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What is FOREX

Course Price

Free

Course length

45 Mins

Sebastian
Blancke

Instructor

Welcome to my Masterclass.

In this lesson you will learn what the foreign exchange market is all about and how we are able to take advantage of the worlds biggest exchange.

What does the term FOREX stand for?

The term 'FX' or 'FOREX' is an abbreviation for 'Foreign Exchange' or the Currency Market. It is the international market where currencies are being traded, by using the differences in exchange rates between currencies. Traders are speculating on a particular currency to rise or fall against another currency.

For example: say you are like me from the Netherlands and the currency in your country is the Euro. It is August 2008 and you decided to by a car of Ebay. Let's say you bought a nice used Porsche 911 turbo for $50,000. Since you are from the Netherlands and your bank account would in Euro's, you would not be able to pay for this car in Euros. When paying for your new set of wheels, you would order your bank to wire $50,000 USD to the seller. Your bank would calculate at the time of the transfer what the EURO/USD conversion rate would be. In this case, the EURO/USD (or EUR/USD as this currency pair is called) was 1/1.60000. This means that for every Euro you would get 1.60000 USD. So this Porsche would cost you in $50,000 / 1.60000 = 31,250 Euros.

Let's say you kept the car until March 2015 and decided to sell it back to the US via Ebay.com. The exchange rate at this time was 1 EUR = 1.05000 USD. So every Euro is worth 1.05000 Dollars. The value of your car on Ebay has not fallen during this time, similar cars on Ebay still go for $50,000. So you decide to sell it for the price you bought it 8 years ago. And within a week you indeed sell it for the $50,000 you asked.

What would you get paid? Since a single Euro is now worth 1.05 Dollars. You get paid by your bank: $50,000 / 1.05000 = 47,619 Euros. This means you have gained 16,369 (47,619 - 31,250) Euros just by profiting from the exchange rate difference in these 8 years.

This example shows how exchange rates differences between currencies can make you money. For this to happen you always have to pair two currencies together. You cannot make money from just buying and holding a 1,000 Dollars for a year and then use it in the USA to buy goods or services. It only works in between economies. 

The terminology used to describe the two currencies together is called a 'currency-pair'. You pair two currencies together to indicate the value difference between them. For instance: EUR/USD, pairing the Euro against the US Dollar. The first currency in the pair (EUR in this case) is called the BASE-currency. The second currency in the pair (USD in this case) is called the QUOTE-currency. 

The forex market is considered an Over-the-Counter (OTC), or “Interbank” market due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
 

WHY TRADE FOREX

The currency exchange market is the most liquid market in the world. In fact the currency market as a whole more than 200 times larger than the the New York Stock Exchange market, in terms of money being traded on a daily basis. On a typical day the NYSE will trade about 22,4 Billion USD worth of stocks, while in the FX market 5 Trillion Dollars will change hands EVERY DAY!

This means that for for any exchange rate value there are buyers thinking the exchange rate will go up, and sellers thinking the exchange rate will fall. If you've ever traded stocks (certainly stocks where the liquidity is low - i.e. the float / number of outstanding shares is low), you know that it can be extremely hard to unload an open position at any given price back to the market. There are simply not enough buyers prepared to take the position off of your hands at your desired price if your position is quite large.

This is never the case in the FX market. It is so huge that even if you would like to sell a 10 Million Dollar EUR/USD position at exactly 1.10048 EURO you could! It is that massive! 

The FX market is open 5 days per week, 24 hours per day. From Sunday 22.00hr GMT till Friday 22.00hr GMT. Since it is a 24hr market during office days, no news can come out to manipulate price when the market is closed. This would result in 'gapping', a phenomenon we frequently encounter in trading stocks. Gapping makes reading price-action harder and most importantly won't enable you to close a position when the market is closed, and goes beyond your stop-loss price, which could result in heavy losses.

For this reason the FX market is very predictable. The price of every closing candle lines up perfectly with the next candle's opening price. What this all means we will teach you in the "Technical Analysis" chapter.

One other advantage of trading FX, is that costs associated with opening and closing positions are the lowest in the industry. Compared to let's say US common stocks (around $15-$25 per round trade (open & close), a typical FX trade on the EUR/USD with a comparable account size (around 10K) would only cost you around $4-$10 per round trade (open & close).   



HOW MANY CURRENCY PAIRS DO WE TRADE

There are hundreds of currency pairs that can be traded. However due to volatility, volume and spread (we'll explain in a bit what this means), we only trade the 8 MAJOR currency pairs.

MAJOR CURRENCY PAIRS

 

The currency pairs listed below are considered the “majors”. These pairs all contain the U.S. dollar (USD) on one side and are the most frequently traded. The majors are the most liquid and widely traded currency pairs in the world.

MINOR CURRENCY PAIRS 

 

Major Cross-Currency Pairs or Minor Currency Pairs
Currency pairs that don’t contain the U.S. dollar (USD) are known as cross-currency pairs or simply as the “crosses.” Major crosses are also known as “minors.” The most actively traded crosses are derived from the three major non-USD currencies: EUR, JPY, and GBP.

No, exotic pairs are not exotic belly dancers who happen to be twins. Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, or Hungary. The chart below contains a few examples of exotic currency pairs. Wanna take a shot at guessing what those other currency symbols stand for?

Depending on your forex broker, you may see the following exotic currency pairs so it’s good to know what they are. Keep in mind that these pairs aren’t as heavily traded as the “majors” or “crosses,” so the transaction costs associated with trading these pairs are usually bigger.

What this means is that the "spread" - which is the difference between the "Buy" and "Ask" price - is higher than on the more heavily traded major and minor pairs. The spread is a cost that is paid when opening a position. The higher the spread, the more expensive it is to take the position. As a rule of thumb; the more an asset is traded, the less spread the asset will have.

 

Because there are more buyers and sellers buying and selling the major USD based currency pairs, the spread on these pairs is usually around 1-2 pips. What "pips" mean, we'll discuss later. For now just know that for major currency pairs, the average spread is around 1-2 pips, for minor pairs (crosses) it is around 3-5 pips and for exotic pairs, it can be as high as 20-70 pips.

 

For this reason we only trade the 28 MAJOR and MINOR currency pairs being (in alphabetic order):
 

  1. AUDCAD

  2. AUDCHF

  3. AUDJPY

  4. AUDNZD

  5. AUDUSD

  6. CADCHF

  7. CADJPY

  8. CHFJPY

  9. EURAUD

  10. EURCHF

  11. EURCAD

  12. EURGBP

  13. EURJPY

  14. EURNZD

  15. EURUSD

  16. GBPAUD

  17. GBPCHF

  18. GBPCAD

  19. GBPJPY

  20. GBPNZD

  21. GBPUSD

  22. NZDCAD

  23. NZDCHF

  24. NZDJPY

  25. NZDUSD

  26. USDCAD

  27. USDCHF

  28. USDJPY 
     

Below you'll find a complete list of all major and minor currency pairs as well as many exotic pairs.

CFD'S AND INDICES

Beside trading currencies we also trade Commodities (CFD's) and Indices (Indexes). These are very liquid assets and liquid assets make for very 'pretty' charts like we see in in the FX market. In fact once you'll get the hang of trading FX, you won't find it very difficult to start seeing opportunities elsewhere, such as in very liquid stocks like Apple, Google, Facebook or Amazon as well.

CFD stands for 'Contract for Difference', and it is a contract to exchange the difference in the value of an asset from the time the contract is open, to the time the contract is closed.

So what does this actually mean? What is CFD trading? 

 

To understand CFDs and how to trade them, the best place to start is with traditional investing. If you wanted to invest in a company, you would buy some shares at the current share price. If you wanted to invest in gold or oil, you could buy a bar of gold or a barrel of oil. Then you would wait for the price (hopefully) to increase, and you would sell the asset at a higher price, and make a profit on the difference.

CFD trading works in a similar way - you open a trade on an asset at a certain price, wait for the price to increase or decrease, and then make a profit (or a loss) on the difference. One of the biggest differences between CFD trading and traditional investing is that you never actually own the asset. Instead, a CFD reflects the price of the underlying asset, and rather than buying that asset, you can speculate on how the price of that asset might change.

You can read into what the market mechanics behind trading CFD really entail, but for now just remember that they can be traded just like currency pairs. All of the brokers that we recommend further in this Masterclass offer a variety of CFD's to be traded such as these commodity CFD's:

  1. Copper

  2. Silver

  3. Gold

  4. US Oil

  5. Natural Gas

  6. Wheat

  7. Soybean

  8. Corn
     

Many CFD's have expiration dates. Which means that your position will be liquidated when the expiration (or rollover) date is up. This on average occurs every 1-2 months. Since our trades usually don't last this long this isn't a problem. However before we open a CFD trade, please check on your brokers website when these contracts expire. We don't want to open a USOil trade when the contract expires that very same day. 

INDICES

Indices is the plural form of index and has several definitions, depending on the context the word is used in. When referring to financial markets and trading, indices relate to the price performance of an asset, sub-asset or a group of shares. Indices are directly related to the stock market and the performance of shares listed on that market.

A stock index is a measurement of the price performance of a group of shares from a particular exchange. The FTSE 100, for example, represents the 100 largest stocks trading on the London Stock Exchange. If those stocks increase in price, the FTSE 100 goes up. If those stocks decrease in price, the FTSE 100 goes down.

An Index is basically a basked of stocks that is capitalisation-weighted, which means that a company with a higher market cap (or total value on the market) has a greater impact on its index’s price.

Because they are purely notional, the only way to trade an index is via a product that mirrors its performance. These products can include index funds, ETFs (Exchange Traded Funds), futures and CFDs. It is important to manage your risk when trading indices, as trading indices means trading a derivative instead of a physical asset.

Just as with CFD's you can read up on the various types of indices and the market mechanics behind it all, but really you don't need to know. A wide variety of indices are offered by your broker to trade, and they can be traded just as easily as currencies and Commodity CFDs. 

Examples of indices that we trade:

  1. SPX500 (S&P 500)

  2. DE30EUR

  3. DJI (Dow Jones)

  4. NAS100 (Nasdaq)

  5. US30

  6. UK100

  7. AUS200

  8. ESP35

  9. FRA40

  10. HKG33

  11. JPN225

  12. CHN50

  13. EUSTX50

  14. US200
     

As you can see there is more to trade than just the 28 major and minor currency pairs. Depending on which broker you end op choosing, we can trade around 50-70 assets in total. As our strategies are "sniper" like, this doesn't mean that we place tens of trades per day.

Taking the 28 currency pairs, CFD's and Indices into consideration, we typically place anywhere from 5-15 trades per month. So you see, the more assets to trade, the more we stand to gain from the markets.

GET IN TOUCH:

Tel: +31 653 250 950

Email: info@fxclusive.com

Gein-Zuid 58, 1391JH

Abcoude, the Netherlands

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