4 Steps to Becoming an Introducing Broker

become an introducing broker

New forex brokers have different ways to enter and offer forex trading services in one of the most fascinating and lucrative markets in the world. One way to do so is by becoming an introducing broker (IB). 

Much like an affiliate marketer, introducing brokers operates in collaboration with another brokerage firm that already has a client base and a successful profitable operation. However, an IB broker is much more than an affiliate marketer. It’s a real partnership between two firms where the IB broker is able to offer additional services and even make higher commissions.

Therefore, if you have the ability to attract forex clients and provide forex trading services, becoming an introducing broker could be the ideal solution for you. With the steps we have outlined in this article, you can start an IB business. But firstly, let’s understand what an IB Introducing Broker is…

What is an Introducing Broker (IB)?

An introducing broker, also known as IB, has a direct relationship with forex clients but without having to directly execute trades for them. Instead, the trades are executed by the brokerage firm with whom the IB partners. This means that the introducing broker directs clients to the partner broker, provides trading services such as consolation and customer support, and in return, receives a commission for every trade executed by the partner broker. 

Essentially, referring clients to a brokerage firm might sound like what an affiliate marketer does. However, there are some notable differences between an affiliate and an Introducing Broker. An affiliate basically can set up a website or simply refer clients by using affiliate links and get paid for referrals for the brokerage. An IB, on the other hand, not only brings in clients but also provides trading services and consultation. An IB can create long-term relationships with clients that are based on the quality of their services and the professionalism they offer. Secondly, an IB doesn’t accept and hold clients’ funds. Lastly, an IB does not need to have a compliance department and proceed with KYC procedures with clients.

How to Become an Introducing Broker (IB)?

If you are wondering how to become an Introducing Broker,  here are the steps you need to take. 

1. Find the Right Brokerage Firm to Partner with

The next step is to find the right broker you want to partner with. There are lots of forex and CFD brokers to choose from so this step might be the most important of all. In some cases, you might have to open a trading account with the prospective partner broker and find clients’ reviews about the firm. 

Further, you should consider the following aspects before you sign up with a partner broker:

  • Is the broker licensed and regulated?
  • What financial assets do they offer? Forex, CFDs, options, stocks?
  • How long do they operate in the forex trading industry?
  • What’s their reputation?
  • Do they have good trading platforms and mobile trading apps?
  • What’s their commission structure for IB?
  • Do they offer marketing assistance?

As we mentioned, finding a regulated brokerage firm to partner with is not an easy task. The forex industry is filled with unregulated brokers and occasionally, even scam brokers. As such, you need to ensure that clients get safe trades and are able to withdraw funds whenever they wish. Partnering with a regulated and reputable broker is essential for your success as an IB.

What’s more, you need to sell your clients a top-notch trading experience and preferably, low trading costs. So, an advanced trading platform and a mobile trading app will help you attract more clients. Additionally, a wide range of financial instruments would be another crucial factor. Make sure you choose a  partner broker that gives your clients access to shares, ETFs, Forex, commodities, indices, and cryptocurrencies. 

2. Close the Partnership Deal with the Partner Broker

Now that you have set your mind on a certain brokerage firm to partner with, it’s time to check out what they are actually offering you. Look at the execution model they have – ECN/STP or market maker, check their commission per trade, and understand all the terms and conditions they have for IB. 

Also, try to figure out whether the rates they offer match your clients’ style. If you can bring heavy traders with a large sum of money to trade with, you might have to choose forex brokers with VIP accounts, and special terms for those who trade with large account balances. Ask your partner broker how flexible they are with the commission types they offer and do they have special packages for the type of clients you plan to refer. Further, will they provide special trading tools for IBs? Do they offer a demo account? Islamic account? 

Then, once you have got the answers and you are certain you made the right choice – close the deal. 

3. Find Clients and Refer them to the Partner Broker

Now it’s time to find clients and refer them to your partner broker. After all, this is how you can make an income from becoming an IB.

To do so, you need to create a website and social media pages or use your existing contacts, if you have any of these. Try to differentiate yourself with the unique service and trading tools you provide your clients. Most importantly, be attentive to your clients’ needs and help them find a way to get reliable access to the market.

When your clients feel that you have the tools to provide them top-notch access to the trading world, you’ll be able to develop a long-term relationship and increase your client base. This will benefit you as an IB as well as the brokerage partner you are promoting. 

4. Build on Your Success

Lastly, you need to build a successful business. One way to do that is to develop an online presence by building a website, social media pages, newsletter, etc. Obviously, you’ll have to create a unique name for your business, whether you decide to use your personal name or a professional brokerage firm name. 

One thing you need to remember – in the world of online trading, reputation is everything. A successful introducing broker usually has the most satisfied customers. So, make sure your clients are satisfied with the trading experience you provide them and do everything possible to transfer that information forward. This can be done via reviews, forums, a YouTube channel, trading tutorials, etc. 

Becoming an Introducing Broker (IB) – Things to Keep in Mind

Now that you have the necessary information on how to become an introducing broker, here are some additional key points to keep in mind. 

You need clients, and you need them now!

As an IB, you need clients. And the more clients you have, the more successful your IB business will become. This means you need to get the word out quickly and aggressively. Use different marketing methods, and set aside a generous budget for marketing. If you don’t have clients, you cannot build a reputation and your business will fail sooner than expected. 

Find a business model

Finding a business model that works takes time, especially in a competitive industry like the forex one. Nonetheless, try to do your best in order to build a business that works for all sides – that is your company, your forex clients, and your partner broker.  

Some forex brokers prefer working with beginner traders while others insist on working with professional high-volume traders. It all depends on the circumstances. Be attentive to your partner broker and make all the calculations that may benefit all sides. If doing so, eventually, you’ll be able to find the right business model. 

Make your partner broker satisfied

In this arrangement, your partner broker is your most important client. Make sure you not only choose a brokerage partner that is regulated and licensed, but also a broker that has a good staff so you can build a long-term relationship and mutually profitable partnership. Also, ensure they are happy with the service you provide and ask them occasionally if there’s anything you can do to improve your offerings.


Become an Introducing Broker Now!

With more people joining the online trading arena and looking for ways to grow their wealth, now is the best time for you to find a partner broker and build your own client base. Start today by reaching out to them, and making the first step to create a successful IB business.


Trading Indices vs Forex – Which Should You Trade?

Since the early years of this century when the forex market has become accessible to every individual investor, many retail traders wonder whether they should trade forex, or perhaps stock indices. Deciding which of the two markets you should trade can be complicated, and there are various factors that you need to consider before making a decision. 

This article will help you understand better the similarities and differences between trading stock indices and trading FX currency pairs and choose that asset class that suits your personality, trading strategy, and trading style.

Key Points to Take Away

  • Trading indices and trading forex are two of the most popular forms of trading.
  • The key differences between stock index trading and trading forex pairs are the way a trader needs to analyze the markets, the leverage ratio provided by brokerage firms, the range of assets, and volatility.
  • While forex trading is more suited for active day traders, indices trading generally works best for medium and long-term investors.

First, What’s the Difference Between Trading Indices and Forex?

To begin with, both the forex and the stock markets are among the most liquid financial markets in the world and are extremely popular among short-term traders. This is partly because there’s plenty of news and information when trading one of these two markets, and it is, therefore, easier to take a large number of trades in a short period of time. Beyond that, both markets are very liquid, which is an essential factor for beginner traders who always need a buyer or a seller on the other side of the trade. 

The key difference between these two asset classes is that when trading forex, you essentially buy one currency and sell the other, meaning you usually need to analyze two economies. In other words, you need to be aware of the interest rates of each currency, the economic performance of the country as a whole, and the expectations of a rate hike rate cut. 

On the other hand, trading major indices typically require you to focus on one market, one economy, and the assets (companies) that the stock market index is composed of. This Is because a stock index is not traded versus other assets and generally has an upward bias due to the nature of the stock markets. Consequently, it would be fair to say that stock indices are generally more suited for long-term investors or medium-term traders.  

What’s more? Index trading typically has wider spreads, which makes it, once again, less suited for active day trading, or scalping. When you trade stock indices, it is a challenge to make intraday profits due to the relatively high spread charged by brokers, the low leverage, and the low volatility (when compared to stocks and forex currency pairs). As such, most people who trade indices usually focus on swing trading (holding poisons between 2-5 days). As for forex – some brokers offer zero spread on FX currency pairs so with the combination of high leverage and very low trading commissions – the forex markets are the ideal playground for active day traders.

Trading TIP

Leverage in trading is known as a double-edged sword – It increases the potential of making profits but also the risk of losing money rapidly

Trading Indices vs Forex – Which Market is Better for Beginners?

Beginner traders and those who prefer simplicity generally will choose to trade indices. With stock indices, trading is very simple and straightforward. After all, almost every person on the planet has some basic understanding of the stock markets, and thus, analyzing stock indices requires a less tactical approach and in-depth knowledge. 

The forex market, on the other hand, is more complex. Investors who want to start trading forex need to learn the basics of the forex market and understand what forex is and how it works
Nonetheless, when it comes to choosing which is the best market for you to trade, there is no decisive answer to this question. Each market has its own pros and cons and there’s no reason for you to not take advantage of both markets, especially if the broker gives you access to both of them.

What are the Possible Ways to Trade Indices and Forex?

One thing you should note: stock indices are not traded on a stock exchange. They are simply benchmarks that track a list of stocks on a certain exchange and are used to measure the growth of the general stock markets. What it means is that, unlike trading stocks, the only way to trade indices is via futures contracts or via CFDs (Contract for Differences). For those unaware, CFDs are financial derivatives that enable traders to speculate on the market movement of assets without owning the underlying assets.

Trading forex is more accessible to ordinary people and there are several ways for any individual to speculate on the price movement of currency pairs. These include the spot market (via bank or a forex change store), futures, and trading CFDs.

Indices vs Forex – Number of Available Markets and Instruments

A crucial factor to consider when choosing an asset class to trade is the range of assets available on each market. When comparing indices to forex, trading the forex market clearly offers more markets and instruments than trading stock market indices. 

Whether you decide to start trading indices via stock index futures contracts or via CFDs, typically you’ll get a range of 15-20 assets. On the other hand, every CFD and forex broker usually offers a range of at least 30 currency pairs, with some brokers like Switch Markets offering a higher selection of 60+ FX pairs

For various reasons, forex traders typically focus on major currency pairs that include the EUR/USD, GBP/USD, USD/JPY, USD/CAD, AUD/USD, NZD/USD, and USD/CHF). These pairs are the most popular and liquid assets and are widely covered in the media. Additionally, most forex brokers offer very high leverage for major currency pairs and very tight spread – another incentive for traders. Some traders, however, prefer to stick with exotic currency pairs, largely due to extreme price movements and the high volatility. 

So, all in all, when compared to indices, the forex market offers a larger variety of assets (at least 100+ assets).

On another note, a useful tool that can assist you in analyzing currency pairs and stock indices is our market heap map that highlights the daily strengths and weaknesses of different assets.

Market Heat Map - Currencies and Indices
Market Heat Map – Currencies and Indices

Forex Trading vs Indices Trading – Key Similarities and Differences

Below, we break down the key similarities and differences between trading forex and indices. 

Similarities

Liquidity – Both markets are extremely liquid, offering investors to get market execution at any given moment.

Both Rely on Macroeconomic News – One of the key similarities between indices and the forex markets is the way you need to follow market news and economic data. Unlike stock trading which requires you to spend time on picking and analyzing public-traded companies, trading indices and foreign exchange currency pairs are based on macroeconomic factors and the economic state of countries. 
Market Trading Hours – Even though the stock markets are open for a limited time during the day, nowadays you can trade indices futures or index CFDs 24 hours 5 days a week, much like the forex market.

Differences

Analyzing the Markets – As we mentioned before, the way a trader analyses the forex market and stock indices is a bit different. This is because stock indices are a collection of top-performing stocks and do not trade against another financial instrument. Hence, a trader needs to analyze the economic performance of the country and be aware of any developments in the companies that composed the index. When analyzing currency pairs, a trader must have more macroeconomic knowledge and be aware of the factors that affect the price movements of forex pairs one versus the other. 

Leverage Ratio – Assuming you decide to trade one of these asset classes via a CFD broker like Switch Markets, then you’ll be able to use the leverage that gives you the option to trade with higher capital than initially deposited. In this case, the leverage provided for forex tends to be much higher than indices and other markets.  On most CFD platforms, traders generally have access to 30:1 for currency pairs and 20:1 for indices. That said, some CFD brokers like Switch Markets provide a higher leverage ratio for FX currency pairs that could be as high as 500:1. 

Range of Assets – Usually, regardless of the trading platform you are going to choose you’ll be able to get access to 10-15 most traded indices. On the other hand, if trading forex, you get access to at least 30 FX currency pairs, and some brokers even offer a larger selection of 100+ currency pairs.  

Volatility – Forex has the lowest volatility of all markets, partly because currency pairs have a major role in civilians’ income and in a country’s economic performance. 
Price Gaps – Because the forex market is open 24 hours a day five days a week, price gaps are less common in the forex market than in indices.

Forex TradingIndices Trading
Best ForActive day tradingMedium and long term investors
Range of AssetsOn most trading platforms –  50+ currency pairsOn most trading platforms –  around 10-15 stock indices
Leverage Ratio via CFDsUsually between 30:1 to 500:1Usually around 20:1
How to TradeSpot, futures, and CFDsFutures and CFDs

Trading TIP

To trade indices, investors need more capital than they do with forex. On the other hand side of the coin, trading indices are presumably less risky due to the lower leverage ratio provided by brokerage firms.

Final Thoughts

The bottom line, index or forex trading will serve your purpose to be able to place a large number of orders on a trading day and find lots of trading opportunities. Both markets are liquid and volatile enough and the flow of news and analysis will help you form your own trading plan and strategy.

Ultimately, I still think the best way to make an informed decision on the asset class you want to focus on is to try both markets and see where you feel more comfortable. Even today, very often I switch between markets with the intention of finding the right trade. You should do the same, at least at the beginning of your trading journey. Luckily, some CFD brokers offer you to open a trading account (or a demo practice account) where you get access to a number of markets including, obviously, the forex market and stock indices.

FAQs

Is forex trading riskier than index trading?

Well, that is a matter of opinion. Trading is subjective and every trader feels more comfortable in other markets. Some prefer to trade the volatile crypto jungle while others prefer to trade less volatile assets like fixed-income assets. 

Still, while many people like the flexibility of the forex market, it is known as a riskier market for one primary reason – that is the high leverage provided by forex brokers.

What’s better for beginners – indices or forex?

The way I see it, if you choose the right platform then you should try to have the best of both markets. Financial markets like the forex markets and indices are connected beyond generic correlations, which means you can follow all markets and find trading opportunities in any market you have access to. 

What are the most popular indices in the world?

Some of the most popular and widely traded stock indices around the world include the S&P 500, NASDAQ100, Dow Jones Industrial Average 30, Nikkei 225, FTSE 100, CAC 40, and DAX 40.

What’s the relationship between stock indices and currency pairs?

In normal market conditions, stock indices and the forex market don’t have a high correlation. Also, each stock index has a different relationship with its domestic currency, which means every case has to be assessed differently. That said, all markets are interconnected so there’s certainly a connection between stock indices and currencies – In most periods when the domestic stock market index rises, the local currency tends to strengthen and vice versa.

Gap Trading: How to Trade Price Gaps in 6 Simple Steps

How to Trade Gaps

From time to time, you’ll be able to notice price gaps when trading the markets – these are blank areas in a trading chart where an asset’s price opens higher or lower from the previous day’s close. 


Generally, it is quite common that gaps tend to get filled at some point in time, which could be a great opportunity to make trading decisions and take advantage of these price gaps. So, let’s see how you can add this tool to your trading arsenal.

Key Points to Take Away

  • In trading, gaps are blank areas in a trading price chart that usually tend to get filled.
  • There are four types of trading gaps – common, breakaway, continuation, and exhaustion.
  • Gaps typically occur due to unexpected fundamental and technical events during times when the markets are closed.

What is a Gap in Trading?

First, in my view, the best way to explain a gap in trading is to see gapping happens on a candlestick chart.

Amazon Daily Chart Common Price Gap
Amazon Daily Chart Common Price Gap

As you can see in the chart above, a gap is simply an area in a chart where no trading activity has taken place, and there’s a sort of empty space from the previous closing price displayed in candlestick and bar charts. In financial terminology, this is known as gapping and is exactly what happened in the chart above when Amazon stock opened higher and in the following three trading days, the gap was filled. 

As we already know, due to the herd behavior in financial markets, a lot of people are looking at the same charts and are taking similar trading actions. Hence, many experienced traders exploit these gaps to make profitable trades.

Types of Gaps

There are 4 types of gaps’ price patterns you can find on trading charts. These are:

Common Gap

A common gap, also known as an area gap, is a price gap that occurs without any pattern or shape. These gaps normally happen due to technical reasons and in most cases tend to get filled quickly. (see image above)

Breakaway Gap

A breakaway gap is an untraded region that occurs at the end of a trend, or more accurately, at the end of a period when the market is in consolidation. Usually, it marks the end of the previous sideways region and the beginning of a new trend. Generally, breakaway gaps are less likely to get filled and if they do, it usually takes a long time for the gap to be filled.

Tesla Stock - Breakaway Gap
Tesla Stock – Breakaway Gap

Continuation (Runaway) Gap

As the name implies, continuation gaps usually occur in the middle of a price trend. So, when a continuation gap is identified, it means that the trend is very likely to continue. A runaway gap is also characterized by a significant gap and high volume.

Tesla Stock - Continuation Gap
Tesla Stock – Continuation Gap

Exhaustion Gap

An exhaustion gap typically occurs at the end of a long market trend when asset prices are testing new record highs or lows. As a result, this type of gap signals a taking profit condition and a reversal of the prior trend. As you can see in the chart below, once the exhaustion gap occurs, the price moves in the opposite direction.

Tesla Stock - Exhaustion Gap
Tesla Stock – Exhaustion Gap

Why Does a Price Gap Occur?

Apart from the cryptocurrency market, all other markets have opening and closing times. The forex market, for instance, is open 24/5 and is closed on Saturday and Sunday. Most stock markets around the world are open for 8-9 hours a day. This leaves plenty of time for unexpected events to influence assets’ prices in times when the markets are closed. Then, when the market reopens again, the fundamental factor that was released is being priced in and thus, the gaps occur when a financial instrument opens at a lower or a higher price.

As a matter of fact, central banks and private companies often prefer to release important data at times when the markets are closed (They usually do that to reduce volatility and market noise). Eventually, these unexpected events such as earnings reports, economic data, and political issues may create a gap in the market. 

Bear in mind that a gap can also occur when you are holding a position overnight. For that reason, it is also crucial to closely follow the economic calendar, companies earning results, and commodities reports. 

So, all things considered, gaps are usually created by fundamental underlying factors, especially in the stock market. In the foreign exchange market, it is not very common to find gaps as the market runs 24 hours five days a week. However, in some cases, you might be able to identify a gap in certain currency pairs on Sunday/Monday when the market opens.

How to Trade Gaps?

Before we delve into the details, you should know that trading the gaps does not actually involve the use of any complex trading strategies, and is usually not a trading strategy you could solely focus on. Most likely, you are not going to search price gaps in the market and make it your top strategy. Still, it’s a good trick and an interesting way to ‘hack’ the markets. 

In my opinion, it is best to keep this method of trading in the back of your mind when you start trading and occasionally enter trades when you identify a gap in a certain market.

So, how does it work? In a nutshell, traders who use gap trading strategies try to identify gaps between the opening price and the closing price on a trading chart and use these gaps as the main reason to buy or sell an asset. The decision obviously depends on the asset’s market sentiment and the type of gap price pattern that was formed. However, this is the main rationalism behind this type of trading – once a trader notices the market is about to close the gap, the trader predicts that the price will cover all the gap regions, which gives the trader an evaluation of the next price movement. 

Keeping the above in mind, here are some basic rules to take into account when trading gaps:

  1. Try to identify the type of gap and the market sentiment before the gap was created
  2. Follow the news and make sure you understand what caused the gap
  3. Always wait for the first candlestick to be completed
  4. If the market goes against you, get out. Once the price reaches near-gap levels, you can enter a trade again. 
  5. Once the asset starts to fill the gap, stay until the end. After the gap occurred and the asset’s price has started to fill the gap, prices rarely stop and typically cover the entire region of the gap. 
  6. Add a volume technical analysis indicator.

So, What’s the Big Deal About Gap Trading?

The bottom line – Much like using Doji candlestick chart patterns in order to make trading decisions, the use of price gaps in trading is something that should come naturally. There’s no need to learn how to use or analyze it – instead, you need to be aware of this occurrence and grab the opportunity whenever you see it. 

As a general rule, I wouldn’t say that gaps are always automatically filled. Occasionally, it takes days, weeks, and even months until the gap is filled. However, I don’t think I’ve seen many cases at which a price gap was not filled (unless the asset is illiquid and there’s low volume). So, taking this ‘trick’ and applying it to your trading routine could be extremely useful for you.  

FAQs

How to trade gaps successfully?

Frankly, trading gaps might be a tricky business. While spotting gaps does not require any special trading skills, it could be quite a challenge to identify the type of gap.  Still, if you master your skills in identifying the type of gap and when to enter a trade, gap trading offers lots of trading opportunities. 

One tip that might be helpful – knowing when to enter a trade once you notice a gap is not an easy task, especially if you are not familiar with the stock or the asset you are trading on. That said, in the vast majority of cases when the asset starts filling the gap, the price will go until the point it fills the entire region. This trading method is something you should take into your decision process and use as much as possible.

How to trade stock gaps?

As we mentioned in our guide, price gaps are more common in the stock market than in other markets, largely because the stock markets are open for several hours a day.  To trade stock gaps, you need to watch the pre-market and the first hour after the stock market opens. Then, once you identify a price gap, wait for the next candle to be completed and try to identify the type of gap. Whenever the stock’s price starts filling the gap, this is your trade – meaning, you need to stay until it covers the entire gap. 

Additionally, one of the key things that create gaps in the stock markets is earnings report so it is advisable to always be alert of reports released by public companies.

How to determine stock gaps to trade?

Generally, there are a few services online that provide a stock screener with alerts about stock gaps. This includes Finviz, Chartmill, and even TradingView. Another way to find stock gaps is to create your own stock screener, and independently find stock gaps during the pre-market session. 

Where to place stop loss when trading gaps?

Another gap trading strategy is to enter a position once the asset has started to fill the gap, and place the stop loss at the level at which the price hits yesterday’s close. This way, if you believe the asset is going to fill the gap and continue this trend, you can benefit from using the previous close as a protection level and try to ‘squeeze’ the trade. 

Best Lot Size Calculator: Full Guide & Tutorial

In forex trading, calculating the exact size of your trade could be quite a challenge, especially given the fact that investors usually get different leverage ratios from their brokerage firm, and each broker offers different lot sizes. 

For that purpose, using a lot size calculator is crucial to your trading success. Until you reach the point at which you can automatically calculate your positions’ size, you should absolutely use a position size calculator. 

So, in this article, we’ll help you understand how a position size calculator works, and how you can easily and efficiently calculate your forex positions.

Key Points to Take Away

  • Lot size calculator is a simple-to-use tool available on many websites online. This includes our Switch Markets lot size calculator that helps traders find the right position size and manage trading risk..
  • Leverage is the most important element of the forex markets and is often referred to as the double edge sword – the greater the leverage, the higher the potential to make profits, and the higher the risk of losing your capital.

What is a Lot Size Calculator?

Historically, FX currency pairs have always been traded in amounts called lots. But unlike the stock market, for example, where things are somehow easier to understand – in the forex market, position sizing is essential to manage the risk and to be comfortable with the size of your positions. As a tip – getting into a large FX position could be very stressful and create unexpected losses. So, this is where a lot size calculator, also known as a position size calculator, comes into play. 

A forex position sizing calculator is a valuable tool that enables a user to know the exact details of a forex position before entering into it. The calculator is usually available on forex websites but it can also be found as an MT4 plugin.

FYI

When you are using a position size calculator to make a forex trade, you need to insert the entry point and the stop-loss location. These two inputs are the most important for understanding the size and risk value of your trade.

Different Forex Lot Sizes

Before we go into the ins and outs of using a forex lot size calculator, there’s one thing every trader needs to know about forex trading – that is, the different forex lot sizes. As already mentioned, the standard lot size in forex is equal to 100,000 units of currency. However, since the majority of traders cannot deal with this size of position (around $10 per pip), forex brokers have created different lot sizes that include mini, micro, and nano.

Lot Size Number of UnitsValue per PipInitial Investment Requirement in USD
1 Standard Lot – 1.0 lots100,0001 Pip – 10 USD1000 USD
1 Mini Lot – 0.1 lots10,0001 Pip – 1 USD100 USD
1 Micro Lot – 0.01 lots10001 Pip – 0.1 USD10 USD
1 Nano Lot – 0.001 lots1001 Pip – 0.01 USD1 USD

How to Use a Forex Lot Size Calculator? 

By now, you should understand the concept of a forex position size calculator. Luckily, using a position size calculator is not rocket science and is extremely simple to use. 

To use the calculator in actual trading, you simply need to insert the inputs of your particular trade in order to get the calculation results. 

For example, when using the Switch Markets lot size calculator, you’ll be asked to insert the following data: FX instrument, deposit currency. Entry-level, stop-loss rate, and risk tolerance (the amount you are willing to lose – fixed income or percentage risk).

Switch Markets Lot size calculator

So, as you can see in the above data, the fixed amount inserted in this example is $250 and the stop-loss rate is 93 pips below the entry price. According to this data, the Switch Markets position size formula makes the calculation and helps investors to know the exact position size needed for this trade, which is, in this case, 0.26 lots. 

Position Sizing Tutorial Switch Markets

What is Leverage And How to Use It As Part of Your Trading Strategy?

Clearly, one of the key features of the forex market, for better and worse, is using leverage ratio (also known as margin trading). In simple terms, a leverage ratio in forex means you can essentially borrow funds from your brokerage firm in order to be able to trade with higher capital. How is that possible? Largely because the forex market is primarily speculative, meaning that forex brokers can provide leverage for their users. 

But to better understand the concept of leverage in the forex and CFD markets, you can view our video below explaining what leverage is, and how much leverage you should use as an independent trader.

More Risk Management Tools to Use

Using a Forex position sizing calculator is an excellent way to calculate the size of positions and know how much money you are risking in a certain position. Besides this tool, there are other useful risk management tools you need to take into account, especially if you are making the first steps as a trader.

The Bottom Line – A Position Size Calculator is a Handy Risk Management Tool

To sum up, knowing the pip value and the position size in every forex transaction you are going to make is not so easy. For some people, it can take months and even years to calculate these metrics, particularly if you are trading multiple assets. This is because you need to consider the lot size (standard, mini, or micro), the leverage ratio you are using, and the currency pair you are trading. For that matter, you certainly should be using the tools available out there to make informed decisions. One such tool is the position size calculator. 

With a number of inputs, a good position sizing calculator will help you find the exact size of your forex position and evaluate the risk of your current account balance you are going to risk in the next trade.

FAQs

How much is best to risk per trade?

Most traders and experts will say that ideally, you should not risk more than 1%-2% per trade of your account balance. On the other hand, most day traders typically risk even more than the above per trade (around 3%-5%) as part of their trading strategy due to the low risk of getting in and out of position in short timeframes.

What lot size should you use?

That largely depends on the amount of capital you have invested, the trading strategies you are going to use, and your financial goals. If you have a small account with a balance below $1000 and you are going to take medium to long-term positions, then you should only use mini and micro-lots. Otherwise, if you are an active intraday trader, you can use the standard lot size as long as you are maintaining other risk management approaches such as the risk-reward ratio in a single trade, stop-loss orders, etc. 

How to calculate gold pips?

Here’s what you need to do to calculate XAU/USD pip value – multiply the amount of your position in lots by the size of the position in oz and then multiply by the current price of golds. The formula – (Volume in lots) x (100 oz.) x (price). Regardless of the formula, generally, the pip of gold is valued at $1 when opening a lot size position, 0.1 for a mini lot position, and 0.01 for a micro lot position. 

How to use the risk-reward ratio?

The risk-reward ratio is a risk trade management tool that measures the profit of a given trade against the loss of the same trade. For long and swing traders, the ideal risk-reward ratio stands at around 1:2 or 1:3, meaning the investor is willing to risk 1 USD to potentially make a profit of 3 USD. For day traders and scalpers – the most recommended risk-reward ratio falls at 1:1 and below. 

How to Build the Perfect Setup for Day Trading

There’s quite an interesting discussion between musicians about the impact of various tools on the sound a musician is able to produce. Some people will argue that you could be the most talented musician in the world but if you don’t have the right equipment, then… Moreover, some medium musicians were able to get that one pedal, tool, or amplifier that makes their playing sound so special and unique. 

In some way, the same applies to trading, especially if you are going to make it as a profession or at least be serious about it. You, therefore, need some tools such as a strong computer, monitors, good trading platforms, VPS service, signals services, and more. In other words, a good trading office setup makes a world of difference in becoming a successful day trader and investor.

You might have to make an initial investment and spend money to create your own trading space, but over the long term, it can lead to future opportunities and better future performance. So, with that in mind, in this article, we take a closer look at some of the most important things you need to get in order to build the perfect setup for day trading. 

Trading Tools and Services You Need for Trading the Markets

1. Strong Computer

Obviously, the most important tool of all is your computer. To quickly switch between charts, view data, get detailed on-screen information, and execute trades – you need a reliable and strong computer. 

So, the first question – are you a mac or windows user? If you’re a Mac user like me you might already know how limited we are when it comes to compatible trading platforms. Still, you have the option to install Windows on your Mac with Bootcamp or Parallels so you can basically use any software available on the market. 

The second question – desktop computer or laptop? Well, the answer lies in your preferences and how you feel more comfortable sitting in front of a computer. Generally, most traders will tell you to use a strong desktop computer, however, in my opinion, it’s not the most crucial factor these days. There are strong laptops now in the market, and you can connect them to several screens and create a great setup with just one laptop. 

So, if choosing the latest, then a laptop with 16GB or more of RAM, and a processor that contains at least 4 to 6 cores should do the work for day trading. Another factor to consider is the size of the screen. It’s advisable to buy a notebook computer with a screen size of 15.6 inches. 

Otherwise, if you insist on using a desktop, then search for at least 16 GB RAM, a processor with at least 2.8 GHz Processor, SSD, and a graphic card with at least 2 GB of GPU.

2. Monitors for Trading

So, by now, you have a strong computer and good effort. That’s good, but you still need to look at something, meaning, the next step is to get multiple monitors for day trading. This is not something you can compromise on as several monitors can help you to get more screen space, keep track of several markets, get a comprehensive visual analysis and data sources, etc.

But, here’s the thing – too many monitors could be very confusing, especially in the beginning. In my experience as a day trader in a trading room, some traders even felt more convenient with just 3-4 screens (that will be enough for you to view at least 12-16 charts). I also know people that trade with one monitor and are doing well. One instrument, one chart – that’s it

Personally, I like the idea of having many monitors in front of you. There are more opportunities and more trade ideas. Hence, I think the most ideal way is to start with 3-4 monitors, and if at some point, you feel that it is not enough for you, you can invest and add more trading screens at a later date. 

In terms of the brands and products to buy, some of the best screens for day trading include: 

  • Samsung CHG90 
  • Dell S Series Led-Lit Monitor 32″ Black
  • LG 43UN700-B 43 Inch Class UHD
  • DELL 24 Inch U2415 Ultrasharp 
  • HP VH240a 23.8-Inch Full HD

3. Trading Platform

Going back to the analogy of musicians, a trading platform is your precious instrument in your trading activity and one of your most important tools to get the most of your trading experience. But choosing the right trading platform could be quite a challenging task that requires in-depth research and the process of trial and error. 

So, where do you start from? First, you need to decide on the market or type of asset class you are going to trade. For instance, if you have plans to trade FX currency pairs and CFDs, then stick with the MT4 or MT5. It’s simple, solid, and fast. Another excellent choice for forex and CFDs is the cTrader

Otherwise, if you want to focus on futures, stocks, and options – then some of the best options include the NinjaTrader, TradeStation, and CQG. 

4.VPS Hosting Provider

A few years ago, I had a fairly big losing trade due to internet disconnection or internet outage. Very frustrating – you make such a huge effort and eventually, you get hit by an unexpected enemy. The solution – a Virtual Private Server (VPS), which is basically a form of web hosting that ensures you always have a good connection to the markets and you can avoid slippages and internet cut-offs. Further, a VPS can significantly reduce the latency, which helps you get a faster market execution than using your broker’s server.  

Usually, the vast majority of VPS hosting services charge around $30-$90 per month. However, some brokers provide you with a VPS hosting service as a free plugin when you open a forex/CFDs trading account.

5. Something Fun to Do

Looking at numbers for long hours every day could be a daunting task. Obviously, there are lots of exciting moments in the markets, but at the same time, there are times when the markets are silent and you’ll have to find a way to stay focused. And, even if you are on a strike of daily returns, you always need to find this one fun activity you like to get you out of the markets. 

That was a great tip I received at some point from one of my mentors. For me, reading a book for 20-30 minutes during a trading day is an alternative for trading time and usually helps me relax. But, if you find any other activity that helps get your mind clear, then do it. Hence, you need to find something you like, put it in your trading room, and add it to your daily routine. 

6. A Good Mobile Phone

From my experience, you can also successfully trade from your mobile phone, especially when mobile trading applications have become so good in recent years. There may be a few professional trading apps like the MT4 that allow you to track the forex market (as well as other markets) from your mobile device, view charts, news feed, technical analysis tools, etc. Further, you can easily place orders in the market from your mobile phone and get instant market execution. 

As a matter of fact, I even know some swing traders and long-term investors, claiming that sometimes it’s even easier to trade directly from a mobile device (although you can’t really day trade from your mobile phone). After all, there are lots of benefits of mobile trading app – you can trade on the go and easily get market alerts and updates to your phone. 

And, even if you are not going to day trade from your mobile phone, intraday trading is addictive. You have to check the markets at any given moment and monitor your account as much as you can. In some cases, you might have to enter your mobile app several times a day to change orders, buy or sell an asset, analyze the markets, etc.

All things considered, you also need a really good mobile phone as part of the perfect setup for day trading. 

The Bottom Line

There’s a high probability that the first image you had in mind when you decided to become a day trader is to sit in front of 7-8 trading screens, get access to top-notch trading platforms, and make thousands of trades per day.  So, in order to get the ball rolling, you need to get the necessary tools and platforms to make the best setup for your trading business. 

Apart from what we’ve mentioned above, you also need to get other essential tools and services including a trading desk or table, high speed internet connection, ergonomic chair, etc. For your convenience, it is also recommended to choose the platform theme (dark or light), and get access to a good economic calendar/news source/trading signals provider. 

TIP

Remember, day trading is a hard job. You need to clear your mind between a trade to trade during the trading day. This means you can add something you like as part of your day trading routine – play bubbles on your phone, read a book, watch TV, visit social media platforms, listen to music, or anything else that makes you feel like you want to go back to the battlezone. 

At last, bear in mind that there’s no one way to do it – some people prefer a minimalist approach with just one laptop, one chart, etc. Others are much more confident in an abundance of information. It would be best for you to start with the basic tools and services we mentioned above and find your way as you go through the first months of your trading journey. 

What is Carry Trade and Why Is It So Important in Forex Trading

Before you make your first trade in the foreign exchange market or even if you are an experienced forex trader already, there’s one concept you must be aware of – carry trade. This is one of the most popular trading strategies in the currency market and one of the key factors that have an impact on the direction of FX currency pairs. At its most basic, a currency carry trade transaction is a speculative trading strategy in the forex market that involves borrowing a low interest-rate currency and buying a higher interest-rate currency.

But, how do you, as an individual trader, can use currency carry trade in your forex trading? And why is it so important these days when we are facing a near-zero interest rate policy by central banks around the world?

First, What is a Carry Trade Strategy?

So, here’s the thing – money can move from one institution to another and from one country to another. Think about it, assuming there are two “financially safe countries” and there’s a gap of 1% in the interest rate that investors and individuals can receive in each one of the countries – where will the money go?

That is, in simple explanation, a carry trade. Let me give you an example – A few years ago, the USD/JPY was trading at around 80, when the Japanese central bank kept rates very low due to Japan’s ongoing recession (and without any forecast of rate hikes). At the same time, the FED was maintaining a near-zero interest rate environment but with high anticipation of rate hikes in the near future. Further, the Japanese government had a strong motive to weaken the rate of its currency in order to increase the value of exports and thus, raise its GDP. Meanwhile, the US central bank was indifferent in a way to the USD/JPY rate.

And, so on, that was my position between 2011/12 until 2016 – buying the US dollar (the funding currency) versus the Japanese Yen and holding it until it reaches above 100. Eventually, it reached 126 before the pair crashed to 115 due to a mini-crisis in China (once again, if there’s a crash in China, money moves from China to Japan, and then has an impact on the USD/JPY rate). 

Nonetheless, it was, in my opinion, a good trade. It is based on the fundamental principles of carry trade and macroeconomic factors. For that reason, it is always crucial to follow the inflationary rate at each country and the anticipation for rate hikes by central banks – this is the number one driving factor for an increase or decrease of an FX currency pair. 

The History of Carry Trade

Carry trades are clearly not a new phenomenon. In fact, it is more than likely that carry trades were done in other forms throughout history, either with the use of currencies or commodities. After all, the use of interest rates in financial transactions can be traced back to 2400 BC. 

But the first modern use of carry trades was introduced when the financial markets opened up in the early 80s. Due to the low-interest rates in Japan, for example, many investors then exchanged the Yen for the US dollar, making it the first real speculative carry trade in history. 

By the early 90s, the vast majority of central banks had decreased their interest rates due to the recession in the US and around the world. Consequently, the high-interest rates of the late 70s and 80s from the US governments and other developed countries were no longer available for investors. This caused a situation where investors and hedge funds were looking for speculative carry trades by taking funds out from developed countries and investing in undeveloped countries with high-interest rates such as Mexico, Turkey, Brazil, and China. 

Additionally, in the two following decades – due to high inflation rates and financial instability, many big institutions and large investors started investing in safe-haven assets like Gold, Silver, Copper, etc. This has nothing to do with carry trade and is simply a result of the uncertainty that revolved around the global economy. Unlike fiat currencies, the value of a safe haven asset is not impacted by the rate of interest rate nor by decisions made by central banks. 

During the first decade of the century (taking aside the dot.com bubble), carry trades were back in fashion as investors, once again, renewed their interest in low-risk positions by borrowing low-yielding currencies such as the Japanese yen and buying high-yield currencies such as the US dollar, Euro, and the British Pound. That was, obviously, a result of the high economic growth in the US and other leading countries from the mid-90s’ up until the financial crisis in 2008. 

Then, from the time of the crisis in 2008 until recently, the use of carry trades among large financial institutions and retail investors has significantly decreased. This can partly be attributed to the near-zero interest rates applied by central banks, which makes currencies around the world less attractive and stocks (and… cryptocurrencies) as the main drivers of return.

The End of Zero Interest Rates Policy is Around the Corner – Is It Also the Return of Carry Trade?

The free market economy has several severe disadvantages including a repetitive crisis every 7-8 years. This was, more or less, the case for the last century. However, since the 2008 financial crisis, the global economy has not been shaken by any major recession. Then, the major surprise for many economists and financial analysts was the strength of the economy during the Covid-19 pandemic, which raised many questions about the new way central banks are dealing with crises – that is – low-interest rates, and… printing money. 

While some people criticize this policy, claiming it will create a big bubble at some point in time, it is difficult to argue with the success central banks and governments have achieved to avoid another serious crisis.

Regardless, many analysts including myself will agree that the end of a zero interest rate policy of central banks around the globe is expected to happen in the near future. If this indeed happens, it will indicate the return of carry trade as one of the key factors driving the direction of FX currency pairs. As such, money will flow into a country that has high growth and inflation rate, low unemployment rate, and expectations for rate hikes in the upcoming years. 

How to Use Carry Trade in Forex Trading?

For the average Joe trader, there are few ways to take advantage of the carry trade strategy. First, many brokerage firms enable investors to receive the interest difference when you buy a currency with a high-interest rate and sell a currency with a lower rate. In forex trading, this is also known as a positive swap. For example, you can check swap rates of FX currency pairs and commodities to evaluate the annual rate you are expected to make if investing in a certain financial instrument. 

Simply put, you receive the interest from your brokerage firm on the currency you hold with the higher interest rate (this includes short positions). That said, you always need to be aware of the fact that most forex brokers do not pay interest rate spreads if it is in negative territory (much like the JPY and CHF).

So, assuming that interest rate differentials between two currencies stand at around 2%, this means investors will be able to make an annual return of 2% by holding a position for one year. A good strategy would be to set the stop loss at the price where you meet the interest rate difference (for the example above, 2%) and take a long-term position buying the high yielding currency and selling the low yielding currency. In other words, you essentially will be trading interest rate differentials. And for that purpose, you need to be aware of the rates of each major, minor and exotic currency at any given moment.

The second approach is to follow the inflationary rates of each country and the anticipation of rate hikes, which is a result of the economic activity of countries. Hence, you need to constantly follow economic events and data published on a reliable economic calendar, and be alert to any major central banks meetings that may indicate the possibility of a future rate hike. Further, it is a good idea to follow government bonds prices to predict future rate decisions and currency values of currency exchange rates.

According to this data, an investor can make an investment decision in the forex exchange currency market. For example, right now, some of the most popular carry trades currencies to sell right now include the Japanese Yen and the British Pound due to the below and near-zero interest rates and the low expectations for rate hikes. On the other hand, good currencies to buy in a carry trade include the US dollar, Australian dollar, and the New Zealand dollar. Thus, an investor will buy the USD/JPY, AUD/JPY, NZD/GBP, etc. 

As we mentioned, one thing to watch closely if you are planning to combine carry trades in your trading account is the expectations for rate hikes by central banks in the near future. For that matter, a great tool to use is the CME FedWatch tool that helps investors to evaluate the latest probability of the Federal Reserve rate hikes, and whether you see a path to raising interest rates. 

The Risk in Carry Trades

Though carry trade is considered a low-risk investment strategy,  there are factors to keep in mind when using it. Much like many other trading strategies, in carry trades, the lower the risk, the less you should receive. This means that the currency pairs with the highest interest rate differentials also tend to be the most volatile, and the trade risks are therefore, higher. 

For example, the interest rate differential between the USD and the Turkish Lira has been attractive for many years and still remains one of the widest in the Forex market at the time of writing (the annual rate in Turkey stands at 18%). Sure, this might be attempting to buy the Turkish Lira currency and sell the US dollar, however, it is certainly a risky long position to take. 

Even in case you decide to carry trade a less volatile currency pair, there’s obviously a risk the trade will go against you. Also, in such a scenario, the rate differentials will most likely be tighter, which means your stop loss and the price at which you start losing money is closer to the price you entered the position.

Therefore, like any other investment you plan to make in the currency markets, it is crucial to use proper risk management tools including a risk-reward ratio, trailing stop loss, and limit orders. 

Final Thoughts

To sum up, there are many benefits of using the carry trading strategy. It is a great method to get passive income in the FX market and identify long-term trends. In the long run, if the exchange rate of the asset currency pair you invest in stays the same or moves in your direction, you make a profit. In addition, when using this strategy correctly, the steady fixed income you are expected to get from a positive carry trade provides a cushion for your trading activity. 

Take note, however, that the carry trade strategy is far more suitable for long-term positions as well as for swing traders. For day traders, there’s no real use of carry trade. Nevertheless, many forex traders, and especially carry traders confirm that carry trades work well over the long term, particularly when central banks increase interest rates or have plans to increase them. Because this is the case in the markets right now, you should pay close attention to interest rate differentials and combine the carry trade trading strategy along with others. 

5 Exotic Forex Currency Pairs Every Trader Should Follow in 2022 and Beyond

Exotic forex exchange currency pairs are often considered to be the most volatile and unpredictable currencies in the market. These pairs are usually currencies that are not covered a lot in the news and are not part of the list of the popular major or minor FX currency pairs. As a result, they are far riskier than the ‘stable’ currency pairs most people trade on. 

At the same time, in some cases, these currency pairs are also the most exciting and… exotic??? So, let’s take a closer look at some of the exotic forex pairs to follow in the next year and beyond.

First, What Are Exotic FX Currency Pairs?

There are hundreds of FX currency pairs in the world that are classified into three categories – majors, minors, and exotic pairs. A major currency pair is any pair that includes the US dollar as the base or quote currency and one of the following currencies as the second currency – the Euro, Japanese Yen, British Pound, Swiss Franc, Canadian Dollar, Australian Dollar, and New Zealand Dollar. . These major currency pairs include the EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, NZD/USD, and USD/CAD. 

Minor FX currency pairs, also known as cross-currency pairs, are basically pairs that do not include the US dollar but combine two of the other major currencies. Examples for minor currency pairs include the EUR/GBP, GBP/JPY, AUD/EUR, etc. 

And, at last, exotic currency pairs. These include any currency pair that has one major currency pair and one non-major currency pair. Normally, the non-major currency pair is classified as a currency of a developing country, however, it would be fair that many of the exotic currency pairs combine two currencies of developed countries. Examples of exotic currency pairs include the USD/SEK, EUR/THB, JPY/SGD, etc. 

What’s the Problem of Trading Exotic Currency Pairs?

So, what’s the catch of trading exotic currency pairs? Two things. The first is the widespread when you buy or short sell the pair. Much like any other commodity in our financial system – if there’s low liquidity, the spread is wider. Ultimately, it becomes much more difficult to get in and out of positions, and therefore, these currency pairs are best suited for long-term investors. 

Secondly, unlike major and minor pairs, exotic currency pairs are not widely covered by the media. Also, getting relevant economic data for a certain exotic currency could be a challenge in some cases. You might have to visit local websites and the official website of the central bank to get reliable and accurate data. 

Therefore, when you trade exotic currency pairs, you’ll have to rely on your analysis and research. And, you constantly need to search for reliable news, updates, and macroeconomic developments about the exotic currency pair. 

5 Exotic FX Currency Pairs to Follow 

Despite the challenges you might encounter when trading exotic currency pairs, there are still lots of opportunities to be found in this niche market. As mentioned above, there are hundreds of exotic currency pairs in the forex market, which could be great assets for trading if you are able to find the right forex brokerage firm. SwitchMarkets, for example, offers a range of over 60 currency pairs, including some of the most liquid and popular exotic pairs. 

So, with that in mind, below we have selected 5 of the most exotic currencies we think you should follow in the upcoming year and beyond.

1. Norwegian Krone vs Japanese Yen (NOK/JPY)

Norway is one of the largest oil and gas producers and exporters in the world while Japan is the fourth largest importer of petroleum products. Hence, it is not surprising that the NOK/JPY is a very important currency pair and very popular among forex traders. 

The Norwegian krone is mostly impacted by oil prices (and interest rates differentials), so when oil prices rise the NOK follows and vice versa. The Japanese Yen is considered a low-yielding currency used by traders for carry trades. Consequently, in normal market conditions when everything goes well, the NOK/JPY pair is expected to rise while in times of uncertainty and economic recession, the JPY will be strengthened versus the Norwegian Krone. 

Add a daily chart when the article goes live

Current RateYTD Change1-Year ChangeAvailable at SwitchMarkets
13.4410.94%18.5%Yes

2. British Pound vs Swedish Krona (GBP/SEK)

The United Kingdom and Sweden are known as trade partners. According to the Department of International Trade, Sweden was the UK’s 16th largest trading partner in 2021 accounting for 1.6% of total UK trade. This clearly makes GBP/SEK  an interesting exotic currency pair to follow. 

In general, Sweden is mostly an export-oriented economy, and like many other exporting countries, Sweden is facing the conflict of devaluing its currency in order to decrease trade deficits and boost the value of exports versus maintaining a stable currency. In recent years, due to the decrease in value of the Swedish Krona, some analysts believe that Sweden is actually facing a currency crisis

Additionally, Sweden is famous for holding interest rates very low since the financial crisis in 2008. At the time of writing, the Swedish central bank keeps interest rates at 0%, slightly below the annual rates in the UK. 

Still, the pair has been trading at a fairly narrow range for several years and is considered stable due to the strength of both economies and the necessity for a non-volatile exchange rate between the two. 

Add a daily chart when the article goes live

Current RateYTD Change1-Year ChangeAvailable at SwitchMarkets
11.855.45%3.68%Yes

3. Euro vs Mexican Peso (EUR/MXN)

There’s no doubt that the EUR/MXN is one of the most important currency pairs in the world, representing the trade relationships between the second-largest economy and reserve currency in the world, to the most liquid currency among emerging countries and the most traded currency in Latin America. 

What affects the EUR/MXN? Basically, the pair is a combination of EUR/USD and USD/MXN, two of the most actively traded currency pairs in the markets. The Mexican Peso is considered a very liquid currency, and more importantly, a commodity currency. This is because Mexico is one of the largest oil producers in the world and in the Americas (after the US, Canada, and Brazil). So, MXN has a high correlation with energy prices. Other factors that impact the value of the Mexican Peso include interest rate differentials (the current interest rate in Mexico stands at 4.75%), and any development of global trade conflicts and political issues with the United States. 

Add a daily chart when the article goes live

Current RateYTD Change1-Year ChangeAvailable at SwitchMarkets
23.68-2.47-5.08Yes

4. Hong Kong Dollar vs Japanese Yen (HKD/JPY)

Since 1983, the Hong Kong Dollar has been pegged to the US dollar and since 2005, investors have been allowed to trade the USD/HKD between a range of 7.75 to 7.85. Also, in recent years, there have been many attempts to unpegged the HKD from the US dollar, especially from the Trump administration. This means that the HKD/JPY is mostly affected by the movements of the Japanese Yen. 

Generally, Hong Kong is such a vital gateway in terms of global connecting China with the rest of the world, which makes the Hong Kong Dollar one of the most interesting exotic currencies to follow, largely due to the ongoing trade war between the US and China

In terms of how to trade this pair- unlike many other exotic currency pairs, this currency pair is an ideal instrument to apply a range trading strategy rather than trend trading strategies. 

Add a daily chart when the article goes live

Current RateYTD Change1-Year ChangeAvailable at SwitchMarkets
14.6910.24%7.98%Yes

5. US Dollar vs the Israeli Shekel (USD/ILS)

Strange fact – the Israeli Shekel is one of the strongest (if not the strongest) currencies in the world over the last 2-3 years. The reasons – first, many tech start-ups sell their operation and bring in US dollars into the local market. Secondly, the interest rate differentials between the ILS and the USD that works in favor of the Israeli Shekel. 

Presently, there’s no reason in the near term for the US dollar to significantly increase its value against the Israeli Shekel. However, in case the markets are heading for another stock market crash, the pair is very likely to rise again to previous rates at around 3.5-3.8. 

Add a daily chart when the article goes live

Current RateYTD Change1-Year ChangeAvailable at SwitchMarkets
3.220.35%-4.76%No

Other Exotic FX Currency Pairs to Keep an Eye On

With so many exotic FX currency pairs, it’s obviously not easy to track all of them. Also, you need to take into account the availability of the currency and the spread available on various forex brokers. For example, it is not very likely to find a forex broker that offers the Iraqi Dinar versus the Brazilian Real. Even if you do find it, the spread will be very wide. 

So, you need to find currency pairs that you actually can trade at retail forex brokers. Apart from the pairs above, other most popular exotic pairs that you might want to follow include: EUR/TRY, AUD/MXN, GBP/ZAR, GBP/SGD, USD/HKD, and USD/THB. 

The bottom line is that there are pros and cons to trading exotic currency pairs. For a day trader, it’s a challenge to trade exotic pairs. But for long-term investors, it could be worthwhile to keep an eye on these pairs as there are lots of opportunities that are not available when trading major or minor pairs. 

What is Forex Trading and How Does It Work?

In its most basic sense, the forex market has been in existence in various forms since money was created and exchanged. Throughout history, humans have always exchanged commodities, coins, and paper money to buy and sell goods, and to build a financial system. 

But the modern forex market as we know it today is quite a new market, particularly the online forex market. Over the last three decades, and especially since the internet has emerged – forex trading is also a global network for currency trading where banks, hedge funds, central banks, governments, corporations, and retail investors all exchange forex currency pairs at any given moment. 

So, in this article, we’ll help you understand the basics of online foreign exchange trading. We’ll explain what forex trading is, how it works, and how you can start trading FX currency pairs. 

What is Forex Trading?

The Forex market, also known as the Foreign Exchange market, involves the buying and selling of FX currency pairs for the purpose of exchanging goods and services as well as for speculation. In essence., Forex trading can be done for various purposes including exchanging foreign currencies to a local currency, buying goods and services in other countries, investing in other regions in the world, etc.  

But the vast majority of online forex trading is made for speculative purposes and the goal of making profits. Simply put, it is a form of speculative trading in which traders exchange one currency for another in order to potentially make revenues. As a matter of fact, it is estimated that nearly 90% of the volume in the currency market is executed by speculators.

Fun Fact

The forex market is the largest and most liquid market in the world with an estimated turnover of $6.6 trillion per day. In terms of market volume, it is 27 times bigger than global stock markets.

How Does Forex Trading Work?

Unlike shares and futures markets, FX currency trading does not take place on any regulated exchange. Instead, forex exchange trading takes place between banks in what is called ‘over the counter’ (OTC) market or interbank market. This global network of banks creates a 24 hours 5 days a week market with no central location and no centralized exchange. 

There are three types of FX currency pairs – majors, minors, and exotic. Major currency pairs account for around 80% of the total volume in the forex market and include the EUR/USD, GBP/USD, USD/JPY, USD/CAD, USD/CHF, AUD/USD, and NZD/USD. Minor currency pairs are a combination of any currency pairs from the major currencies that do not include the US dollar (EUR/GBP, GBP/JPY, AUD/GBP, etc). And, exotic currency pairs are combinations of a major currency with a currency of an emerging country or a currency of a less developed or strong economy. For example, EUR/TRY, USD/SEK, GBP/HKD, etc. Find out more information about some of the best exotic currency pairs in 2022

As for the currencies structure – FX currencies are always traded in pairs, meaning you buy one currency and sell another. The pair is made up of a base currency, which is the first currency, and the quoted currency, which is the second currency. For example, if we take the GBP/USD – the base currency is the British pound while the quoted currency is the US dollar.

The smallest price movement in a currency pair is known as a pip, short for “percentage in point”.

Let’s say the EUR/USD moves from 1.1600 to 1.1601, it basically means the currency price changed by 1 pip.  

Each currency pair has a spread, which is simply the difference between the buying and selling prices, or bid and ask. The spread differs between forex brokers and is based on the type of market execution the forex broker offers (ECN/STP, market maker, etc). 

What is Leverage in Forex Trading?

One of the main attractions of online forex trading is the high leverage provided by retail forex brokers. For those unaware, leveraged trading (also known as margin trading), is a trading mechanism in which a trader borrows funds from the brokerage firm in order to be able to trade with a larger amount of capital than initially deposited. 

For example, online forex brokers offer forex trading with a leverage ratio of 50:1 to 1000:1 to allow traders to increase the size of their positions. Here, at SwitchMarkets, we offer a leverage ratio of up to 500:1 on major and minor currency pairs, which requires a trader to use only 0.2% of the account balance to be able to open a position. 

In order to better understand how leverage works in forex trading, below you can find a comparison table for each level of the leverage ratio and margin requirement.

The Risk of Leverage in Forex Trading

Even though leverage is a huge benefit in forex trading, it is important to note that the higher the leverage you use, the higher the risk. When you are using a high leverage ratio, it essentially means you increase the chances of making high profits but at the same time, you increase the risk involved in trading the forex markets. In short, leverage is a double-edged sword. 

For example, a leverage ratio of 100:1 requires a margin of only 1%. So, with a position size of $1,000, you would be able to control $100,000. This means that a value of one pip is equal to $10 and if the market goes against you by 100 pips, then you’ll automatically exit the trade (unless you deposit more funds). So, the best solution is to use a leverage ratio that you can deal with and feel comfortable when trading. In addition, in order to know your exit level and where to set your stop-loss, you can use tools like Forex Profit Calculator and Lot Size Calculator

What Determines the Value of FX Currency Pairs?

Currencies are traded in pairs, which means the value of a currency pair is determined by the strength or weakness of one country versus the other. As such, you need to evaluate the economic performance of one versus the other, and according to this data, take a decision to buy or sell a certain currency versus the other.

With that in mind, here are the main factors that affect the value of FX currency pairs:

  • Inflation and interest rates – Clearly, the number one factor that has a direct impact on the value of currencies is interest rates maintained by the country’s central bank. Simply put, when there’s an interest rate differential (IRD) between two currencies in a pair, investors will prefer to invest in the currency with higher interest rates and sell the one with the lower interest rate – a trading strategy known as carry trade
  • Economic Performance – A country’s economic performance is an early indicator of an interest rate hike and thus, an increase in the value of its currency. Therefore, economic data such as GDP, CPI, exports and imports, etc – are all crucial and ultimately affect the value of the currency. 
  • Geopolitical Stability – Obviously, a political state of a country is a major factor for a country’s economic growth and can affect the value of its currency. So, situations like war conflict, Brexit, elections, political instability, protests, etc – have a direct impact on a currency.
  • Balance of Trade – Balance of trade, also known as net exports, is the difference between the value of a country’s exports and imports. The meaning of a positive trade balance is that a country’s total exports exceed imports and thus, the demand for its local currency rises.
  • Speculation – At last, the forex market is extremely speculative. It is ​​estimated that 90% of the total volume in the forex market is fueled by speculators, so very often the main reason for a movement of a certain currency pair is simply a market trend and the growing demand from investors to make profits.  

Fun Fact

It is estimated that nearly 90% of the volume in the forex market is done by speculators.

What are CFDs in Forex?

Forex trading can be done in various forms including through banks, dealers, and online brokers. Any individual, for example, can visit a money exchange store or contact the bank to buy a currency and sell the other. However, CFDs, which are a popular form of trading derivative products, provide the best way to get access to forex trading.  

So first, what are exactly CFDs? A Contract for Difference (CFD) is a financial derivative contract in which two parties agree to speculate on the price of an asset without having to exchange, and hold it. For example, when you buy the British pound and sell the US dollar at your local bank, you are essentially transferring currencies, and you make a ‘physical’ exchange. The bank is responsible for transferring GBP to your bank account and transferring your USD to another account. 

When trading CFDs, on the other hand, traders can easily speculate on the future price movements of an underlying asset without any hassle to exchange and hold the currencies and pay high commissions. Notably, almost all forex brokers in the industry offer users to trade currencies in the form of CFDs. Some of the pros and cons of Forex CFDs vs Forex include:

Pros

  • CFDs allow you to trade on both rising and falling markets
  • High leverage ratio
  • To ultimate way to speculate on FX currencies price movements
  • Unlike conventional forex market, CFDs can be traded 24/5
  • Low trading costs

Cons

  • High risk
  • CFD Forex brokers charge an overnight fee, meaning it is less suited for long term positions
  • You do actually own the currencies, meaning you cannot use the currency you bought in case you need it

Forex Trading for Beginners

Make no mistake, forex trading is tough. You can essentially lose your money in a second and even if your first trade is profitable, don’t get too excited about it. You need to form a long-term trading structure and understand how the forex market works. In my view, the best way is to invest money you can afford to lose and use this money in order to learn how the market works and how to find the strategy that works best for you

Much like lawyers, accountants, and every other profession, you need to set a period of time, sort of an internship of 3-6 months, and learn how the fundamentals of trading and what makes currencies move in a certain direction. A great approach to achieve true expertise in trading is the 10,000 rule, which says that it takes roughly 10,000 hours of practice to become an expert in a certain field. I mean, it worked for the Beatles and Bill Gates so…

Regardless, there are few steps you need to take before you start trading forex:

  • Understand the basic terms of forex and the jargon of financial markets
  • Take forex online courses and free forex trading webinars about the Forex market and trading
  • Learn as much as possible about risk management tools – Risk/Reward ratio, risk management EA, stop-loss, and trailing stop-loss orders. 
  • Open a demo account that enables you to trade currency pairs with virtual money
  • Find a reliable news source provider and economic calendar

The 5 Steps to Start Trading Forex

Assuming you have completed all the steps above and you want to start forex trading, here’s what you need to do:

  1. Open an online trading account with a reputable and regulated forex broker
  2. Fund your trading account. It is recommended that you start with a small initial investment
  3. Select 1-3 currency pairs you wish to trade on and focus on these currency pairs
  4. Start trading
  5. Use risk management tools – Set a stop loss and risk-reward ratio

Forex Trading – Pros and Cons

Forex trading comes with some notable pros and cons that you need to consider before getting started:

Pros

  • Liquidity – the Forex market is the most liquid market in the world, which means you’ll always be able to find a buyer or seller when you want to open and close positions. 
  • Accessibility – Opening a forex trading account is not as difficult as opening a stock, futures, or options trading account. There are lots of brokers that provide a great trading environment, including a demo practice account and a variety of trading tools. 
  • The ability to short sell assets – The good thing about forex trading in comparison to the stock and futures market is that you can easily short sell currencies and take advantage of trading in both directions. 
  • Leverage – Forex brokers provide an extremely high level of leverage of up to 1000:1. Consequently, if you can form a successful trading strategy, forex trading could potentially generate high profits. 
  • Trading hours – Unlike the stock market, the forex market is open 24 hours a day, 5 days a week.
  • Low initial investment requirement – Unlike other forms of investment, there’s no need to make a large investment to start trading forex. Some forex brokers enable users to start trading the markets with a very low initial deposit. 

Cons

  • The risk of using leverage – As we mentioned earlier, leverage in forex trading is a powerful tool but it also significantly increases the risk of losing money rapidly.
  • High volatility – The FX market is known as a volatile and unpredictable market when compared to other markets. 
  • Price determination – In the forex market, price determination is somehow complex as there are various factors that influence the exchange rate of a currency pair.  Additionally, local government intervention can be a major factor to determine the value of currencies and often cannot be predicted by traders.

FYI

Cable is a known term among forex traders used to describe the GBP/USD currency pair. The term was first used in the mid 19th century when the GBP and USD were the most traded currencies in the world and transactions between the two currencies were executed via a transatlantic Telegraph Cable. 

Conclusion

To sum up, there are many reasons why the forex market has gained such popularity over the last two decades. Understanding the dynamic in the forex market is interesting not only as a way to earn money, but also to open our eyes to the world and get a better understanding of how the economy and financial trade works. Additionally, over the last few years regulation has improved and scammy brokers are quickly removed by regulators. This makes the forex industry more competitive and clean from frauds. 

The bottom line – whether you are a beginner or an experienced trader, the forex market is a great way to get involved in trading. If you are ready to do that, visit our sign-up page and open an online trading account. 

FAQs

Is forex trading profitable?

Generally, trading is subjective as there are many ways to analyze and trade forex. In online forex trading, the vast majority of traders lose money, largely due to the high leverage and because they usually enter the market not prepared. That said, trading forex can definitely be profitable if you reach the point of understanding the dynamics in the market and you are able to form the right trading strategy. 

How to open a real trading account on MetaTrader4?

MetaTrader4 is certainly the most popular online trading platform among forex and CFD traders. To open a real trading account on MetaTrader4, you need to find a forex broker like SwitchMarkets that gives users access to this trading platform and then open an online trading account. If you are not familiar with the platform, it is advisable to start with a demo account to get a better grasp of the platform and add funds to your live account when you are ready to trade the live markets. 

Is forex trading good for beginners?

That depends on many factors. Even though trading forex is considered a risky form of trading, it is a great place for beginners to start trading, and for several reasons. First, it is accessible and there’s no need to risk a large amount of capital as you might have to do when investing in stocks and futures. Secondly, forex brokers provide a great trading experience including online trading platforms, tools, leverage, and investment recommendations by their analysts. Finally, the forex market is less complicated than other markets, especially for beginners. You need to follow the news, understand macroeconomics and the political impact on FX currency pairs, and find the best hours of the day to trade the markets. 

What is an online broker in Forex?

In simple terms, an online forex broker is a financial services company that gives traders access to the forex market via online trading platforms. 

Do you need a forex broker to trade currency pairs?

In essence, no, there’s no need for a forex broker to trade currency pairs. You can do that by exchanging currencies at a money exchange store or buy and sell foreign exchange currencies at your bank. However, this way, speculating the prices of forex pairs is extremely difficult and you need large amounts of money to make small profits. Forex brokers, on the other hand, provide leverage and online trading platforms where you can actually trade currency pairs as an additional or main source of income. 

What is copy trading in Forex?

As the name suggests, copy trading is a technology that enables users to automatically copy the forex trades of other traders. It is mainly used by beginners or those who do not have the time and knowledge to research the forex market. Instead, they simply use the skills of other traders, which are in return compensated to share their trading activity. 

Forex Basics – Things You Need to Know

The Forex market comes with a set of terms and jargon that every trader must know in order to follow market commentary and trade currencies. Some are completely related to the forex markets and some are more trading related. Nonetheless, it is essential that you understand the terminology of forex trading and the ins and outs of trading the foreign currency market before you start FX trading. So, let’s get started.

Key Points to Take Away

  • The foreign exchange market is the largest and most liquid market in the world with an annual trading volume of approximately $6 trillion.
  • There are many technical terms and forex terminology that you need to know before you start forex trading.
  • What’s more – Currencies and currency pairs have nicknames, the FX market has 4 trading sessions, and it has an extremely unique market structure.

The Forex Jargon – Terms That Every Forex Trader Should Know

Like any other field or industry, the foreign exchange market has its own terms, words, and slang – or in other words, jargon. Below you will find some of the most common terms you need to know to make the first step to get into the Forex and financial markets and trade FX currency pairs. 

Pip – A pip stands for ‘percentage in point’ and represents the smallest market price movement of a forex pair. For example, when the US Dollar versus the Japanese Yen (USD/JPY) moved from 114.00 to 114.01 then the currency pair rose by 1 pip. If the USD/JPY jumped from 114.00 to 115.00 then the pair price changed by 100 pips. 

Lot Size – In forex, a lot size is the size of position measured in the number of currency units. The standard lot size is equivalent to 100,000 units of currency and the pip value is calculated according to the size of the position. Today, most forex brokers offer Standard lot size in addition to min (10,000), micro (1000) and nano (1000). To calculate the right trade size for your forex trade, it is advisable to use a lot size calculator

The Bid and Ask Spread – A spread in forex is the difference between the currency price at which investors are willing to buy or sell that one currency pair. Whenever you see a quote of a currency pair, you’ll notice a bid and ask price, or buy and sell. For instance, the bid quote for the EUR/USD currently stands at 1.16061and the ask at 1.16065 – a spread of 0.4. 

Leverage/Margin – In essence, leverage in the forex markets is the ability to trade currency pairs by using only a fraction of the total funds you have in your account. For example, using a leverage ratio of 100:1, a trader can control a position size of $100,000 by using a margin of just 1%, or $100. However, while leveraged trading enables investors to control larger sizes of positions, it also significantly increases the risks involved in losing money.

Bullish and Bearish Market – Simply put, the terms bullish and bearish describe the market condition or sentiment of a certain asset/market. A bullish market refers to a situation where the market is rising while a bearish market refers to a situation where the market is falling. The terms come from the way in which a bull and a bear attack their opponent – bull attacks in an upward direction while a bear attacks in a downward direction.  

Long and Short – In currency trading, long and short are definitely terms you’ll hear frequently. In simple terms, going long means to buy an asset, while going short means short selling an asset. For example, taking a long position in the EUR/USD essentially means you are buying the Euro and selling the US dollar. Short selling the EUR/USD means you are doing the opposite, selling the Euro and buying the US dollar. 

Used/Free Margin – On the vast majority of online forex trading platforms, you’ll see tabs of free and used margin. A free margin shows an investor’s money available to open new positions while a used margin shows the money used for open positions. 

Stop Loss and Take Profit – Two of the most important and widely used market orders in trading. A stop loss is an order to close the position at a certain price in order to limit the potential loss. A take-profit order allows you to set a price at which you wish to close the position at profit. 

Currencies and Currency Pairs Nicknames

If you want to learn how to trade the foreign exchange markets, it also might be helpful to know the nicknames of the most popular individual currencies and FX currency pairs. This way, you can easily read and understand market news and forecasts related to currencies. 

Nicknames for Currencies

  • US Dollar – Greenback
  • British Pound – Sterling, Quid
  • Euro – Fiber or Single
  • Canadian Dollar – Loonie
  • Australian Dollar – Aussie
  • New Zealand Dollar – Kiwi
  • Swiss Franc – Swissy
  • Norwegian Krone – Noki

Nicknames for Currency Pairs

  • EUR/USD – Fiber
  • GBP/USD – Cable
  • USD/JPY – Ninja
  • EUR/GBP – Chunnel
  • USD/CAD – Loonie
  • USD/RUB – Barnie
  • GBP/JPY – Gopher or Guppy
  • EUR/JPY – Yuppy
  • EUR/RUB – Betty

Fun Fact

The USD/RUB and EUR/RUB are named after Barnie and Betty Rubble, the neighbors of the Flinstones family from the iconic Flintstones movie and TV series.

Forex Market Structure

The forex market is different from any other market in the sense that it is decentralized and has no major exchange. Ironically, it works the same as the cryptocurrency market. The only difference is that FX currencies are not decentralized (as they are controlled by central banks and governments) while digital assets like Bitcoin, Ethereum, and other altcoin are, in fact, decentralized. 

Regardless, the way the forex market structure works are quite impressive. There’s huge competition in this giant global marketplace and quotes essentially vary from one dealer to another. At its most basic, this global decentralized over-the-counter (OTC) market enables any person on the planet to buy and sell currencies at any given moment. 

In terms of market structure – Major banks are at the top of the forex market hierarchy. They are responsible for creating the interbank market, which is basically a huge global network where banks trade currencies and provide exchange rates. Next, the exchange rates are being transferred to electronic brokering services such as EBS or Reuters dealing 3000 spot-matching and from there to medium and small size commercial banks. At last, retail market makers, ECN brokers, hedge funds, investment banks, and information data websites extract the quotes and allow retail traders to view and trade currencies. 

Trading Sessions in the Forex Market

Unlike the stock market, the forex market is decentralized and runs 24 hours a day, five days a week from Monday to Friday.   This essentially means that currencies are traded worldwide in four major forex decentralized exchanges across the globe that include Sydney, Tokyo, London, and New York. Getting to know the exact times of trading sessions is crucial as many traders are looking for certain hours with high liquidity, tighter spreads, etc. On the other hand, some traders prefer to trade at times when the markets are slow and less liquid and avoid times at which economic data is released. 

With that in mind, here are the four trading sessions each trading day:

  1. Sydney session: 21:00 GMT (5 pm EST) to 06:00 GMT (2 am EST)
  2. Tokyo Session: 23:00 GMT (7 pm EST) to 08:00 GMT (4 am EST) 
  3. London Session: 07:00 GMT (3 am EST) to 16:00 GMT (12 pm EST) 
  4. New York Session: 12:00 GMT (8 am EST) to 21:00 GMT (5 pm EST) 

Taking the above into account, the forex market opens at 5 pm EST (21:00 GMT) on Sunday and closes at 4 pm EST on Friday (20:00 GMT). 

TIP

According to analysts and traders, the best time to trade the forex market is during the overlap of the New York and London exchanges. It is estimated that 50% of all forex trades are executed during these hours..

Forex Trading Basics – The Bottom Line

In a nutshell, understanding the technical terms and jargon used in the forex market can help you in your progress as a trader. Occasionally, you’ll contact your brokerage firm or read an article with some of the terms above – so getting familiar with these terms will make the process of learning and your forex trading journey more effective and exciting. 

If you have no previous knowledge in trading, it is advisable to take an online forex trading course to achieve confidence and develop your own trading strategies before you start trading. We also suggest you visit our guide on what is forex and how does it work. As they say, knowledge is power and power is knowledge. 

FAQs

How’s the forex market regulated?

Generally, there’s no one regulatory body that is responsible for the regulation of the forex market. However, the primary market participants in the forex market are banks and retail forex brokers, which are regulated by various regulatory agencies. Therefore, even though the forex market is not directly regulated by one regulator, all transactions and dealers must be approved and licensed by a regulatory authority in the area they provide services. 

How to trade news in forex?

The forex market is highly influenced by market news and economic data. As such, many traders monitor news and important information released on the market to assess currency pairs and based on that, take trading decisions. For that purpose, it’s important for a forex news trader to find a news source provider and understand the key factors that impact a certain currency pair’s price movements. 

Can you make a living from trading forex?

Well, in essence, yes you can. But that is very difficult and only a few reach the point in which they have the skills to generate consistent profits over the long term.   

What is the minimum capital required to start trading forex?

If you want to trade forex, you can basically with just $100. However, it is recommended that you make an initial investment of at least $500-$1000 to get the most out of your trading forex account. 

What’s the best way to trade FX currencies?

The key to successful trading in the forex market is to develop a trading strategy or trading style that works for the long term. There are lots of ways to do that and each successful trader has different strategies. To start, you need to know how to read candlestick charts, use technical analysis indicators, and effectively interpret fundamental factors and central bank announcements that influence currency prices. 

A Beginners Guide to Forex Trading Strategies

If you have decided to start trading the forex markets, you should first know this – day trading or any type of trading is not easy. If you enter into the forex market without a trading plan or a strategy – you’ll be losing your money. Frankly, no one guarantees that such a trading system ensures you’ll be making money as a forex trader. After all, psychology and discipline play a big role in forex trading and quite often are considered to be the main factors for a trader’s success.  

Still, you want to do the best of your ability to increase the chances of success. Or, in other words, you need to find a trading strategy or your own trading style that you feel comfortable with and that works for you. So, in this article, we introduce you to some of the basic forex trading strategies for beginners and help you find ways to analyze the markets. 

Key Points to Take Away

  • Technical and fundamental analysis are the primary techniques to analyze FX currency pairs
  • There are five simple forex trading strategies for beginner and experienced traders – supports and resistance levels, moving average indicators, breakout trading, range trading, and scalping trading strategy.
  • Besides developing a successful trading strategy, psychology also plays an important role in an investor’s trading experience. 

Ways to Analyze FX Currency Pairs

First, you need to recognize the methods used by traders to analyze the currency market. For that matter, the two techniques to analyze currency pairs (or any other financial instrument) are technical and fundamental analysis. Simply put, these techniques enable traders to get some clue about a certain market, either by using a chart showing prices or by reading the news and analyzing economic data. While some traders use only one method of analysis, some prefer to combine fundamental and technical analysis to determine entry and exit levels. 

No matter what, you need to at least have a basic understanding of both methods. In the best scenario, you can become an expert at one of the techniques or find the ideal way to combine the two. 

Technical Analysis 

In simple terms, technical analysis is a trading technique that attempts to help a trader to predict the price movement of an asset by using historical data and technical indicators displayed on charts. The theory of technical analysis is that past trading activity can help a trader to predict future price movement as the markets move in a repetitive pattern. Also, according to technical analysis traders, all the data is displayed in the chart and if a trader knows how to effectively read a trading chart, it is enough to be able to analyze the market and determine entry and exit levels. 

Fun Fact

Charles Dow, who allegedly introduced the theory in the early 18 century, is known as the inventor of the technical analysis theory. According to other sources, however, Homma Munehisa was the first person to use technical analysis in the Asian markets.

Fundamental Analysis

Unlike technical analysis, a fundamental analysis attempts to measure the intrinsic value of a currency pair based on economic factors and financial outputs. Consequently, a trader that analyzes a currency pair based on this approach will look at economic data published on the economic calendar, political events, market news, central banks announcements, and changes in interest rates. 

5 Forex Trading Strategies for Beginners

Only a few forex traders are able to find the right trading strategy and the right mindset straight from the first days of trading. In some ways, trading is a process of trial and error, which means you sometimes need to try, fail, and then try again another strategy. 

But no matter what your vision and goals for trading currencies, there are several basic trading strategies you need to be aware of. In some cases, even if you are not going to use a particular strategy, it is still crucial to know how the strategy or indicator works. Perhaps you’ll see a market forecast from an analyst with a certain strategy, so you want to know how to use it. Or, you might want to combine several trading strategies until you find the one that is right for you.

With that in mind, let’s take a closer look at some of the simple and highly effective beginners FX trading strategies:

1. Support and Resistance Levels

Using support and resistance level can simplify your trading and significantly help you find entry and exit points. It is one of the most common and effective strategies out there and is very often used by all types of traders. The reason is that because many traders look at the same levels, then some points in a certain market become crucial and indeed have some meaning.

Bear in mind that there are many ways to use support and resistance levels in trading, with some of the most popular include round numbers, Fibonacci levels, range trading support and resistance levels, and swing highs and lows.  

For example, in the image below you can see the EUR/USD chart forming a range trading formation with support and resistance levels. 

On the chart below, we have drawn Fibonacci retracement levels. For that matter, an investor needs to define a time period and draw the lines from the lowest level to the highest level in the specified period of time. 

2. Moving Average

Moving Average (MA) is a simple yet very powerful technical analysis indicator used by day traders and long-term investors. In simple terms, this market trends indicator shows the average price of a currency pair over a specified period of time and helps traders to identify entry and exit points. 

Once again, there are lots of types of moving averages including the simple moving average, exponential moving average, weighted moving average, etc. Also, there are different ways in which a trader can use this indicator – crossover, different lengths, combining moving average indicator with Bollinger bands indicator, etc. 

Generally, the MA is an excellent method to get an indication of the next price movement of a certain financial asset. According to this indicator, a trader buys the asset when the MA line crosses the price of the asset and vice versa.

3. Scalping Trading

There’s a rule in trading – The shorter the trades you make, the less exposure you have to market movements. Makes sense. The idea of a scalping trading strategy is that an investor tries to obtain small price movements in very short periods of time. For that matter, the forex trade could be seconds, or minutes but not longer than that. 

How to do that? That depends on the type of trader you are and whether you prefer to trade in times of high volatility or in times when the markets are calm. Regardless, it is an exciting way to trade FX currency pairs and is particularly used by forex traders due to the high leverage ratio provided by forex brokers (For example, SwitchMarkets offers a leverage ratio of up to 500:1 on FX currency pairs).

4. Breakout Trading

If you love action, then this is the right trading strategy for you. Breakout trading is a trading technique in which a trader is basically trading breakouts of support and resistance levels or high and lows (of the day, weekly, monthly, and all-time). For example, if the USD/JPY is trading during the day near the high level, a trader simply waits for the breakout and buys the pair once it breaks above the highest level of the day. 

It would be fair to say that breakout trading is essentially ‘trading the momentum strategy’ as you basically trade with the trend. Still, it’s a relatively difficult strategy as in many cases a false breakout occurs, meaning prices break above or below the identified level and reverse back to the contrary direction. 

5. Range Trading

Range trading is sort of the opposite of breakout trading (although it is certainly possible to combine the two). In basic, it is a trading strategy that involves buying and selling an asset inside a predefined range, meaning you buy the asset at the bottom support level and sell the asset at the high resistance level.

There are various ways to trade ranging markets and it usually works well in less volatile assets or in times when the markets are in a state of consolidation. For some people, this trading strategy is just more suited for their personality as it requires a lot of patience and discipline. Learn more from our Range Trading guide.

More Trading Tips and Tricks for Beginner and Experienced Traders

Apart from the five forex trading strategies and indicators above, there are more tools and tricks you can use to maximize your trading success. These include:

  • Using the Risk-Reward Ratio
  • Trading the News and Macroeconomics Data
  • Use Stop-Loss and Take-Profit Orders
  • Carry Trade Trading Strategy
  • Start with a Small Initial Investment
  • Focus on 1-3 Currency Pairs
  • Always know the Currency Trading Costs
  • If you’re Having a Bad Trading Day, Don’t Trade

The Psychology of Trading in the Forex Market

Let’s assume you have developed the perfect trading strategy and gained the necessary experience in the foreign exchange market. Unfortunately, that still does not guarantee your success as a trader. Trading is, more than anything else, a mind game. 

Much like individual and team sports, in trading, there are good and bad days. It’s a challenging profession, and in most cases, those who have mental toughness are able to become profitable traders. But, no one can really teach mental toughness and you’ll probably have to get into the forex markets and find out on your own if you have it. Still, what you can do to get some basic tools and understanding is to take online courses about psychology in trading, read books, and trade the markets with real money that you can afford to lose. 

FYI

There are remarkable similarities between poker and trading. As a matter of fact, because of the similarity, many proprietary trading firms are looking for successful poker players to join their teams.  

Summary

To sum up, the same way you do not want to get into a new adventure in life without a plan, you also cannot trade the FX market without having a trading strategy. And, even if you are not going to use the first trading strategy you have chosen at the beginning, it’s still better for you to start trading with a plan. If it doesn’t work, then simply change it and try another one instead. 

As a starting point, we suggest that you start with the tools and strategies that we have mentioned in this ultimate beginners guide. They are simple to utilize and widely used by other traders so you’ll be able to find lots of information on how to use them in your forex trading journey. 

FAQs

What are the best forex trading courses to find online?

Basically, there are plenty of online forex trading courses available. One online website that we highly recommend is HowToTrade – they provide extensive forex trading courses and cover all aspects of trading as well as the basics of the forex market. 

What are the best forex volume indicators?

Generally, volume is a vital indicator in trading, however, because of the way the forex market works (not via a centralized exchange), it is quite difficult to get information about the volume of FX currency pairs. Yet, if you wish to combine forex volume indicators when you trade forex, some of the best indicators include the Volume Zone Oscillator (VZO), the Chaikin Money Flow indicator (CMF), and the on-balance volume indicator. 

What are the trading mistakes beginner and experienced traders do?

Well, everybody makes mistakes. However, in trading, mistakes cost money so you need to try to avoid any mistake that might lead to a losing trade. Some of the mistakes beginner and experienced traders do are overleveraging their positions, trading with emotions, trading without a strategy/plan, revenge trading, trading multiple markets simultaneously, and not knowing when to take a break.

How to read currency charts?

A forex chart shows the exchange rate of two currencies trading one against the other. Each bar or candlestick shows the price change over a specified period of time, meaning you can analyze the currency pair by seeing its historical behavior. For technical analysis, candlestick charts are the best type of trading chart and provide a lot of information.

What should you learn first to start trading forex?

Before you work on developing your trading strategy, it is important to understand forex basics and understand what forex trading is and how it works. Then, take some time to read the news, learn how a trading platform works by practicing on a demo account, try different ratios of leverage, and find the currency pairs you want to focus on.