Introduction To Forex Trading - Swissquote

Introductionto Forex Tradingswissquote.com/forex

“The mark of a well-educatedperson is not necessarily inknowing all the answers, but inknowing where to find them.”Douglas Everett Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.

ContentWhat is Forex4What affects the Forex market5How a Forex trade works6Trading strategies8Trading platforms10How to start trading Forex11 Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.

What is ForexThe forex market isthe world’s largestfinancial marketForex tradingoccurs fromMonday morning inNew Zealand untilmidnight Friday onthe west coast ofthe USAIf you have traveled, you probably alreadyhave forex trading experience: when youbuy the currency of your destination countrywhile paying with your own currency, that isforex trading.Forex traders buy and sell currencies for profitor to protect investments. An estimated USD5 trillion is traded daily, most of it speculative.The forex market is the world’s largestfinancial market, and since trading is betweenmarket participants, there is no “open” or“close” of market except on weekends.Most tradedcurrency pairsIn other words, forex trading occursfrom Monday morning in New Zealand untilmidnight Friday on the west coastof the USA.You might enjoy trading the majorcurrency pairs, or have knowledge about thestrength of an exotic currency, or a feel forcommodities; some opportunities presentthemselves to people who keep up withnews and events, while others require patientanalysis. Traders bring their own strengths andpreferences to their trading and, over time,create their own trading style.LondonNew 0 23 22 21 20 19 18 17 16 15 14 13 12 11 10 09 08 07 06 05 04 03 02 01 004 Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.

What affects the Forex marketPeople trade forexbased on expectationsof the future, whichare shaped by manyfactors.Each market participant has their goals;some are companies who are hedgingcurrency exposure to protect their business;some are fundamental traders who focuson factors that affect the strength of wholeeconomies; others are technical traders wholook for price patterns to trigger their trades.The various market participants place differentweight on information about interest rates,policy (laws), economic announcementsand natural or man-made events: all affectexpectations and thus market movements.Remember that in the forex market, you canprofit from down-turns as well as rising prices.In addition, there are central banks, hedgefunds and financial institutions who all bringdifferent goals and interpretations to sTradeLawsInfluencers Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.5

How a Forex trade worksSimilar to your vacation pocket money,forex trading always involves two currencies.The base currency is the one you are buyingor selling, and its price is given in the quotecurrency:ValueLong trade (buy)Sell EUR 100,000Buy USD 105,2501.0525USD 250 profit1.0500Buy EUR 100,000Sell USD 105,000Base currency/Quote currencyEUR/USDTime1/1.0500One Euro costs 1.05 US dollars.MarginImagine that you believe the EUR will risein value relative to the USD. You buy EUR100,000, paying USD 105,000 from yourtrading account (regardless of the account’sdenomination).The EUR indeed rises a great deal, to1.0525 at the end of the day. Therefore,when you close your position by selling theEUR 100,000, you receive USD 150,250,earning USD 250.You might ask, “where did I get USD 105,000from in the first place?” and the answer mightbe that you have USD 2,000 in your tradingaccount, and your broker enables you toborrow USD 100 for each US dollars in youraccount. With this 100:1 margin, you canenter forex positions with values of up toUSD 200,000. If you did have USD 2,000 inyour account and earned USD 250, you earned12.5% of your account value on this trade.Also called leverage, margin is money borrowed from yourForex broker. Leveraging amplifies price changes and thusthe profit or loss from a given trade. A 2% margin meansthat you can command positions that are 50 times greaterthan the funds in your account.LotA lot is a unit used in trading, especially on MetraTraderMT4/MT5 platforms. At Swissquote, 1 lot is 100,000 ofthe base currency. In other words, in the example, 1 lotis traded.1 lot 100,000 units of base currency1 mini-lot 10,000 units of base currency1 micro-lot 1,000 units of base currencyIt is possible to trade less than 1 lot. For example, to trade10,000 of the base currency (called a mini lot), type 0.1 lotinto the Volume field. To trade 1,000 of the base currency(called a micro lot), write 0.01 lot. The smallest enabledtrade size is a micro lot. Trade sizes are given in lots on thetrading platform, so keep this in mind!6 Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.

Now imagine that in the example above,the Euro did not rise; indeed instead it fell to1.0475 at the end of the day. Therefore,when you close your position by selling theEUR 100,000, you receive USD 104,750,loosing USD 250.ValueLong trade (buy)Buy EUR 100,000Sell USD 105,0001.0500USD 250 loss1.0475Sell EUR 100,000Buy USD 104,750TimeBearishBullishYou think a currency will riseYou buy the currencyYou take a Long positionYou think a currency will fallYou sell the currencyYou take a Short positionWhen you trade Forex, you have the choice between buying or selling a currency pair.When you buy,you are said to be BullishWhen you sell,you are said to be Bearish Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.7

Trading strategiesFundamental tradingSome traders find opportunities to tradeby looking at fundamental indications ofeconomic health. For example, supply anddemand for a currency decide the price andliquidity, so traders keep an eye on the centralbank’s interest rates to see which way themarket might move.If a currency has a high interest rate, it mightbe profitable to invest for the interest alone;however, the reason for the high interest ratemight be economic instability. All marketparticipants trade based on their informationand expectations.Events that move a given currency quicklyenable intra-day trades, i.e. trades that areopened and closed on the same day. If yourexpectation is for price movement over longertime, you will hold your trading position openfor longer; in general, your position is closed at22.00 GMT and rolled over (“swapped”) into anew trade opened immediately after. This newposition takes into account the closing priceand adds or subtracts interest.Anything that makes an economy lookstronger points at taking long positions, whileweaknesses point at taking short positions.Fundamental traders look at indicators suchas employment rate, inflation and consumersentiment as well as news about policychanges, interest rate and events. Much of thisinformation is announced by governmentsaccording to a schedule, so it is possible tofind or create “economic calendars” that willprovide inspiration.Carry tradeIf one currency has a low interest rateand the other a high interest rate, youcan participate in carry trading by buyingthe currency with the high interest ratewhile selling the currency with the lowinterest rate. While you pay the lowinterest on the currency you borrowedto sell, you receive the high interest onthe currency you bought.8 Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.

Technical tradingMost forex traders use charts to decide whento enter and exit trades, and technical tradersin particular pay attention to price patterns.By looking at charts and weighing price,volume, volatility and timing, it is possible tofind patterns that indicate opportunities.For example, if the price of a currencyrepeatedly reaches a given value but doesnot rise above or fall below it, the currencyis said to have found a resistance or supportlevel. Many traders will keep an eye on pastpatterns and have an opinion on how far theprice will move if it does break the support orresistance level.Over time, various analyses have beendeveloped and built into our trading platforms.Some are simple classics, others are moredifficult to apply, and still others are wellsuited to some currencies but not others.You can take a position at any time - anyexpectation you have will point to anopportunity to buy or sell.Technical Analysis toolsResistance:key price level where the asset price tends to findresistance as it rises. This means the price is more likelyto “bounce” off this level and fall afterwards.ValueSupport:key price level where the asset price tends to findsupport as it fall. This means the price is more likelyto “bounce” off this level and rise afterwards.ResistancendTrelineTrend line:It is formed when a diagonal line can be drawn betweena minimum of three or more price pivot points.SupportTime Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.9

Trading platformsThe forex market participants create the forexmarket; this is called an Over-the-Counter(OTC) market. This is in contrast to, for example,the stock market, where all trades go throughstock exchanges.EURUSDAsk1.13324SpreadBid1.13308You access this market usinga trading platform providedby a broker. At Swissquote,investors can trade Forexwith the proprietary platformAdvanced Trader or with thepopular MetaTrader 4 or 5.On top, Swissquote providesspreads as narrow as 0.9 pipsand offers 1% - 2% marginon most pairs.When you have selectedyour trading platform,familiarize yourself with theavailable spreads and tools.Swissquote provides demoversions that enable you totry everything using virtualmoney. Try the charts andindicators, and explore orders,which are automatic tradesbased on your expectations,used to open or closepositions at predefined pricepoints.10SpreadThe difference between the price you can buy and sell at is the spread.The spread is the broker’s fee and reflects liquidity and risk. Althoughmany brokers apply commissions in addition to the spreads theyadvertise, at Swissquote, there are no other fees or commissions.PipForex price changes are given in pips. One pip is a change in the fourthdecimal point (except for JPY, for which it is the second decimal point).Another way to look at it is that the pip is often the 5th digit in the quotecurrency regardless of decimals.EUR/USD 1.1275 USD/JPY 106.78& Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.

How to start trading Forex1Why trading forex with Swissquote?Go to swissquote.com/forex 20 years of online trading expertise Trusted by 300,000 traders worldwide2Open a demo account.3You can practice Forex trading withUSD 100,000 virtual money.No risk & no obligation.Try a demo now! Multilingual Customer Support Exclusive market research with daily &weekly reports Global Liquidity & Precise Execution Segregated accounts with depositprotection International Group listed on theSIX Swiss Exchange (SIX:SQN)Swissquote is regularly quoted andconsulted by global financial media. Swissquote 2017. All rights reserved. Forex and CFD trading involves a high degree of risk and is not suitable to all investors.11

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forex trading always involves two currencies. The base currency is the one you are buying or selling, and its price is given in the quote currency: Base currency/Quote currency EUR/USD 1/1.0500 One Euro costs 1.05 US dollars. 1 lot 100,000 units of base currency