Reading the title of this post.... Is that true?? Well, it is true!! Forex Trading is a way to earn money.. and it is very easy if you have the edge. You can earn 1%, 5%, 10%, 20% or even 100% in a month. Can you imagine that? You can get rich very quick. How are we going to get that high return in forex trading?
But here is the catch: "High Return, High Risk". That is the wisdom in a trading or investment world. You will lost all your money in your trading account very quick too. So, there is another question that need to be answered: How can we manage risks in forex trading?
You need to learn the basic of trading. It can be applied to various trading instruments besides forex such as gold, oil, stocks, CFD, indices, crypto currencies, etc. Every new skills need to be learned. For example, when you want to drive a car but you don't have the skill. How do you start driving? You need to learn the basic of driving, right? What is the basic? You want to know the instruments in the car, what the functions of that instruments are, how they help you in driving, what the steps to drive are, how to control the gas pedal, the brake pedal, the gear, etc. You need to learn all of that in a structured way.
So what are the trading basics that need to be learned?
1. What are the instruments?
2. Why do the price of instruments move?
3. How to count your profit or loss.
4. Learn the chart: support-resistance, candle patterns, chart patterns, trending and consolidation phase.
5. Learn to create a trading setup or strategy.
6. Learn position sizing.
7. Learn about stop loss.
8. Learn the reverse strategy.
9. How to find a good forex broker.
10. How to trade a Forex Account.
"Wow, so much to learn dude", you probably want to say that. But Hey, you want the big money? I can elaborate those topics in this article in a simple way or you can search those in forex education websites such as babypips.com.
Here we go....
1. What are the instruments?
There are many instruments that can be traded at forex, basically all currency pairs can be traded except those that aren't allowed by its regulators such as USD/IDR (US Dollar vs Indonesia Rupiah).
As you can see, the symbol of the instruments consists of 2 abbreviation, for example EUR/USD = Euro vs US Dollar, GBP/USD = Great Britain Poundsterling vs US Dollar, EUR/JPY = Euro versus Japanese Yen, USD/TRY = US Dollar versus Turkish Lira, etc. And there are also commodities that pairing with US Dollar, XAU/USD = Gold in US Dollar, XAG/USD = Silver in US Dollar.
In trading, the currency pairs are grouped in different names, which are (1) Major Currency Pairs, (2)Cross Currency Pairs, (3)Exotic Currency Pairs.
Major Currency Pairs are pairs that include USD and currency of big countries (in term of economy) in it such as EUR/USD, GBP/USD, USD/JPY, AUD/USD, NZD/USD, USD/CHF, USD/CAD. The three most traded pairs are EUR/USD, GBP/USD and USD/JPY.
Cross Currency Pairs are pairs that don't include USD but come from big countries, such as EUR/JPY, GBP/JPY, EUR/GBP, AUD/JPY, CAD/JPY, AUD/NZD, NZD/JPY, EUR/CHF, GBP/CHF, CHF/JPY and so on.
Exotic Currency Pairs are pairs that rarely traded in the world such as USD/TRY, USD/ZAR, USD/RUB etc.
2. Why do the price of instruments move?
Before we begin, there are 3 movements of the price -> (1) upward, (2) downward and (3) sideways. Let's take EUR/USD pair for example. Upward movements in that pair means that the Euro is stronger than US Dollar. On the chart, it will show the price move up north. Downward movements means that the US Dollar is stronger than the Euro. On the chart, the price move down south. While sideways means that the price of EUR/USD move up and down in a tight range.
So why the price moves. Usually, the movement of the price is related to the changes of the monetary policies made by Central Banks, macro economy situation, political tension issues, supply and demand of commodities, and company's condition (for individual stocks).
For example, there was an issue of the US Federal Reserve (US Central Bank) will not raise interest rate anymore this year. The markets will anticipate the news by selling the US Dollar against other major currencies. And the results: for the EUR/USD pair, the currency pair will go up. And for the USD/JPY pair, the currency pair will go down.
You can monitor updated news in FXStreet.com, investing.com, reuters.com, bloomberg.com or the wired news published on MT4 trading platform. You can also monitor upcoming macroeconomic data at the calendar produced by Forexfactory.com or investing.com
3. How to count the profit or loss?
There are 4 elements to count the profit or loss: (1) The difference of closing and opening price in pip, (2) The value of 1 pip, (3) The number of lots, (4) The commission value, (5) The swap value.
So the formula is (The difference of closing and opening price in pip) * The value of 1 pip * The number of lots - commission + swap value.
First, we need to know what is pip. The pip is a unit to count the range of the price movement. There are 3 type of the price format: (1) 4/5 decimals, (2) 2/3 decimals, and (3) without any decimals.
4/5 decimals. In the past, there are only 4 decimals but in the year 2000 era, the brokers implemented extra decimals in the price, so it become 5 decimals. But traders always count the pip from the 4th decimal. For example:
Open Price: 1.13115
Close Price: 1.13127
The difference: 1.13127-1.13115 = 0.00012
And the pip start from the 4th decimal = 0.00012 * 10,000 = 1.2 pip
The pairs with 4/5 decimals: Almost every currency pairs that not include JPY such as EUR/USD, EUR/GBP, AUD/USD, AUD/CAD , etc.
2/3 decimals. The same as above, currently every brokers use 3 decimals instead of 2 decimals but the pip count always start from the second decimals. For example:
Open Price: 108.505
Close Price: 108.516
The difference: 108.516 - 108.505 = 0.011
And the pip start from the 2nd decimal = 0.011 * 100 = 1.1 pip
The pairs with 2/3 decimals: every currency pairs with JPY: USD/JPY, EUR/JPY, GBP/JPY, commodities: XAU/USD, XAG/USD, Crude Oil and some indices price such as KOSPI, NASDAQ, S&P500
No decimals. It usually indices prices such as NIKKEI, HANGSENG and DOW JONES and the difference of the close and open price is the pip. For example:
Open Price: 27450
Close Price: 27500
The difference: 27500-27450 = 50 pip.
Now we need to know the value of the pip. How we convert it into the value of the money (usually in USD).
To count the value of the pip, it will require the value of the contract or the contract size. There are several contract size: (a) 100,000 for standard lot size, (b) 10,000 for mini lot size, and (c) 1,000 for micro lot size. But for the simplicity, let's us the 100,000 contract size and using decimal for mini and micro lot size. For mini lot, using 1 decimal and for micro lot, using 2 decimal => 0.1 is a mini lot size for 1 lot, and 0.01 is a micro lot size for 1 lot.
So the value of 1 pip of a standard lot in USD:
Direct Pairs: EURUSD, GBPUSD, AUDUSD, NZDUSD :
Contract Size in USD * (Difference between close and open price):
USD 100,000 * 0.0001 = USD 10
Indirect Pairs: USDJPY, USDCAD, USDCHF :
Contract Size in USD * (Difference between close and open price) / Current Settlement Rate:
For USD/JPY => USD 100,000 * 0.01 / 108.500 = USD 9.21
For USD/CAD => USD 100,000 * 0.0001 / 1.32720 = USD 7.53
Cross Pairs: EURGBP, EURJPY, GBPJPY, AUDNZD, etc
Contract Size in USD * (Difference between close and open price) * (Base Rate/ Current Settlement Rate):
For EURGBP, the base rate is EURUSD and the Current Settlement Rate is EURGBP:
USD 100,000 * 0.0001 * (1.13131/0.88910) = USD 12.72
For EURJPY, the base rate is EURUSD and the Current Settlement Rate is EURJPY:
USD 100,000 * 0.01 * (1.13131/122.720) = USD 9.21
After we know what the pip is and how to count the value of the pip, let's count the profit/loss:
1st example:
I open a buy of 0.01 lot (it is a micro lot) EURUSD at 1.13130 and close it with a sell at 1.13231. Since the close price is higher then an open price, it is a profit. Let say the commission and the swap value is zero. So the profit will be:
(The difference between close and open price in pip) * The value of 1 pip in USD * The lot Size - commission + Swap value.
((1.13231 - 1.13130)*10,000) *USD 10 * 0.01 - 0 + 0 = USD 1.01
2nd Example:
I open a sell of 0.1 lot (a mini lot) EURJPY at 122.701 and close it with a buy at 123.502. How much is the profit if the commission and the swap value is zero?
(The difference between close and open price in pip) * The value of 1 pip in USD * The lot Size - commission + Swap value.
((123.502-122.701)*100) * USD 9.21 * 0.1 - 0 + 0 = USD 73.77
Looking into those calculations above seems difficult to count the profit/loss. Well, it will be easier when you get use to it and the fact is you don't need to count it by yourself, the trading platform will provide you with the result of profit and loss. :)
4. Learn the chart!
Chart is very important in trading. It shows the big picture of how the price moves. We will know if the price currently in trending or consolidation phase. The chart shows the psychology of the traders. It also shows where the big chunk of sellers or buyers reside. You can predict instantly where the price will move if you understand the chart.
You can get the chart by downloading the Meta trader 4 or MT4 platform on mobile or desktop. You can check Playstore or Appstore for mobile apps. or you can go to MT4 for window's PC platform.
To be continued.....
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