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 is a step by step Forex trading tutorial. This tutorial aims to provide all the necessary information to newcomers in one place.
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 .
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: Technical Analysis Basics Tutorial.
We ask you to be patient while reading, especially in the beginning. If you feel that a topic is not cleast 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.
You can move between chapters through the drop down menu below.
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.