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What Is Forex Trading? – A Definition & Introduction

What is Forex? – The basics

Basically, the Forex market is where banks, businesses, governments, investors and traders come to
exchange and speculate on currencies. The Forex market is also referred to as the ‘Fx market’, ‘Currency
market’, ‘Foreign exchange currency market’ or ‘Foreign currency market’, and it is the largest and most
liquid market in the world with an average daily turnover of $3.98 trillion.

The Fx market is open 24 hours a day, 5 days a week with the most important world trading centers
being located in London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris, and Sydney.

It should be noted that there is no central marketplace for the Forex Market trading is instead said to be
conducted ‘over the counter’; it’s not like stocks where there is a central marketplace with all orders
processed like the NYSE. Forex is a product quoted by all the major banks, and not all banks will have the
exact same price. Now, the broker platforms take all these feeds from the different banks and the
quotes we see from our broker are an approximate average of them. It’s the broker who is effectively
transacting the trade and taking the other side of it…they ‘make the market’ for you. When you buy a
currency pair…your broker is selling it to you, not ‘another trader’

A brief history of the Forex market

In 1876, something called the gold exchange standard was implemented. Basically it said that all paper
currency had to be backed by solid gold; the idea here was to stabilize world currencies by pegging them
to the price of gold. It was a good idea in theory, but in reality it created boom-bust patterns which
ultimately led to the demise of the gold standard.

The gold standard was dropped around the beginning of World War 2 as major European countries did
not have enough gold to support all the currency they were printing to pay for large military projects.
Although the gold standard was ultimately dropped, the precious metal never lost its spot as the
ultimate form of monetary value.

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The world then decided to have fixed exchange rates that resulted in the U.S. dollar being the primary
reserve currency and that it would be the only currency backed by gold, this is known as the ‘Bretton
Woods System’ and it happened in 1944. In 1971 the U.S. declared that it would no longer exchange
gold for U.S. dollars that were held in foreign reserves, this marked the end of the Bretton Woods
System.

It was this break down of the Bretton Woods System that ultimately led to the mostly global acceptance
of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign
currency exchange market, although it did not become widely electronically traded until about the mid-
1990s.

What is Forex Trading?

Forex Trading as it relates to retail traders is the speculation on the price of one currency against
another. For example, if you think the euro is going to rise against the U.S. dollar, you can buy the
EURUSD currency pair low and then (hopefully) sell it at a higher price to make a profit. Of course, if you
buy the euro against the dollar (EURUSD), and the U.S. dollar strengthens, you will then be in a losing
position. So, it’s important to be aware of the risk involved in trading Forex, and not only the reward.

Why is the Forex market so popular?

Being a Forex trader offers the most amazing potential lifestyle of any profession in the world. It’s not
easy to get there, but if you are determined and disciplined, you can make it happen. Here’s a quick list
of skills you will need to reach your goals in the Forex market:

Ability – to take a loss without becoming emotional

Confidence – to believe in yourself and your trading strategy, and to have no fear

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Dedication – to becoming the best Forex trader you can be

Discipline – to remain calm and unemotional in a realm of constant temptation (the market)

Flexibility – to trade changing market conditions successfully

Focus – to stay concentrated on your trading plan and to not stray off course

Logic – to look at the market from an objective and straight forward perspective

Organization – to forge and reinforce positive trading habits

Patience – to wait for only the highest-probability trading strategies according to your plan

Realism – to not think you are going to get rich quick and understand the reality of the market and
trading

Savvy – to take advantage of your trading edge when it arises and be aware of what is happening in the
market at all times

Self-control – to not over-trade and over-leverage your trading account

As traders, we can take advantage of the high leverage and volatility of the Forex market by learning and
mastering and effective Forex trading strategy, building an effective trading plan around that strategy,
and following it with ice-cold discipline. Money management is key here; leverage is a double-edged
sword and can make you a lot of money fast or lose you a lot of money fast. The key to money
management in Forex Trading is to always know the exact dollar amount you have at risk before
entering a trade and be TOTALLY OK with losing that amount of money, because any one trade could be
a loser. More on money management later in the course.

Who trades Forex and why?

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Banks – The interbank market allows for both the majority of commercial Forex transactions and large
amounts of speculative trading each day. Some large banks will trade billions of dollars, daily.
Sometimes this trading is done on behalf of customers, however much is done by proprietary traders
who are trading for the bank’s own account.

Companies – Companies need to use the foreign exchange market to pay for goods and services from
foreign countries and also to sell goods or services in foreign countries. An important part of the daily
Forex market activity comes from companies looking to exchange currency in order to transact in other
countries.

Governments / Central banks – A country’s central bank can play an important role in the foreign
exchange markets. They can cause an increase or decrease in the value of their nation’s currency by
trying to control money supply, inflation, and (or) interest rates. They can use their substantial foreign
exchange reserves to try and stabilize the market.

Hedge funds – Somewhere around 70 to 90% of all foreign exchange transactions are speculative in
nature. This means, the person or institutions that bought or sold the currency has no plan of actually
taking delivery of the currency; instead, the transaction was executed with sole intention of speculating
on the price movement of that particular currency. Retail speculators (you and I) are small cheese
compared to the big hedge funds that control and speculate with billions of dollars of equity each day in
the currency markets.

Individuals – If you have ever traveled to a different country and exchanged your money into a different
currency at the airport or bank, you have already participated in the foreign currency exchange market.

Investors – Investment firms who manage large portfolios for their clients use the Fx market to facilitate
transactions in foreign securities. For example, an investment manager controlling an international
equity portfolio needs to use the Forex market to purchase and sell several currency pairs in order to
pay for foreign securities they want to purchase.

Retail Forex traders – Finally, we come to retail Forex traders. The retail Forex trading industry is
growing everyday with the advent of Forex trading platforms and their ease of accessibility on the
internet. Retail Forex traders access the market indirectly either through a broker or a bank. There are
two main types of retail Forex brokers that provide us with the ability to speculate on the currency
market: brokers and dealers. Brokers work as an agent for the trader by trying to find the best price in
the market and executing on behalf of the customer. For this, they charge a commission on top of the
price obtained in the market. Dealers are also called market makers because they ‘make the market’ for
the trader and act as the counter-party to their transactions, they quote a price they are willing to deal
at and are compensated through the speed, which is the difference between the buy and sell price
(more on this later).

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Advantages of Trading the Forex Market

• Forex is the largest market in the world, with daily volumes exceeding $3 trillion per day. This means
dense liquidity which makes it easy to get in and out of positions.

• Trade whenever you want: There is no opening bell in the Forex market. You can enter or exit a trade
whenever you want from Sunday around 5pm EST to Friday around 4pm EST.

• Ease of access: You can fund your trading account with as little as $250 at many retail brokers and
begin trading the same day in some cases. Straight through order execution allows you to trade at the
click of a mouse.

• Fewer currency pairs to focus on, instead of getting lost trying to analyze thousands of stocks

• Freedom to trade anywhere in the world with the only requirements being a laptop and internet
connection.

• Commission-free trading with many retail market-makers and overall lower transaction costs than
stocks and commodities.

• Volatility allows traders to profit in any market condition and provides for high-probability weekly
trading opportunities. Also, there is no structural market bias like the long bias of the stock market, so
traders have equal opportunity to profit in rising or falling markets.

While the Forex market is clearly a great market to trade, I would note to all beginners that trading
carries both the potential for reward and risk. Many people come into the markets thinking only about
the reward and ignoring the risks involved, this is the fastest way to lose all of your trading account
money. If you want to get started trading the Fx market on the right track, it’s critical that you are aware
of and accept the fact that you could lose on any given trade you take.

Part 2: Forex Trading Terminology

Forex Trading Terminology

The Forex market comes with its very own set of terms and jargon. So, before we go any deeper into
learning how to trade the Fx market, it’s important you understand some of the basic Forex
terminology that you will encounter on your trading journe…

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Basic Forex Terms

Cross rate – The currency exchange rate between two currencies, both of which are not the official
currencies of the country in which the exchange rate quote is given in. This phrase is also sometimes
used to refer to currency quotes which do not involve the U.S. dollar, regardless of which country the
quote is provided in.

For example, if an exchange rate between the British pound and the Japanese yen was quoted in an
American newspaper, this would be considered a cross rate in this context, because either the pound or
the yen is the standard currency of the U.S. However, if the exchange rate between the pound and the
U.S. dollar were quoted in that same newspaper, it would not be considered a cross rate because the
quote involves the U.S. official currency.

Exchange Rate – The value of one currency expressed in terms of another. For example, if EUR/USD is
1.3200, 1 Euro is worth US$1.3200.

Pip – The smallest increment of price movement a currency can make. Also called point or points. For
example, 1 pip for the EUR/USD = 0.0001 and 1 pip for the USD/JPY = 0.01.

Leverage – Leverage is the ability to gear your account into a position greater than your total account
margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position,
he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin
in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and
losses.

Margin – The deposit required to open or maintain a position. Margin can be either “free” or “used”.
Used margin is that amount which is being used to maintain an open position, whereas free margin is
the amount available to open new positions. With a $1,000 margin balance in your account and a 1%
margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000.
This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1.

If a trader’s account falls below the minimum amount required to maintain an open position, he will
receive a “margin call” requiring him to either add more money into his or her account or to close the
open position. Most brokers will automatically close a trade when the margin balance falls below the
amount required to keep it open. The amount required to maintain an open position is dependent on
the broker and could be 50% of the original margin required to open the trade.

Spread – The difference between the sell quote and the buy quote or the bid and offer price. For
example, if EUR/USD quotes read 1.3200/03, the spread is the difference between 1.3200 and 1.3203,
or 3 pips. In order to break even on a trade, a position must move in the direction of the trade by an
amount equal to the spread.

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The major Forex pairs and their nicknames

Understanding Forex currency pair quotes

The exchange rate of two currencies is quoted in a pair, such as the EURUSD or the USDJPY. The reason
for this is because in any foreign exchange transaction you are simultaneously buying one currency and
selling another. If you were to buy the EURUSD and the euro strengthened against the dollar, you would
then be in a profitable trade. Here’s an example of a Forex quote for the euro vs. the U.S. dollar:

The first currency in the pair that is located to the left of the slash mark is called the base currency, and
the second currency of the pair that’s located to the right of the slash market is called the counter or
quote currency.

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If you buy the EUR/USD (or any other currency pair), the exchange rate tells you how much you need to
pay in terms of the quote currency to buy one unit of the base currency. In other words, in the example
above, you have to pay 1.32105 U.S. dollars to buy 1 euro.

If you sell the EUR/USD (or any other currency pair), the exchange rate tells you how much of the quote
currency you receive for selling one unit of the base currency. In other words, in the example above, you
will receive 1.32105 U.S. dollars if you sell 1 euro.

An easy way to think about it is like this: the BASE currency is the BASIS for the trade. So, if you buy the
EURUSD you are buying euro’s (base currency) and selling dollars (quote currency), if you sell the
EURUSD you are selling euro’s (base currency) and buying dollars (quote currency). So, whether you buy
or sell a currency pair, it is always based upon the first currency in the pair; the base currency.

The basic point of Forex trading is to buy a currency pair if you think its base currency will appreciate
(increase in value) relative to the quote currency. If you think the base currency will depreciate (lose
value) relative to the quote currency you would sell the pair.

Bid and Ask price

Bid Price – The bid is the price at which the market (or your broker) will buy a specific currency pair from
you. Thus, at the bid price, a trader can sell the base currency to their broker.

Ask Price – The ask price is the price at which the market (or your broker) will sell a specific currency
pair to you. Thus, at the ask price you can buy the base currency from your broker.

Bid/Ask Spread – The spread of a currency pair varies between brokers and it is the difference between
the bid and ask the price.

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Part 3: Going Long or Short? Order Types and Calculating Profits & Losses
Buying and selling

The basic idea of trading the markets is to buy low and sell high or sell high and buy low. I know that
probably sounds a little weird to you because you are probably thinking “how can I sell something that I
don’t own?” Well, in the Forex market when you sell a currency pair you are actually buying the quote
currency (the second currency in the pair) and selling the base currency (the first currency in the pair).

In the case of a non-Forex example though, selling short seems a little confusing, like if you were to sell a
stock or commodity. The basic idea here is that your broker lends you the stock or commodity to sell
and then you must buy it back later to close the transaction. Essentially, since there is no physical
delivery it is possible to sell a security with your broker since you will ‘give’ it back to them at a later
date, hopefully at a lower price.

Long vs. Short

Another great thing about the Forex market is that you have more of a potential to profit in both rising
and falling markets due to the fact that there is no market bias like the bullish bias of stocks. Anyone
who has traded for a while knows that the fastest money is made in falling markets, so if you learn to
trade both bull and bear markets you will have plenty of opportunities to profit.

LONG – When we go long it means we are buying the market and so we want the market to rise so that
we can then sell back our position at a higher price than we bought for. This means we are buying the
first currency in the pair and selling the second. So, if we buy the EURUSD and the euro strengthens
relative to the U.S. dollar, we will be in a profitable trade.

SHORT – When we go short it means we are selling the market and so we want the market to fall so that
we can then buy back our position at a lower price than we sold it for. This means we are selling the first
currency in the pair and buying the second. So, if we sell the GBPUSD and the British pound weakens
relative to the U.S. dollar, we will be in a profitable trade.

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Order types

When you execute a trade in the Forex market it is called an ‘order’, there are different order types and
they can vary between brokers. All brokers provide some basic order types, there are other ‘special’
order types that are not offered by all brokers though, and we will cover them all below:

Market order – A market order is an order that is placed ‘at the market’ and it’s executed instantly at
the best available price.

Limit Entry order – A limit entry order is placed to either buy below the current market price or sell
above the current market price. This is a bit tricky to understand at first so let me explain:
If the EURUSD is currently trading at 1.3200 and you want to go sell the market if it reaches 1.3250, you
can place a limit sell order and then when / if the market touches 1.3250 it will fill you short. Thus, the
limit sell order is placed ABOVE current market price. If you want to buy the EURUSD at 1.3050 and the
market is trading at 1.3100, you would place your limit buy order at 1.3050 and then if the market hits
that level it will fill you long. Thus the limit buy order is placed BELOW current market price.

Stop Entry order – A stop-entry order is placed to buy above the current market price or sell below it.
For example, if you want to trade long but you want to enter on a breakout of a resistance area, you
would place your buy stop just above the resistance and you would get filled as price moves up into your
stop entry order. The opposite holds true for a sell-stop entry if you want to sell the market.

Stop Loss order – A stop-loss order is an order that is connected to a trade for the purpose of preventing
further losses if the price moves beyond a level that you specify. The stop-loss is perhaps the most
important order in Forex trading since it gives you the ability to control your risk and limit losses. This
order remains in effect until the position is liquidated or you modify or cancel the stop-loss order.

Trailing Stop – The trailing stop-loss order is an order that is connected to a trade like the standard stop-
loss, but a trailing stop-loss moves or ‘trails’ the current market price as your trade moves in your favor.
You can typically set your trailing stop-loss to trail at a certain distance from current market price, it will
not start moving until or unless the price moves greater than the distance you specify. For example, if
you set a 50 pip trailing stop on the EURUSD, the stop will not move up until your position is in your
favor by 51 pips, and then the stop will only move again if the market moves 51 pips above where your
trailing stop is, so this way you can lock in profit as the market moves in your favor while still giving the
trade room to grow and breath. Trailing stops are best used in strong trending markets.

Good till Cancelled order (GTC) – A good till cancelled order is exactly what it says…good until you
cancel it. If you place a GTC order it will not expire until you manually cancel it. Be careful with these
because you don’t want to set a GTC and then forget about it only to have the market fill you a month
later in a potentially unfavorable position.

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Good for the Day order (GFD) – A good for day order remains active in the market until the end of the
trading day, in Forex the trading day ends at 5:00pm EST or New York time. The exact time a GFD expires
might vary from broker to broker, so always check with your broker.

One Cancels the Other order (OCO) – A one cancels the other order is essentially two sets of orders; it
can consist of two entry orders, two stop loss orders, or two entry and two stop-loss orders. Essentially,
when one order is executed the other is cancelled. So, if you want to buy OR sell the EURUSD because
you are anticipating a breakout from consolidation but you don’t know which way the market will break,
you can place a buy entry and stop-loss above the consolidation and a sell entry with stop-loss below
the consolidation. If the buy entry gets filled for example, the sell entry and its connected stop loss will
both be cancelled instantly. A very handy order to use when you are not sure which direction the market
will move but are anticipating a large move.

One Triggers the Other order (OTO) – This order is the opposite of an OCO order, because instead of
cancelling an order upon filling one, it will trigger another order upon filling one.

Lot size / Contract size

In Forex, positions are quoted in terms of ‘lots’. The common nomenclature is ‘standard lot’, ‘mini lot’,
‘micro lot’, and ‘nano lot’; we can see examples of each of these in the chart below and the number of
units they each represent:

How to calculate pip value

You probably already know that currencies are measured in pips, and one pip is the smallest increment
of price movement that a currency can move. To make money from these small increments of price
movement, you need to trade larger amounts of a particular currency in order to see any significant gain
(or loss). This is where leverage comes into play; if you don’t understand leverage totally please go read
Part 1 of the course where we discuss it.

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So we need to know now how lot size affects the value of one pip. Let’s work through a couple
examples:

We will assume we are using standard lots, which control 100,000 units per lot. Let’s see how this affects
pip value.

1) EUR/JPY at an exchange rate of 100.50 (.01 / 100.50) x 100,000 = $9.95 per pip

2) USD/CHF at an exchange rate of 0.9190 (.0001 / .9190) x 100,000 = $10.88 per pip
In currency pairs where the U.S. dollar is the quote currency, one standard lot will always equal $10 per
pip, one mini-lot will equal $1 per pip, one micro-lost will equal .10 cents per pip, and a nano-lot is one
penny per pip.

How to calculate profit and loss

1) The rate for the USD/CHF is currently quoted at 0.9191 / 0.9195. Let’s say we are looking to sell the
USD/CHF, this means we will be working with the ‘bid’ price of 0.9191, or the rate at which the market is
prepared to buy from you.

2) You then sell 1 standard lot (100,000 units) at 0.9191

3) A couple of days later the price moves to 0.9091 / 0.9095 and you decide to take your profit of 96
pips, but what dollar amount is that??

4) The new quote price for the USD/CHF is 0.9091 / 0.9095. Since you are now closing the trade you are
working with the ‘ask’ price since you are going to buy the currency pair to offset the sell order you
previously initiated. So, since the ‘ask’ price is now 0.9095, this is the price the market is willing to sell
the currency pair to you, or the price that you can buy it back at (since you initially sold it).

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5) The difference between the price you sold at (0.9191) and the price you want to buy back at (0.9095)
is 0.0096, or 96 pips.
6) Using the formula from above, we now have (.0001 / 0.9095) x 100,000 = $10.99 per pip x 96 pips =
$1055.04
For currency pairs where the U.S. dollar is the quote currency, calculating profit or loss is pretty simple
really. You simply take the number of pips you gained or lost and multiple that by the dollar per pip you
are trading, here’s an example:
Let’s say you trade the EURUSD and you buy it at 1.3200 but the price moves down and hits your stop at
1.3100….you just lost 100 pips.

If you are trading 1 standard lot you would have lost $1,000 because 1 standard lot of pairs with the U.S.
dollars as the quote currency = $10 per pip, and $10 per pip x 100 pips = $1,000
If you had traded 1 mini-lot you would have lost $100 since 1 mini-lot of USD quote pairs is equal to $1
per pip and $1 x 100 pips = $100
You can also use our Forex Trade Position Size Calculator.
Always remember: when you enter or exit a trade you have to deal with the spread of the bid/ask price.
Thus, when you buy a currency you will use the ask price and when you sell a currency you use the bid
price.

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Part 4: What is Professional Forex Trading?

What is a professional Forex trader?

A professional Forex trader is someone who uses price movement in the Foreign exchange currency
market to make profit. The aim of any Forex trader is to win as many trades as possible and also to
maximize those winning trades. A professional Forex chart technician uses price charts to analyze and
trade the market. By trading with an EDGE in the market, professional traders can put the odds in their
favor to successfully trade price movement from point A to point B.

Caution: Forex trading is not a ‘get-rich-quick’ scheme and it is more difficult to make money in Forex
than what most popular Forex system-selling websites would have you believe. To trade profitably we
must not only have winning trades, but we must also cut our losing trades short so that our winners out-
pace our losers. You see, losing is an enviable part of trading the Forex markets, and you must learn to
lose properly by taking small losses relative to your winners. This means you must A L W A Y S trade with
a stop loss on E V E R Y trade you take and make sure the dollar amount you have at risk is an amount
you are 100% comfortable with losing.
Professional Forex price-chart traders have a winning edge which is developed via Technical Analysis
(more on this in Part 4). There are also Fundamental Analysis traders and traders who use a combination
of both analysis techniques; we will discuss all of these later.

A professional Forex trader understands that reading a price chart is both art and skill, and as such, they
do not try to mechanize or automate the process of trading as each moment in the market is unique, so
it takes a flexible and dynamic trading strategy to trade the markets with a high-probability edge.

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How do pro traders trade the Forex markets?

There are many different trading strategies and systems that pro traders use to trade the markets with,
but generally speaking, professional traders do not use overly-complicated trading methods and rely
mainly on the raw price data of the market to make their analysis and predictions. To be comprehensive,
I wanted to give you guys a brief overview of all the primary different styles and ways people trade the
Forex market:
Automated / Robot Trading: Software-based trading systems, also known as forex trading robots, are
created by converting a set of trading rules into code that a computer can make use of. The computer
will then run this code via trading software that scans the markets for trades that meet the
requirements of the trading rules contained in the code. The trades are then executed automatically via
the trader’s broker.

Discretionary Trading: Discretionary Forex trading depends on a trader’s ‘gut’ trading feel or

discretionary trading skill to analyze and trade the markets. Discretionary trading allows for a more
flexible approach than automated trading but it does take a certain amount of time to develop your
discretionary trading skill. Most professional Forex traders are discretionary traders because they
understand the market is a dynamic and constantly flowing entity that is best traded by the human
mind.
Technical Trading: Technical trading, or technical analysis, involved analysis of a market’s price chart for
making one’s trading decisions. Technical analysis traders use price patterns or ‘technical signals’ to
trade the market with an edge. The common belief amongst technical analysis traders is that all
economic variables are represented by and factored into the price movement on a price chart.
Fundamental Trading: Fundamental trading, or news trading, is a trading technique wherein traders rely
heavily on market news to make their trading analysis and predictions. Fundamental news does ‘drive’
price movement, but often times the market will react differently than what a particular news release

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would imply due to the fact that market participants often buy on expectations of future events and sell
once the reality of said future event occurs. This is another main reason many pro traders rely more
heavily on technical analysis than fundamental analysis, although many do use a combination of the
two.

Day Trading: Traders who day-trade the Forex market are in and out of the market within one day. This
means they typically buy and sell currencies over a very short period of time and they may enter and
exit numerous trades in one day.

Scalping: Scalping is similar to day-trading but it relies on more frequent and shorter-term trades than
even day-trading does. It is a trading style that refers to jumping in and out of the market many times a
day to ‘scalp’ a few pips here and a few pips there, generally with little regard for placing logical stop-
losses. Scalping is generally not recommended by experienced / pro traders because it is essentially just
gambling.

Swing Trading / Position Trading: This style of trading involves taking a short to mid-term view on the
market and traders who swing trade will be in a trade anywhere from a few hours to several days or
weeks. Swing or position traders are generally looking to trade with the near-term daily chart
momentum and typically enter anywhere from 2 to 10 trades per month, on average.

Range Trading: Range trading involves trading a market that is consolidating between obvious support
and resistance levels. By watching for trading signals near the support and resistance boundaries of the
trading range, traders have a high-probability entry scenario with obvious risk and reward placement.

Trend Trading: Trend traders are traders who wait for the market to trend and then take advantage of
this high-probability movement by looking for entries within the trend. An uptrend is considered to be in
place when a market is making higher highs and higher lows, and a downtrend is in place when a market
is making lower highs and lower lows. By looking for entries within a trending market, traders have the
best chance at making a large profit on their risk. Traders who continually try to trade against the trend
by trying to pick the top and bottom of the market, generally lose money quite quickly. Professional Fx
traders are largely trend-traders.

Counter-trend Trading: Trends do indeed end, and if you are a savvy and skilled trader you can
successful trade a counter-trend move, but this should not be tried until trend-trading has been

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mastered as counter-trend trading is inherently more risky than trend-trading and there can be many
false tops or bottoms in a trend before the real one emerges.

Carry Trading: Carry trading, or simply ‘the carry trade’ as it is called, is the strategy of simply buying a
high interest-rate currency against a low interest-rate currency and holding the position for what is
usually a long period of time. Forex brokers will pay traders the interest rate difference, or ‘swap’,
between the two currencies for each day the position is held. The trick here is that higher-yielding
currencies are susceptible to large sell-offs if the market loses risk appetite since these currencies are
generally considered riskier than safe-haven currencies like the U.S. dollar or Japanese yen, so it’s a
good idea to trail your stop loss up to lock in profit as the carry trade moves in your favor.

Professional Forex traders vs. amateur Forex traders

Professional Forex trading might seem like something of an elusive or difficult goal for those of you
struggling to trade profitably or just beginning to trade. But, there are a few key differences between
pro traders and amateur traders that you should be aware of to help you improve your trading or get
started on the right track if you are a newbie:

The important role of Banks in Forex trading

Banks play a very important role in FOREX trading. In fact, most of the market plays against larger banks,
hedge funds and big-money players. Commercial banks (such as Deutsche Bank and Barclays) provide
liquidity to the Forex market due to the trading volume they handle every day. Some of this trading
represents foreign currency conversions on behalf of customers’ needs while some is carried out by the
banks’ proprietary trading desk for speculative purpose. The bottom line is that we retail Forex traders
are small-change compared to the bigger players like commercial banks, hedge funds, and other big
players. We can profit from the moves these big players cause in the market by finding our own edge in
the market and trading it with discipline.

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Part 5: What is Fundamental Analysis?

Fundamental Analysis

Fundamental analysis is the study of how global economic news and other news events affect financial
markets. Fundamental analysis encompasses any news event, social force, economic announcement,
Federal policy change, company earnings and news, and perhaps the most important piece of
Fundamental data applicable to the Forex market, which is a country’s interest rates and interest rate
policy.
The idea behind fundamental analysis is that if a country’s current or future economic picture is strong,
their currency should strengthen. A strong economy attracts foreign investment and businesses, and this
means foreigners must purchase a country’s currency to invest or start a business there. So, essentially,
it all boils down to supply and demand; a country with a strong and growing economy will experience
stronger demand for their currency, which will work to lessen supply and drive up the value of the
currency.
For example, if the Australian economy is gaining strength, the Australian dollar will increase in value
relative to other currencies. One main reason a country’s currency becomes more valuable as its
economy grows and strengthens is because a country will typically raise interest rates to control growth
and inflation. Higher interest rates are attractive to foreign investors and as a result they will need to
buy Aussie dollars in order to invest in Australia, this of course will drive up the demand and price of the
currency and lessen the supply of it.

Major economic events in Forex

Now, let’s quickly go over some of the most important economic events that drive Forex price
movement. This is just to familiarize you with some more of the jargon that you will likely come across
on your Forex journey, you don’t need to worry too much about these economic events besides being
aware of the times they are released each month, which can be found each day in my Forex trade setups
commentary.

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Gross Domestic Product (GDP)

The GDP report is one of the most important of all economic indicators. It is the biggest measure of the
overall state of the economy. The GDP number is released at 8:30 am EST on the last day of each quarter
and it reflects the previous quarter’s activity. The GDP is the aggregate (total) monetary value of all the
goods and services produced by the entire economy during the quarter being measured; this does not
include international activity however. The growth rate of GDP is the important number to look for.

Trade Balance
Trade balance is a measure of the difference between imports and exports of tangible goods and
services. The level of a country’s trade balance and changes in exports vs. imports is widely followed and
an important indicator of a country’s overall economic strength. It’s better to have more exports than
imports, as exports help grow a country’s economy and reflect the overall health of its manufacturing
sector.

Consumer Price Index (CPI)

The CPI report is the most widely used measure of inflation. This report is released at 8:30 am EST
around the 15th of each month and it reflects the previous month’s data. CPI measures the change in
the cost of a bundle of consumer goods and services from month to month.

The Producer Price Index (PPI)

Along with the CPI, the PPI is one of the two most important measures of inflation. This report is
released at 8:30 am EST during the second full week of each month and it reflects the previous month’s
data. The producer price index measures the price of goods at the wholesale level. So to contrast with
CPI, the PPI measures how much producers are receiving for the goods while CPI measures the cost paid
by consumers for goods.

Employment Indicators
The most important employment announcement occurs on the first Friday of every month at 8:30 am
EST. This announcement includes the unemployment rate; which is the percentage of the work force
that is unemployed, the number of new jobs created, the average hours worked per week, and average
hourly earnings. This report often results in significant market movement. You will often hear traders
and analysts talking about “NFP”, this means Non-Farm Employment report, and it is perhaps the one
report each month that has the greatest power to move the markets.

Durable Goods Orders

The durable goods orders report gives a measurement of how much people are spending on longer-term
purchases, these are defined as products that are expected to last more than three years. The report is

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released at 8:30 am EST around the 26th of each month and is believed to provide some insight into the
future of the manufacturing industry.

Retail Sales Index

The Retail Sales Index measures goods sold within the retail industry, from large chains to smaller local
stores, it takes a sampling of a set of retail stores across the country. The Retail Sales Index is released at
8:30 am EST around the 12th of the month; it reflects data from the previous month. This report is often
revised fairly significantly after the final numbers come out.

Housing Data
Housing data includes the number of new homes that a country began building that month as well as
existing home sales. Residential construction activity is a major cause of economic stimulus for a country
and so it’s widely followed by Forex participants. Existing home sales are a good measure of economic
strength of a country as well; low existing home sales and low new home starts are typically a sign of a
sluggish or weak economy.

Interest Rates
Interest rates are the main driver in Forex markets; all of the above mentioned economic indicators are
closely watched by the Federal Open Market Committee in order to gauge the overall health of the
economy. The Fed can use the tools at its disposable to lower, raise, or leave interest rates unchanged,
depending on the evidence it has gathered on the health of the economy. So while interest rates are the
main driver of Forex price action, all of the above economic indicators are also very important.

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Technical Analysis VS. Fundamental Analysis

Technical analysis and Fundamental analysis are the two main schools of thought in trading and
investing in financial markets. Technical analysts look at the price movement of a market and use this
information to make predictions about its future price direction. Fundamental analysts look at economic
news, also known as fundamentals. Now, since nearly any global news event can have an impact on
world financial markets, technically any news event can be economic news. This is an important point
that I want to make which many fundamental analysts seem to ignore…
One of the main reasons why I and all of my members prefer to trade primarily with technical analysis is
because there are literally millions of different variables in the world that can affect financial markets at
any one time. Now, Forex is more affected by macro events like a country’s interest rate policy or GDP
numbers, but other major news events like wars or natural disasters can also cause the Forex market to
move. Thus, since I and many others believe that all of these world events are factored into price and
readily visible by analyzing it, there is simply no reason to try and follow all the economic news events
that occur each day, in order to trade the markets.

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Part 7: What is Technical Analysis?

What is Technical Analysis?

Technical analysis is the study of the price movement on a chart of a particular Forex currency pair or
other market. We can think of technical analysis or “T.A.” for short, as a sort of framework that traders
use to study and make use of the price movement of a market.
The primary reason that traders use T.A. is to make predictions about future price movement based on
past price movement.

Technical analysts believe that all current market variables are reflected via the price movement on a
price chart. So, if we believe that all market variables are reflected via price movement, it only goes to
reason that we don’t really need much else to analyze and trade the markets besides price.

Technical analysts look for patterns on the chart that tend to repeat themselves; they do this to develop
their trading edge from. The underlying logic here is that since most price movement is driven by human
beings, certain patterns will repeat themselves in the market as human beings tend to be repetitive in
their emotion and interaction with the market.
Technical analysis also encompasses learning to analyze the market structure; find trends, support and
resistance levels and generally learn to ‘read’ the ebbs and flows of a market. There is obviously
discretion involved here and I will be the first person to tell you that T.A. is more of an art than a
science. That said, it is something you will get more comfortable with and better at given time and
practice. T.A. forms the back-bone of my core trading method of price action, which is simply a
derivative or off-shoot of ‘traditional T.A.”, except with more clarity and more concise strategies that

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don’t involve confusing forex indicators or things like Elliot Wave Theory that are far too messy and
open to interpretation for me to believe they are worth trading or teaching.

Most traders instantly think of a price chart like the one above when someone mentions the word
“technical analysis”. Price charts provide us with an amazing amount of useful data that paints a
complete picture of a market’s historical and current supply and demand situation, as well as the price
levels that the market participants have deemed the most important. As technical analysts we need to
pay special attention to these price levels as price will tend to respect them again and again.

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Part 8: How to Make a Forex Trading Plan

How to Make a Forex Trading Plan

Having a Forex trading plan is one of the key elements to becoming a successful Forex trader. Many
traders never even make a trading plan, let alone use one regularly. It’s very important that you do both;
make a trading plan and use the one you make…don’t just make one and then never look at it like many
traders do. Here are some important points to consider regarding Forex trading plans.

Follow a plan, have a journal, log trades

You need to do three essential things to become and remain an organized and disciplined Forex trader.
These things are the following: 
1) Create a Forex trading plan
2) Create (or use an existing) 
3) ACTUALLY use BOTH of them.

The process of creating a Forex trading plan around an effective trading strategy like price action
trading, will work to solidify your understanding of the trading strategy and will also provide you with a
blueprint for what you need to do each time you interact with the market. Having this market blueprint
is essential for developing the type of ice-cold discipline that it takes to succeed in the Forex currency
market over the long-term.

Logging your trades in a trading journal is critical to your success because it allows you to have a visual
representation of your ability (or lack thereof) to trade the markets, it also creates a track record for you
that you can use which will show you how your trading edge plays out over time, this will allow you to
‘tweak’ and adjust your trading strategy as you see fit.

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Trading plans contain a routine and check list

To put it simply, you NEED to have a routine in your trading activities; otherwise you will just end up
running and gunning the seat of your pants. I have a trading philosophy that revolves around trading
Forex like a sniper and not a machine gunner, if you want to trade like a sniper you have to have a
routine that you follow, and you have to be disciplined…a sniper in the military is an extremely
disciplined individual, and you need to think of the Forex market like it’s a war, and you are a sniper
trying to take only the ‘easiest prey’; your ‘prey’ in the markets consists of only the most obvious trade
setups.

Your trading plan should include a checklist that you follow; this will include things that you look for in
the market and what you want to see before entering a trade. If you can tick all the boxes then you
enter the trade, if not then you hold off until your trading edge appears again. You can actually
formulate your whole trading plan as a checklist; this will make it a smooth format that allows you to
quickly decide if any potential trade setup is worth taking.

Trading plans contain written guidelines of what a trader will do and look for
as well as images of trade setups

Your trading plan should contain a written description of what you will do in the markets. This includes
things like what your trading edge is, how you trade it, when you trade it, what time frames you trade (I
prefer daily Forex chart trading), your strategy for risk management and profit taking, and your overall
goals as a trader. You should also include images of your trading edge setups, so that you are constantly
reminded of what an “ideal” setup looks like. Eventually, after you follow your written guidelines and
“ideal” trade setup images long enough, you will burn them into your brain to the point of knowing
exactly what you are looking for in the market, which will work to build your confidence as a trader.

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Trades planned in advance and ‘anticipated’ work best

One of the main reasons to create a Forex trading plan is because pre-planning your trades and pre-
determining what you are looking for in the markets is the best way to profit over the long-run. You will
never be more objective and calm then when you are NOT in the market, so if you can plan out all your
trades when you are not in the markets, you will be totally uninfluenced by market variables when you
are in a trade, and this will work to protect you from becoming an emotional Forex trader.

Be patient and wait for the conditions of a plan to unfold – don’t force the
issue

Patience is perhaps the most important virtue that a Forex trader can possess. When you are a patient
trader it means you know what you are looking for in the markets and you wait for your trading edge to
appear before you execute a trade. Trading in this manner eliminates many losing trades that are the
result of trading emotionally…or without patience. A large part of trading, and perhaps the largest part,
is simply waiting for an “ideal” price action setup or other trade setup to form in the market. Traders
who don’t wait for an ideal setup to form, end up losing their money quickly because they negate their
trading edge and are simply gambling instead. Make sure you stress the importance of patience in your
trading plan, this way you will be reminded every time you read it why being a patient trader is so
important to making money in the Forex market.

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