Forex may seem complicated, but to start investing in this market, all you need is a willingness to learn, consistency and cold calculation. In order to plan your forex strategies well, you need to understand what market news is crucial and what speculation is all about. Check out our forex guide and learn how to start forex trading and how to make money on forex! This forex tutorial for beginners will help you understand how the forex currency market works and how to best test the forex demo.
Basic information
The Forex market is a specialized market and in order to understand its individual elements and mechanics faster, it is worth starting your adventure with it by learning the basic and most common concepts:
Long position and Short position – a long position is nothing more than opening a position in which we make money on the increase in the price of a given asset and lose on the decline. For example, a long position on EURUSD means that we buy EUR for USD, so we make money on the increase in the price of EUR against USD, and lose on the increase in the price of EUR against USD. Of course, a short position (short position) is the opposite of a long position.
Ask price and bid price – the ask price is the price at which a currency pair can be bought, and the bid price is the price at which it can be sold.
Currency spread – is the difference between the ask and bid prices. The lower the spread, the lower the cost of opening a given order. It is important to remember that the spread is not a fixed value and is clearly larger during times of extremely high volatility or extremely low liquidity in a given market. For example, the spread on the EUR/USD during the European session will be much lower than during the Asian session, and thus during the London session, trading will be cheaper.
Pip – most currencies are quoted to the fourth decimal place and it is the unit 0.0001 that is called one pip. The exception is e.g. USDJPY, which is quoted to the second decimal place (in this case, the pip is 0.01). A unit smaller than a pip is a point (1 pip = 10 points). If the price of EURUSD is 1.1100 and it rises by one pip, it means that it will rise to 1.1101 (1.1100 + 0.0001). The value of a pip depends on the size of the order (volume) – to learn more about what a pip is, what its value depends on and how to calculate.
Lot – this is a term for the size of a Forex trade. A standard lot consists of 100000 units of the base currency (the first in the pair). At XTB, the minimum transaction value available for currency CFDs is 0.01 lots, and the nominal value of an order of this size is 1,000 units (for EUR/USD it will be one thousand euros).
Leverage – is a mechanism operating on the derivatives market, allowing investments with only a percentage of its nominal value. For example, an investment in a EUR/USD CFD worth EUR 100,000 requires a margin of EUR 3333. In 2018, a standard was introduced in Europe that defined the maximum leverage available for CFD instruments – for major FX pairs, it is a leverage of 1:30 (major currency pairs are those composed of any two of the following currencies: USD, EUR, JPY, GBP, CAD and CHF). For other currency pairs, it is 1:20. This does not apply to clients with the status of experienced client and professional client.
Margin – This is the margin required for leveraged trading. The size of the margin required depends on the size of the investment and the level of leverage offered. For 1:30 leverage, the margin is 3.33% of the nominal value of the investment, while for 1:20 leverage it is 5%.
Swap / swap points – this is an integral part of the forex currency market. The value of swap points results from many complex factors, the most important of which is the difference in the interest rate of currencies from a given currency pair. Most often it has a negative value (i.e. it is a cost), but unlike e.g. the spread, the swap is not charged when the position is opened, but every day at midnight it is added to the value of the open position for transferring it to the next day. Importantly, the swap value has a different value for long and short swap. In the case of currency CFDs, both of these values are usually negative, but not always. A positive currency swap is most often when the disparity in interest rates in the pair is clear (it is worth seeing on the example of EUR/TRY or USD/ZAR). A style of investing based on the use of positive swap points is called Carry Trade.
Stop loss (SL) and take profit (TP) – These are so-called defensive orders available on most forex trading platforms, and their purpose is to set the level of take profit (TP) and the level of maximum loss (SL) for individual orders. You can learn more about SL and TP orders, as well as how to use them, here.
How to analyze currency pairs?
The two most popular methods of analyzing Forex currency pairs are technical and fundamental analysis.
Technical analysis focuses primarily on price and price charts, and it is based on three pillars:
The market discounts everything – we ignore fundamental factors, assuming that the market has already taken them into account when forming the price.
Prices are subject to trends – we assume that the price moves in line with the trend. This means that once a trend is established, it is much more likely that the trend will continue than reverse.
History repeats itself – using price movements from the past, you can look for patterns (price formations) and thus increase the probability of predicting the price in the future.
Fundamental analysis, unlike technical analysis, focuses not only on the price itself, but also on all available macroeconomic data to finally estimate the correct value of a given market. A forex trader particularly monitors the monetary policy pursued by individual central banks, i.e. forecasts and publications of interest rates, interventions and the so-called open market operations.
Types of Forex Charts
Price charts are a very important element of any investment in financial markets, especially for traders who use technical analysis to analyze quotes. Each type of chart can be presented in multiple time frames, ranging from a minute time frame to a monthly time frame, and the most common types of charts are:
- Line chart – the simplest form of price presentation. They are created by drawing a line connecting successive closing prices.
- Bar Chart (OHLC) – Bar charts show not only the closing price, but also the opening price and the low and high prices of a given period. Depending on the time frame, one bar reflects the range in which the price has been moving at a given time.
- Candlestick chart – candlestick charts are very similar to bar charts and contain the same information about prices. At the same time, they are clearer and therefore more popular than bar charts.
- Among the less popular types of price charts, we can find Point and Symbol, Renko, Heiken-ashi, Kagi.
Each chart can be presented in multiple time frames, starting from one minute (M1) and ending with one month (MN).