Welcome to Forex Trading Tutorial For Beginners basics guide. If you are new to Forex trading and willing to start learning, you have landed at the right page.
This tutorial is created by a Forex trading expert; AKA Technician. Technician has been in the markets for over a decade . He is specialized in technical analysis and running for the Chartered Market Technician(level 2) certification. In addition to a Master’s degree in finance.
This is a step by step Forex trading tutorial for newbies. This tutorial aims to provide all the necessary information to newcomers in one place.
In this guide, we will explain the most basic definitions and concepts. The concepts you must know before you start learning how to analyze the markets, and make trades.
We will explain things like, what Forex trading is, and how trading works. Also, what is a Forex broker and how to choose one. How to read the prices and much more .
After completing this tutorial, you will be ready to start the intermediate level tutorial. The intermediate tutorial covers analysis and forecasting: Forex Technical Analysis Tutorial.
We ask you to be patient while reading, especially in the beginning. If you feel that a topic is not clear keep going, it will be clearer by the end of the tutorial.
If you have any questions after completing, please drop it in the comments section. It is at the end of this page.
What is Forex Trading
Trading is the action of buying and selling a product, aiming to generate profit,over a short period of time. And that what makes trading different than investing. Investors usually hold their positions(trades) for a longer period, more than a year.
The products that you buy and sell can be several; a currency, a company’s share, a commodity or any other “Security” (also called Instrument). A security is any tradable asset. Such as Microsoft shares, or the Euro currency, or commodities like oil or gold.
In this Forex Trading tutorial for beginners, our main focus is the Forex market. The Forex market is where currencies trading happen.
Trading Forex allows you and me (individual retail traders) to speculate(bet) in the currencies market, also called the Forex market.
To be able to do so, we need to open a trading account with a Forex broker, then we can start buying or selling currencies, aiming to generate profits.
In Forex, we simultaneously buy and sell currencies. Simply, just like if you want to travel from the U.S. to Japan, you will go to the bank to exchange your dollars to the Japanese Yen.
Simply, Forex Trading is exchanging a currency with another currency aiming to generate a profit.
In the USD and Japanese Yen example we just mentioned, since you exchanged your bucks to Japanese yen, you would generate profit if the Japanese Yen rose in value against the U.S. dollar.
Let’s say you exchanged $2,000 to JPY at an exchange rate of 100 Yen for every dollar.
$2,000 x 100= 200,000 Yen
After a couple of months, the exchange rate changed to 90 Yen for every U.S dollar.
This is a 10 percent decrease in the value of U.S. dollar against the Japanese Yen.
Now, if you exchange back the JPY you have to U.S dollars.
200,000 / 90 = $2,222
A good $222 profit from this trade.
Since trading has a short time horizon. Traders buy and sell frequently.
In fact, there is a type of traders called “scalpers” that make dozens of trades each day.
Scalpers enter the market for seconds or few minutes then exit. They buy a product then sell it for a tiny profit. And keep repeating the process(This trading style is not recommended).
Trading types or styles vary, the main styles are:
- Day trading: traders enter and exit their trades before the end of trading day. This type of trading is more applicable in the stock market, as the market closes every day. The Forex market only closes on weekends (we will discuss this later in the tutorial).
- Short-term swing trading: traders can hold a position for one day up to few weeks.
- Position trading: traders trade for a long time horizon. They hold their position for months.
Next, let’s have a quick introduction to the Forex market structure.
Where Trading Happens
Trading happens in the marketplace. Our focus in this Forex trading tutorial is the the Forex market, also called Foreign Exchange, or FX.
The Forex market is the market where buying and selling of currencies happen .
The Forex market is the largest financial market. Its average daily trading volume is more than $4 trillion. Putting all the world’s stock markets together, their trading volume would only equal around 20 percent of the Forex market.
That makes the currency market the most liquid market worldwide.
What liquid means in simple words, is how fast you can sell a product. It is that if you have more buyers and sellers in a market, you are likely to sell your product much faster.
Buying and selling stocks happens in the stock exchange. If you are looking to trade stocks, your trades will be processed through one of these stock exchanges. So, it is a physical entity that facilitates the trading of shares to investors.
Accordingly, the stock market is a centralized market, where the exchange is the center.
Unlike the stock market, the Forex exchange is a decentralized market. It is called the over-the-counter market (OTC).
That simply means that there is no physical exchange like the New York stock exchange or NASDAQ that complete the trades between traders. Instead, trading is done through a computer network with no centralized physical location.
The Forex market is a network of multiple banks and financial firms that exchange currencies directly or indirectly.
At highest levels, major banks trade directly with each other. These major banks are called the interbank market.
At the next levels, small sized banks trade indirectly with major banks through an electronic brokerage service.
Next are the brokerage firms, hedge funds, and regular corporations. And finally, the retail Forex traders(Individuals).
Generally, each level provides the next lower level with liquidity.
For example, if a retail trader placed an order to buy euros at a broker, the broker passes this order to a bank at the higher level which has sizable amount of euros. The bank executes this transaction by selling the broker the euros, the broker then reflects that in my trading account. This happens instantly through a trading software.
Usually higher level firms like banks, provide lower level firms or clients liquidity, and therefore they are called liquidity providers.
Largest Banks such as Citibank, JP Morgan, HSBC to name a few, are the main liquidity providers in the market.
What’s Available for Trading
In Forex, you can trade mainly currencies. One currency against another, and that’s why it is called a currency pair. The value of one currency against another currency.
For example, the EUR/USD is a currency pair, which is the value of one Euro in U.S. dollar.
Remember: Major and most traded currency pairs in the Forex market are the EURUSD, GBPUSD, USDJPY, USDCHF, USDCAD, AUDUSD and NZDUSD.
In the past decade, Forex brokers have expanded their offering to include other types of instruments. If you open a trading account with any good broker nowadays, you would be able to trade several types of products. For example:
- Precious metals such as gold and silver.
- Energy, such as Oil and Gas.
- Global stock indices. Such as S&P500 and NASDAQ.
- And recently, even Bitcoin.
Forex trading tutorial hint: When you are ready to start trading, always look for brokers that have a wide variety of instruments. You never know where the opportunity resides.
How to Connect to the Forex Market
As a Forex retail trader, you don’t have direct access to the inter-bank market. And here comes the role of a Forex brokerage firm.
Step 1: Broker Types
To be able to start trading, you must open a Forex account with a Forex broker. We will give a quick introduction about forex brokers, and at the last section of the tutorial “How to Choose a Forex broker” we will revisit this topic with greater details.
Forex Market Makers
The Forex market maker is a company that is always ready to buy or sell a financial instruments, and sets both the sell and the buy prices for their clients. They make transactions at these prices with their customers. That’s why it is called a “liquidity provider” for its clients.
If you want to sell, the Forex market maker will be the buyer and if you want to buy it will be the seller. Market makers must take the opposite side of your trade.
In Forex, we simultaneously buy and sell currencies. Simply if you want to travel from the U.S. to Japan, you will go to the bank to exchange your dollars to the Japanese Yen.
So if you buy EUR/USD, it basically means that you are buying euro and selling U.S. dollars at the same time.
Now, let’s have a look on how the exchange rate of the Euro against the U.S. dollar will look like, it’s called a price quote:
The first price is the selling price(called Bid as well) and the second one is the buying price. The selling price is the price that you will get if you want to sell the EUR/USD, while the Ask is the price you will get if you want to buy it.
The difference between the bid and ask prices is called the spread, and it goes to the Forex broker as sort of commission on the trade.(We will discuss price quotes later in this tutorial).
ECN Forex Brokers
ECN Forex brokers provide access to the inter-bank market by using an electronic system that passes prices from multiple liquidity providers to clients. Such as banks and market makers connected to this electronic communication network (ECN). The broker then displays the best bid/ask quotes on their trading platforms for traders.
ECN brokers provide the tightest spreads in the industry. An ECN broker usually charges a commission (in addition to the spread) on each trade made by clients.
Step 2: Open a Demo Trading Account
To trade Forex, you need to open an account with a broker. Then using their trading platform, you can start making trades. But, before opening a real account, a common and necessary practice among new Forex traders is to start trading using a demo account.
To open a demo account start by downloading the trading software. A widely used software to trade Forex is the MetaTrader platform. It is used by most Forex brokers. We will use MetaTrader software as our default trading platform for this tutorial. You can download it here.
The Basics of Metatrader 5 Platform
Let’s first introduce you to the Metatrader 5 terminal. Go ahead and open the MT5 terminal if it is not already open. The default window should be like this:
- Market Watch Panel: On the left-hand side is the market watch panel, where all the pairs that you can trade are shown, along with their prices. The initial list is far from complete. To show the rest of the pairs, right-click on any of the pair and click “Show All”.
- Navigator: Just below the market watch, the navigator panel. Here you can access your accounts and many other tools that we don’t need at this moment.
- Toolbox(called Terminal in MT4): At the bottom is the Toolbox panel. This is where you can see your capital and your trades along with many metrics that we will explain shortly.
You can move along the tabs, one important tab is history, which show you closed positions.
- Connection Status: In the right down corner of the platform you will find if the connection with the broker is on or off.
- Charts: Here you can see all the charts you open.
- Make an order: You can place new orders through this button.
Those are the main elements that you need to know at this stage. Go ahead and explore the terminal and just try, its demo money we do not have to worry :).
The Basic Terms of Forex Trading
Forex Currency Quote
A currency quote is simply the current live price of the currency. And it consists of two prices, the one on the left is the Sell or Bid price, which is the price that you will get if you sell the EURUSD. The price on the right is the Buy or Ask price, which is the price that you will get if you buy the EURUSD.
All currencies are quoted this way, first currency/second currency.
The first currency is called the base currency, and the second currency is called the quote currency.
You always buy or sell the base currency. For example, If you decided to buy EURUSD then you bought the EUR and sold the USD. If you decided to sell the EURJPY, then you sold to EUR to buy the JPY.
Examples of currency Quotes:
The U.S. Dollar against the Japanese Yen:
This translates to,
- The selling price for 1 U.S dollar = 107.35 Japanese yen
- The buying price for 1 U.S. dollar = 107.37 Japanese yen
- Spread = 2 pips(we will explain what is a pip shortly)
- USD is the base currency, and JPY is the quote currency
The Euro against the British pound:
- EURGBP = 0.7810/0.7013
- Means, 1 EUR = 0.7810 British pound
- Spread = 3 pips
- EUR is the base currency and GBP is the quote currency
Note: In the last example, the USD is not included in the pair. It is called a “Cross Currency”. A cross currency pair is a currency pair that doesn’t include the USD. More examples of cross currency pairs are the GBPJPY and the NZDCHF.
Forex Pips and Pipettes
In Forex, a pip is the fourth decimal place of the price(0.0001). For example, if the Bid price of the EUR/USD is 1.1356, the last and fourth digit is 6. If the price changed from 1.1356 to 1.1357, then it moved one pip higher.
In the USD/JPY, because it has only two decimal points, the second decimal place is a pip. For example, if the price changed from 107.35 to 107.34 then it moved one pip lower.
In recent years Forex brokers introduced a fifth decimal place for more precision. It is called a pipette. And it is a 1/10 of a pip.
For example, EUR/USD at 1.13561. The fifth digit (1) is a pipette. If the price moved from 1.13561 to 1.13571 then it moved 10 pipettes, which is equal to one pip.
Forex Leverage and Lot
As a retail Forex trader, your starting capital is probably limited. Perhaps you have few thousands to dedicate for trading. Let’s assume the following:
(1) You decided to buy 1000 Euros worth of the EUR/USD pair at 1.1350 prices. At 1.1350 exchange rate, this 1k of euros is equal to 1,1350 U.S. Dollars.
1000 x1.1350 = $1,135
Note that, on average, a pair like the EURUSD can move 100 pips in a single day. It can move more or less depending on how active the trading day was.
(2) let’s say that after buying this amount, the EUR/USD pair moved 100 pips higher toward 1.1450 within the next two days. Now your investment is equal to:
1000 x 1.1450 = $1,145
So, you have just gained 10 dollars from this trade. Trading 1000 euros in a period of two days have returned 10 dollars.
This is a small amount and apparently not worth the time and effort you would dedicate and risks associated with Forex trading.
Leverage came to solve this issue.
So basically, leverage in Forex is the ability to boost their trading capital. For example, what if the 1000 euros you used in the prior example turned to 100,000? (multiplied by 100).
If we repeat the same trading example with 100,000.
(1) At 1.1350 exchange rate:
100,000 euros is equal to
113,500 U.S. Dollars
100,000 x1.1350 = $113,500.
(2) After buying this amount, the EUR/USD pair moved 100 pips higher toward 1.1450.
Now your investment is equal to:
100,000 x 1.1450 = $114,500
You gained 1000 dollars from this trade. 100 times more than the first example, obviously that is because the amount you traded is 100 times more. Each pip is equal to $10 dollar while in the first example each pip was equal to 10 cents.
In the above example, our Forex trading leverage was 1:100. Forex Brokers provide different leverage options for clients, you can choose to have up to 1:1000 leverage in some Forex brokers.
Forex Trading Tutorial Hint: The bigger the leverage the bigger the risk. High leverage is not recommended.
Forex Industry gurus have also introduced a standard unit called a “lot” in trading. In Forex, a standard lot is worth 100,000 units of the base currency of the pair being traded. A mini lot equal to 10,000 units and a micro lot 1,000 units.
For example, one lot of the EUR/USD pair is 100,000 Euros. Which equals to 100,000 x EUR/USD rate in dollars. if the exchange rate is 1.1350, then 1 lot of EURUSD is equal to 113,500 U.S Dollars.
So, to be able to open a one lot trade position of EURUSD you need to have 113,500 dollars?
No. Here comes the leverage. If you choose to have a 1:100 leverage with your Forex broker, then you need only $1,135 to open a position of one lot. Which is 113,500/100. And this is called the Required Margin for your 1 lot trade or EURUSD.
Accordingly, the higher the leverage you have the less amount of money you need to control one lot.
We explained that you need 1,135 to control one lot of EURUSD if you have 1:100 leverage. If you have higher leverage, let’s say 1:200, then you need only 567.5. For 1:400 leverage you need 283.75. And so on.
Calculating Pip Value
To get the value of one pip in a currency pair, we have to divide one pip in decimal form (0.0001) by the current exchange rate, and then multiply it by the position size.
- In case the USD is the Quote currency:
For one lot positions size (100,000 unit), the pip value for the EURUSD equals:
(0.0001/1.1300) X (100,000)= 8.85 Euros.
Now to get it in U.S. dollars , we multiply by the exchange rate:
8.85 euro x 1.1300 = 10 USD
The pip value for the EURUSD is 10 USD for every bought or sold 100,000 units (one lot).
Remember: If we apply that to all the currency pairs that have the USD as the Quote currency, like EURUSD, GBPUSD, AUDUSD, NZDUSD, etc. We will find that the pip value is equal to $10 in all the currency pairs with the USD as the quote currency. Otherwise, the pip value is variable.
- In the case of the USD is the base currency:
Let’s take the USDCAD as an example
(0.0001 / 0.9800) x (100,000) = $10.2
In this case, we do not need the last step of multiplying by the exchange rate, because the outcome is already in USD term.
The pip value for the USDCAD at the current price is 10.2 USD for every 100,000 units(one lot).
In the above case, where the USD is the base currency, pip value is not constant, it depends on the price of the pair.
- In the case of cross currencies, the same concept applies:
In this case, the GBP is the base currency and the JPY is the quote currency. So the result will be in GBPs.
Let’s take the GBPJPY as an example:
(0.01/current exchange rate) x position size
(0.01/ 130.80) x 100,000= 7.645 British Pound
To get the value in USD, we have to convert the pounds to USD. So simple we multiply by the exchange rate of the GBPUSD:
7.645 GBP x 1.2740 = 9.74 USD
The pip value for the GBPJPY is 9.74 USD for every 100,000 units(one lot).
Forex Balance, Equity and Margin
Go ahead and open the Metatrader 5 platform.
Metatrader will automatically create a $10,000 demo account when you install it(We explain how to create a new demo account in the video above).
This 10k you see in the toolbox section is called “Balance”. it is the amount of money that you have.
The balance will change as you make trades. For example, if I made a trade and won $200. The balance will change from 10,000 to 10,200.
Let’s summarize everything we have covered and add some more in one example:
Balance = $10,000. This is the amount of money you have before the trade.
Let’s make a live demo trade and buy one standard lot of EURUSD at market price at 1.11387. This is how our account will look like the moment after we opened the trade.
Equity = This equals to the Balance + profit of current active trades.
10,000+(-5)= $9,995 and keeps changing.
That’s why it’s floating, it changes as profit changes. (the value of equity is always floating because the price keeps fluctuating).
I am already losing 5$. and the price hasn’t moved yet. How come? Remember the spread.
You already know that you close a buy order by a sell order. So even if the market has’t moved, the buying price always differs from the selling price because of the spread. and this is a commission for the broker.
Buying price at the time we executed our order was 1.11387 and selling price 1.11382 . The difference is 5 pipettes (0.5 pips). We explained earlier that each pip equals $10 for every lot on currencies that have the U.S. dollar as a quote currency.
Margin = $1,113.87 (Required margin for your trade).
We also explained that this depends on the leverage you choose and the volume of your trade(in this case it is 1 lot of EURUSD) and our leverage is 100:1.
Required Margin = (Position size x Exchange rate) / leverage
Required Margin = (100,000x 1.11382) / 100
Free Margin : This is equal to the balance – margin +/- profit/loss of current trade.
$10,000 – $1,113.87 – $5 = $8,881.13 .
The free margin is how much purchasing power you still have after this trade. You have $8,881.13 margin available for you to take additional trades.
Margin Level = 897.32%. It is how much equity you have compared to the margin.
(Equity/Margin) x 100.
($9,995 / $1,113.87) x 100 = 897.32%
If equity drops below the required margin, that mean your margin level is below 100 percent, your open positions will be closed starting from the larger losing position, until margin level reaches back above the 100 percent. This process is called Margin call.
Margin Level will only appear in the toolbox window of your MetaTrader if you have open orders.
Remember: Different Forex brokers have different margin calls rules. Minimum margin level can be 100%, 50%, 25% or even zero. You should ask the broker about their minimum margin level before opening an account.
Market Order: A market order is executed immediately at the current market price(Bid price for sell or Ask price for Buy).
Buy limit: It is an order that is pending. It is an order to buy at a price lower than the current price. The Buy limit order will be activated if the price reaches this preset price and the order becomes an active buy order.
Use Case: You use buy limit in case you think the price will eventually go higher, but you expect it to move lower before reversing higher.
Sell Limit: It is an order that is pending, it is an order to sell at a price higher than the current price. The Sell limit order will be activated if the price reaches your preset price and the order becomes an active sell order.
Use Case: You use a sell limit in case you think the price will eventually go lower, but you expect it to move higher before reversing lower.
Buy Stop: It is an order that is pending, it is an order to buy at a price higher than the current price. The buy stop order will be activated if the price reaches your preset price and the order becomes an active buy order.
Use Case: You use a buy stop in case you think the price will go high, but you need a confirmation by witnessing the price rise to your specified level first.
Sell Stop: It is an order that is pending, it is an order to sell at a price lower than the current price. The sell stop order will be activated if the price reaches your preset price and the order becomes an active sell order.
Use Case: just like the buy stop. You use a sell stop in case you think the price will go lower, but you need a confirmation by witnessing the price fall to your specified level first.
Take Profit Order: A take-profit order automatically closes an open order when the exchange rate reaches the specified price.
Stop Loss Order: A stop-loss order is a defensive mechanism. You can use it to protect gains, or limit losses. Like the take profit, it also closes an open order when the price reaches the specified level.
Trailing Stop Order: This is a type of stop loss order, but it is variable. It basically a stop loss that trails the price if the price move in the expected direction.
For example, if you buy Gold at 1300$/ounce and create a trailing stop order of 5$. Then if the price of gold reaches 1305, the platform will automatically place a stop loss order at 1300. If the price continues to move higher the stop will move with it. So if the price reached 1306, your stop will be at 1301 and so on.
Now if the price moves back reverses and move back lower towards 1301, your stop loss will be triggered and your trade will be closed at 1301.
Here is an illustration of how the trailing stop works.
Assuming we bought the EURUSD at 1.1280 and placed a trailing stop of 30 pips. The trailing stop will keep moving higher along with price, until the price reaches the highest at 1.1340. At that point stop loss will be at 1.1310. Then the price failed to continue higher and reversed to touch our stop loss at 1.1310 and close the position.
Note: Traders have invented new terminology for the words buy and sell. “Long” means buy and “Short” means sell. For example, going long gold means buying gold.
Rollover is a small percentage of interest that can be deducted or credited to your balance if you hold a position overnight. Depending on the currency pair you are holding.
Without going too much into details of what is a rollover, as it has no meaningful impact on a trader’s performance and maybe a confusing topic for newbies.
What you need to know is that when you make a trade in the Forex market, you are simultaneously buying one currency and selling another.
Therefore, you must pay interest on the currency you sold and you will earn interest on the currency you bought.
For example, if we assume that the interest rate in Australia is 2.00% and 0.1% in the U.S. and you have a buy position of 1 lot in AUDUSD at 0.7500 exchange rate. You will earn 2.00% per year on your Australian dollar and pay 0.1% per year on your USD.
So to calculate an approximate amount of what you will pay or gain on this trade we will do the following:
On what you bought:
Buying and holding 100,000 AUD will result in,
2,000 per year
Divide 2,000 by 365 to get the amount per day,
That equals to 5.48 AUD per day
On what you sold:
You sold USD in this case. So to get the amount you sold, simply multiply the position size by the exchange rate:
(100,000 AUD x 0.7500)= 75,000 USD
To get the interest you pay for the year,
0.1% x 75,000 = 75 USD per year
Now divide by 365 to get per day,
75/365 = $0.2 per day
To calculate the sum,
We subtract what we paid from what we gained. However, we have to convert the 5.48 AUD to USD first.
5.48*0.7500 = $4.11
Sum = $4.11 – 0.2 = $3.91
Accordingly, the hypothetical amount that we should get on this trade as a rollover is $3.91 dollar per day. However, in real life, this is not the case. It will vary depending on your Forex broker’s rollover rates. To have the precise rates you need to review your broker’s rollover rates.
We calculated the rollover per day because, it is processed daily. Each day at 5 pm in New York.
In the Forex market, any positions that are open at or before 5 pm sharp are considered to be held overnight and are subject to rollover. A position opened at 5:01 pm is not subject to rollover until 5 pm the next day.
Who are the Participants in the Forex Market?
- Large Commercial and Investment Banks
UBS,JP Morgan,Citi , Barclays are just a few names of large banks that exchange currencies in the forex market.
Their purpose of participating varies from speculation(investment banks), to making the market to others. They provide most of the liquidity in the Interbank market.
- Central Banks
A Central bank participates in the Forex market directly, by intervening to buy or sell their currency according to its price target.
The price target that maintains the country’s financial and economic stability. Central banks can intervene indirectly through monetary policy tools such as interest rates.
For example, if inflation is higher than the healthy levels, the central bank raises interest rates to shrink money supply in the economy and that would have a positive impact on their currency.
- Investment Funds
Such as hedge funds. They participate in the market for speculation and investment purposes.
- Large Corporations
Amazon like companies participate in the forex market for a few reasons.
A simple example is importing component for their new kindle tablet from china requires them to exchange U.S. Dollar for Chinese Yuan.
They can also participate for hedging purposes (hedging is buying or selling a currency at a certain price to protect the company from un-favorable change in the future).
For example, if Amazon is planning to start producing the new kindle one year from now. Production requires amazon to buy components from china worth 50 million yuans.
Let’s say every one U.S. dollar equals 7 Yuans at that date. So if the purchasing manager is to purchase right away, it will cost the company 7.14 million dollars.
What if Amazon decided to wait 12 month, and the exchange rate changed to 6 yuans for every dollar?
Amazon will have to pay 8.33 million dollars. That is an increase of around 16 percent in cost.
A good finance manager that expects the US dollar to fall against the Yuan, will advise to hedge this risk and purchase the components right away.
- Financial Forex Brokers and their retail clients (People like you and me).
Remember: Always keep an eye on announcements from central banks. As they create major fluctuations (up and down) in the underlying currency, for the first few minutes of announcement.
When you can trade Forex?
The Forex Market is open for trading 24-hours, 5 days a week. Because the market operates in multiple time zones, it can be accessed at almost any time. The market closes for retail trading on the weekend.
The Forex market opens on the first business day of the week in Australia and closes on Friday with the end of the business day in the U.S. And that translates to 5:00 pm Eastern Time Sunday through 5:00 pm ET on Friday (22.00 GMT on Sunday until 22.00 GMT on Friday).
A specific currency will usually be most active when that particular market is open. For example, the British pound pairs tend to be most active during the hours when the London market is open. The Japanese yen pairs will be more widely traded during the Tokyo business day.
The market hours for the major Forex markets are as follows:
- London Session – 3 AM through 12 noon Eastern time (around 35% of total FX volume)
The Most active pairs during London session are the British pound and the European currencies like the Euro.
- New York Session – 8 AM through 5 PM Eastern time (around 20% of total FX volume)
All USD pairs are active during this session.
- Sydney Session – 5 PM through 2 AM Eastern time ( around 4% of total volume)
Asian currencies will be most active. Currencies such as the Australian Dollar and New Zealand Dollar.
- Tokyo Session – 7 PM through 4 AM Eastern time (~6% of total volume)
Japanese Yen and other Asian currencies are most active.
Remember: When there is an overlap between sessions, the market tend to be more active(higher trading volumes, hence major prices movement).
During the hours of 8 AM and 11 AM Eastern US time, the two largest markets (London and New York) overlap for about 3 hours. And that makes it the most active Forex trading hours of the day.
Also, Sydney and Tokyo sessions overlap between 7 PM and 2 AM Eastern time. And that makes it the most active session for pairs that include Asian currencies.
How to Choose a Forex Broker
First, lets explain the main forex broker types and how they might affect your trading.
Understanding Broker Types
Forex Market Makers (Dealing Desk Broker)
The Forex market maker is a company that is always ready to buy or sell a financial asset and sets both the sell and the buy prices for their clients. They make transactions at these prices with their customers. and that makes it a liquidity provider for its clients.
If you want to sell, the Forex market maker will be the buyer and if you want to buy it will be the seller. Market makers must take the opposite side of your trade.
Forex market makers are dealing desk broker, this simply means that they have a dealer sitting at the dealing desk in the firm. As you place an order the dealing desk agent receives it and deals with it.
Forex market makers are your counterparties. Therefore, many of them will then try protecting themselves by copying your order somewhere else typically their liquidity providers( a bigger broker or bank). So if you make a profit on the trade, they have themselves covered because they will also make the same profit.
The process of covering usually happens in sums. For example, if the brokers have a net of 234 units buy positions on the EURUSD, and 112 units of sell EURUSD then the net exposure is a 122 units buy EURUSD. If the market maker decides to cover, then it will buy the 122 units of EURUSD from banks.
There are also times in which market makers may decide not to cover if they see that the majority of positions are wrong.
In that case, if the broker didn’t cover the positions somewhere else, and the clients bets turned correct, the broker would lose money. As the must pay their clients the profits.
Given all the information above, the market makers have flexibility. Since they are making the market, they can execute your order at artificial prices that’s not exactly the current real market price.
They can delay your order execution few seconds until the price has changed and then resend to you the new price asking you whether you want to execute your order at this new price.
They can also widen spreads, or even reject to execute your order.
Note: We don’t claim that these practices are done by all market makers. But they do strongly exist in the forex world.
ECN Forex Brokers
ECN Forex brokers provide access to the inter-bank market by using an electronic system to pass on prices from multiple market liquidity providers. Such as banks and market makers connected to the electronic communication network (ECN). The broker then displays the best bid/ask quotes on their trading platforms for traders.
This process is explained in the image below. The ECN broker aggregates multiple price quotes from different banks, for bid and ask and provide the trader the highest BID price and lowest ASK price.
ECN Forex brokers do not make the market for you under this type. Therefore, they are not your counterparties. And thus there is no conflict of interest. The broker profits only from the commission they receive on each trade.
ECN brokers do not have the flexibility market makers have. For example, if you place an order on your trading platform, and the live price changes before the order reaches the broker, the broker will not execute your order. It will automatically resend you a new quote with the new price asking you if you want to execute the order at the new price.
In terms of cost, ECN brokers have the tightest spread in the industry, but they charge extra commission(in addition to the spread) on each transaction made by clients. Thus, the net cost per trade will be very similar to a market maker.
Forex Trading Tutorial Hint: You can see that there are trade-offs with each type of brokers. Choosing the broker type depends on you and what suits your trading style. I personally prefer true ECN brokers as they represent the real conditions/environment of the Forex Market .
Only trade with a regulated Forex broker. Never open an account with an unregulated broker.
Regulation entities such as the NFA and CFTC in the U.S. or FSA in the U.K aim to provide a safer environment for investors and traders.
Regulators develop rules and services to protect the integrity of the Forex market, traders, and investors.
Other Regulatory Institutions:
- The Australian Securities and Investments Commission (ASIC)
- The Japanese Financial Services Agency (FSA)
- The Investment Industry Regulatory Organization of Canada (IIROC) (ASIC)
- The Cyprus Securities and Exchange Commission (CySEC)
Regulated brokers will abide by specific regulations to maintain its regulation by the regulator. Such as capital requirements, fund safety, and segregation (keep client funds in separate bank accounts in major banks).
There are always risks, however, choosing a regulated Forex broker is one of the major steps you should take to minimize chances of unpleasant events.
Forex Account specification that suits your trading style.
Leverage, margin requirements,rollover rates, Commissions and Spreads.
If you are a conservative trader, an account with lower leverage of 20:1 might suit you better.
Word of mouth.
Only listen to experienced traders you trust.
Deposit and withdrawal
Methods that suits you. And ask for any limitation of withdrawal amount specially on credit card withdrawals.
Forex Trading Tutorial Hint: Opening a demo account to try the broker is useless advice. This is because brokers put demo accounts on autopilot dealing, and do not monitor them. Thus, there is no human intervention at all. A better idea is to start with a small trial capital.
Here I conclude the first part of the Forex Trading Tutorial for beginners. I introduced the basic fundamentals of trading. I tried my best to simplify the concept and be clear.
I encourage you to practice in your demo account and experiment with the Metatrader 5 platform. Apply everything you learned, that would help grasp anything that you didn’t comprehend well.
If you have any feedback or having difficulty with any topic do not hesitate to ask your question in the comments section below. I will be waiting for your comments and will be happy to answer.
Finally, go ahead and start my Forex technical analysis basics tutorial.
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