takes place in New
York and that session are known as the New York Session.
The majority of trading takes place during the London session and the first half of the New York session. You are also advised to trade during these times as price will move more during these periods than any other period.
Brokers, Service and Platforms
In order to buy and sell currency, you will need to set up an account with a FX broker. There are many brokers online and across the world. You don’t physically need to visit a broker to open an account. It doesn’t matter which country your broker is based in. Money can always be transferred between your trading account and your bank account easily.
My broker is in the United States whilst I live in Europe.
When filling out the application form, you’ll need to specify what type of account you will require (regular, mini or universal if offered).
You don’t need any previous trading experience to open a trading account.
Remember to shop around for the best broker. Look for one who will offer you as many of the items listed below:
• Low spreads for each currency
• No commission (not many charge this nowadays as they make their money from the spread)
• Universal Account allowing you to place either a mini or regular trade from the same account
• See if they offer free training or training material
• A good trading platform with lots of functionality (covered below)
• A reliable service along with good customer service
• Guaranteed fills on all the orders you place (covered later)
• A good range of currencies which can be traded with that broker
• Minimal slippage (covered later)
Make sure your broker is reputable and has been around for some time.
When you place an order to buy or sell a currency, this doesn’t mean that your order will be filled (executed and placed) automatically. There is the odd occasion when your order may not be executed at the price you want – it may be filled a pip or two away from the price you asked for. When this happens, it is known as slippage as the execution has slipped away from the price you wanted to be filled at.
In my opinion, a good functional trading platform is more important than many other factors.
A trading platform is a software package (normally provided by your broker) which contains charts, prices, news, and a whole host of other information which will allow you to make informed decisions and place trades directly from within that platform.
The platform is an easy way to place trades without having to call your broker every time you need to open or close a position.
Not every broker has a fully fledged platform. Some only offer prices on their platform whilst others offer much more.
You don’t even have to use the platform provided by your broker. If you don’t like it, just use any other platform and when you’ve made a decision to place a trade, you can either place it through your own broker’s platform or call them via telephone.
Sometimes, the data (prices and news) which is fed into the platform is provided by a third party who adds to the confusion.
Therefore, it would be much easier and better if you got all the functionality of a good trading platform and a good brokerage service from the same place. This is why it’s important to spend some time researching which broker you’d like to sign up with.
This is what a typical trading platform may look like:
It consists of dealing rates, charts, account information and lots more which can be selected with your mouse.
After you have learnt the techniques of trading the FX market, you’ll be able to place trades by simply clicking on the currency name or some other easy method (depending on the platform).
Almost every broker will have a live version and a demo version of the trading platform.
You can download the trading platform free of charge from the broker’s website.
You need to start with a demo version as this is used for practice.
With the demo version, the price and chart movement is all real. It happens in real time and you can place trades as you would do with real money. Remember, price will move continuously throughout the day and so you’ll be making money, losing money or sitting aside. The difference being the X amount of money in your demo account is just dummy cash. With this, you can practice and test your theories before committing yourself with real money on a live account.
New traders should spend at least 3 months demo trading (also called paper trading). This will allow you to get familiar with the trading platform, Forex routines & terms and will allow you to test various systems and your beliefs.
When you trade a real account, you will be distracted by many emotions which will eventually lead to bad trades. Although a demo platform won’t eliminate those emotions, it will put you in a position from where you can progress further.
Before you continue reading the remainder of this manual, you need to download the charting software I use so you may follow along.
I use the “Meta Trader 4” Platform offered by FXDD (Broker). Visit their website and open a demo account. Download the trading platform so you can follow everything you learn in this course. The website is located at www.fxdd.com.
Margin and Leverage
Although we trade 100,000 worth of currency, we don’t actually need that much. We can use a small amount of our own cash to control a standard lot of 100,000 of a particular currency.
The ability to control a large amount with only a small amount in our trading account is known as Leverage.
Your broker will specify how much money is required in your account in order for you to be able to control a regular or mini lot. The amount required in your account is known as margin. Typically, brokers require $1000 positive balance in your account at all times to trade 1 regular lot. If you are trading 2 regular lots then the margin required will be $2000 and so on. To put it another way, using $1000 to control $100,000 is a leverage of 100:1.
Whilst having an open position by trading a particular currency, if your balance approaches the minimum margin limit, you will receive a margin call. This means your broker will call you and instruct you to either deposit more funds or close your position soon. This is to protect the broker from having to deal with negative balances from their own pockets.
This is why I mentioned a recommended starting balance of $2000. Although you can start trading regular lots straight away, you are advised to begin with mini lots until you are making money consistently. If you start with $300, you will have no choice but to start with mini lots. The margin required for a mini account is typically $25-$50.
Lots and Lot Sizes
Do you remember the kiosk example given above? You were exchanging £100 for $240 at the rate of 2.4? If you did that every day, you wouldn’t make enough money worth trading for.
In the FX market, you normally trade in 100,000 lots. So in the example above, you’d give £100,000 in exchange for $240,000. This is known as trading one standard or regular lot.
100,000 = 1 standard or regular lot (1 contract)
Don’t worry; you won’t have to provide that amount of money.
Let’s say £1 equals $2.0400, then 1 lot (or 1 contract) of £100,000 should be worth $240,000 and a fluctuation of 0.0001 (1 pip) should be worth 100,000 x 0.0001 = $10
Therefore, a 1 pip move is equal to $10
Here is the formula if you want to calculate the pip value for a given currency.
1 pip, with proper decimal placement / currency exchange rate x Lot Size
Here is an example using EURUSD:
(.0001/1.4096) x EUR 100,000 = EUR 7.09
But we want the pip value in USD, so we then must multiply EUR 7.09 by the EUR/USD exchange rate. So 7.09 x 1.4096 = $10.
You will find that the pip value = $10 with any currency in which the first currency quoted under
Cur1 (such as EURUSD, GBPUSD, or AUDUSD) is not the USD but the second currency (Cur2) is. The pip value is always $10.00 per 100,000 currency units. So $10 is the fixed value for 1 pip when dealing with the US Dollar as the 2nd currency in the pair.
Here is an example including the Japanese Yen:
USDJPY: Current Price (exchange rate) = 114.70
(.01/114.70) x USD 100,000 = $8.718
So a 1 pip move when trading the USDJPY pair will yield a profit or loss of $8.718.
Don’t worry if you don’t understand this right now as you don’t really need to know it. There are many calculators online which will help you with pip values. Almost all brokers will work this out for you anyway. For now, just remember that trading the Euro or the Pound against the US Dollar and trading 1 standard lot will give a $10 profit or loss. To do this, you need a regular trading account with a Forex broker.
If you trade the EURUSD or the GBPUSD more than any other, you’ll always gain or lose $10 per pip.
If you trade the USDCHF or the USDJPY, you’ll average about $8 per pip because the pip value changes as these currencies fluctuate.
You can also trade 10,000 lot sizes. A 10,000 lot is a fraction (a tenth) of a regular lot (100,000).
Trading with this amount is known as trading a mini lot. Each pip on the Euro, Pound etc… is worth $1 when trading a mini lot. For e.g. if you were to trade a lot size of 30,000, each pip would be worth $3 and you would be trading 3 mini lots at a time. You need a mini account with a Forex broker to trade mini lots.
However, some brokers offer accounts which are combined. This means you can trade regular lots as well as mini lots.
Pips and Pip Value
A pip is the smallest increment of a change in price. Profit is measured in pips also. Every currency you trade (except the Japanese Yen) will be quoted with 4 digits after the decimal point such as 1.2945. When the last digit changes by 1, the price has moved a pip.
.0001 to .0002 is a change of 1 pip.
For example, if the GBP/USD price changes from 2.0140 to 2.0141, the price has changed by 1 pip.
If the EUR/USD price changes from 1.4096 to 1.4086, the price has changed by 10 pips.
If the USD/JPY price changes from 114.70 to 114.71, the price has changed by 1 pip.
If the EUR/USD price changes from 1.4096 to 1.4046, the price has changed by 50 pips.
Any currency paired with the Japanese Yen will have 2 digits after the decimal point. It works just the same as any other currency pair.
So, how much money do you make if the price changes by 1 pip in your favor?
This depends on the currency being traded and the amount you are trading.
Currency Pairs
Many different currencies are traded every day. Traders buy and sell these currencies to make a profit. You don’t need any special skills to trade. You simply need the knowledge and the ‘know how’ to do the same. That is exactly what I will teach you in this manual.
So how do you make money trading currencies?
Let’s start with an example.
Let’s say 1 British Pound is worth 2.045 US Dollars. This means that if you go to the currency exchange kiosk at your local airport and you give them £1 in exchange for dollars, they will give you $2.045 (in return for your £1 – disregard any commission for now).
You saw the news on TV and now you believe that the Dollar will get stronger against the Pound and so you buy many dollars.
Let’s say you gave the kiosk £100 in exchange for $204.50 at the exchange rate of 2.0450.
100 x 2.0450 = $204.50
A few hours later, you see that the exchange rate has changed and now every Pound is worth 1.90 US Dollars. This means that the dollar has increased in value against the Pound. Before, each pound was worth 2.04 US Dollars but now it is only worth 1.90 US Dollars. In other words, the Pound has become weaker against the US Dollar and the US Dollar has become Stronger against the Pound. You will see this as you go back to the kiosk and re-exchange your Dollars back to Pounds. So if each Pound is worth 1.90 US Dollars, how many pounds do you get for $204.50?
$204.50 / 2.90 = £107.63. This means you have just made yourself a profit of £7.63. You only had £100 before but now you have £107.63.
Trading currencies at home works on the same principle except you will be doing it on a larger scale and without the hassle of visiting kiosks and their inflated rates. Listed here are some of the currencies you can trade on the FX market along with their abbreviations:
You can’t just trade any currency against any other currency. You can only trade what is available to you. Currencies are traded in set pairs. From the ‘dealing rates’, you can see the ‘set pairs’ which are available and you can see that currency 1 (Cur1) is traded against currency 2 (Cur2). Each currency is abbreviated. Whatever is quoted under Currency 1 is the base currency. This means that if you buy the EUR/USD pair, you will actually be buying the Euro (base currency) and selling the USD at the same time. If you wanted to buy the US Dollar against the Euro, you would simply sell EUR/USD. Whether you buy or sell, you will be doing that action to the first currency quoted in the pair. In effect, you will be doing the opposite for the 2nd currency quoted in the pair.
“Buy” GBP/USD means I am buying the Pound and selling the US Dollar. “Sell” GBP/USD means I am selling the Pound and buying the US Dollar.
So you see, you will be trading set currencies against each other. When prices change, you stand to make a profit or a loss. Later, you will learn how to trade in a manner which will produce a good positive income by trading the right currencies at the right time.
The exchange rate (in simple terms) is the ratio of one currency valued against another. The first currency is known as the base currency and the second currency as the counter or quoted currency. For example, the AUD/CAD exchange rate specifies how many Australian Dollars are required to buy a Canadian Dollar, or conversely, how many Canadian Dollars are needed to purchase an Australian Dollar.
There are 2 prices quoted for each currency pair – the BID price and the ASK price.
The ask price is what you pay if you are buying the currency pair and the bid price is what you pay if you are selling the currency pair.
Have a look at the GBP/USD price above. It is quoted as 2.0458/2.0462 which may also be shown as 2.0458/62.
If you buy the GBP/USD, you will pay the price of 2.0462. If you then decided to sell it straight away, you would sell it at a price of 2.0458. This means you would have made a loss, as the bid price is always lower than the ask price. This is quite normal and the trades you undertake will take this into account.
As soon as you place a trade, you are already in a loss situation. This means that you will have to recover this loss amount as well as make a profit on top for a successful outcome. Don’t worry about this instant loss for now as it will all become clear as you read on. Just accept it for now.
The difference between the bid and ask price is known as the spread.
To clarify the bid and ask components, a currency exchange rate is shown as a bid price and an ask price. The bid price is always lower than the ask price. The bid price shows the price which will be obtained in the counter currency when selling one unit of the base currency. The ask price represents what has to be paid in the counter currency to obtain one unit of the base currency.
Have a look at this as an example:
EUR/USD: 1.4259/61
The first part (before the slash) is showing the bid price (what you obtain in USD when you sell the Euro - Sell EUR/USD). In this example, the bid price is 1.4259. The second part (after the slash) is the ask price (what you have to pay in USD if you buy the Euro – Buy EUR/USD). Here, the ask price is 1.4261.
If you buy a currency (at the ask price) and sell it straight away (at the bid price), it may be obvious to you that you would always lose out because the ask price is always higher than the bid price. This difference (spread) is where the broker takes his cut. So, instead of charging you commission for every trade, he makes his money by taking a little chunk out of every trade you place. The spread is something which all traders have to live with. It is something you will need to take into account when placing a trade.
However, when you deal with profits of $1000 every week, the spread is negligible. Although there are scores of currencies being traded around the world, there are 4 major currency pairs and these are traded more than any other. When starting out, you are advised to stick with these ‘4 majors’ until you become more proficient in trading.
They are – EUR/USD, GBP/USD, USD/JPY and USD/CHF.
When you buy or sell a particular currency, you are placing a trade which is also known as opening a position. When you exit that trade (either with a profit or loss), you are said to be closing that position. You will notice a similarity between the EURUSD pair and USDCHF price movement.
When one of these rises, the other will fall and vice versa. No need to know why at this point. Just know that it does. When you see a currency pair which does not include the USD, it is said to be a cross pair. For e.g. the EUR/JPY is a cross pair as it does not have the US Dollar as one of the pairs. Cross pairs are traded in a different manner from the 4 major pairs. As a beginner, forget trading the cross pairs as some of the techniques taught in this manual will not work on those pairs.
