Currency Trading Basics Everything you need to start profitable trading today Published by Dean Watt at Smashwords Copyright 2013 Dean Watt Smashword Edition License Notes Thank you for downloading this free ebook. You are welcome to share it with your friends. This book maybe repoduced, copied and distributed for non-commercial purposes, provided the book remains in its complete original form. If you enjoyed this book, please return to smashword.com to discover other works by the author. Thank you for your support. Table of contents Learn forex trading What is a currency pair? Forex pips explained - What is a pip? Forex Lots Explained - What is a lot? Leverage Forex margin explained - What is forex margin? What is the risk of ruin? Forex Money Management is the traders friend Want to learn how to become an auto forex trader ? About The Author Learn forex trading Trading the foreign exchange market is a great way to make extra income. However to be able to earn consistent profits takes time, dedication and effort. The only way we can become profitable is through learning. When we take the time to learn we begin to understand how we can make money from the forex market. As we learn we are developing essential skills that will make us money for life. Why learning and experience matters When we are starting out on our journey to trading success. We do not understand the trials and pitfalls that lay ahead. We believe that making money from the markets is easy. All we need to do is follow a technique or an indicator and watch the profits flow. The reality is very different. Instead of making profits we lose money. We keep losing money until we have learned enough skills to become successful. Only by trading and learning and learning and trading do we gain the understanding to become profitable. How do I know? Well I have been on this path too. I have dedicated myself for years to learning and improving. I have gained the skill and knowledge to become consistently profitable in the forex market. Along the way I have learned that there is more than 1 way to make money in forex. We are all unique and we have to find a way to trade that works for us. Here I share my knowledge on all aspects of making money from the foreign exchange market. The basics – The foundations of success One of the most important lessons I can give you is to learn your basics. When we understand these basic building blocks we have the knowledge that underpins all of our future forex trading and knowledge. The forex basics are: • Pips • Lots • Leverage • Margin You will learn about these subjects in this e-book and this will give you the back ground knowledge you need. By learning these basics you have given yourself a great foundation for your future trading. These four topics tell us: • What profits can be expected per pip • The basis of risk control and over-trading • Teaches you how to maximize your profits with broker leverage while minimizing risk • How our brokers lend us money to trade and how this effects our trading Learning about advanced forex concepts Now that we understand the building blocks we can move on to more advanced skills and concepts. This is where we can start to learn the how to make money and develop the skills to keep it. The core advanced concepts are • Money management • Risk of ruin Be a better trader with money management On our road to successful trading we eventually discover the importance of money management. Every trader must learn this skill to be successful. However money management is normally learned the hard way. After we have lost thousands of dollars and years of struggle trying to be profitable Once we understand the power of these two concepts our trading will never be the same again. Money management turns us into a professional trader and using money management means we have taken a giant step towards profitability. My 15 minute forex investing system is available to you for free on my website. It has all the tools you need to start making money in forex. It is a complete money management system and can be used by all traders to help control our risk and boost our profits. This gives us a professional way of managing our money. Follow a professional for accelerated results One way we can accelerate our profits and short cut our learning is by following a professional trader. As we know knowledge and profitability takes time to learn. It takes on average 3 years of hard work for a trader to become consistent enough to make money. Most people trade forex because they want to make money but most fail in the first year. By following a professional we can start making money because a professional has found their own way of trading, they have learned the skills and persevered and become profitable. To follow a professional trader their trading account is linked to our trading account via the internet. When they trade we trade and this gives us an automatic way of making money. How I make my money from the forex market We have talked about finding our own way of earning profits from the forex market. The way I make my money is by being a money manager and I use an investment approach. I use my professional money management strategy and combine it with professional signal providers. I am looking to use a professional (or portfolio of professionals) to earn between 20% and 100% return per year. I then use my money management system to protect myself and control the trading signals I receive. If a professional stops being profitable then I simply remove them and replace them with a more profitable trader. By making consistent returns every year I use the power of compounding to multiply the money my trading account. This gives me an automated way of making consistent long term profits and is a true road to wealth. It takes me 15 minutes a day to control my traders and make my money. This is my 15 minute forex investing system. You can sign up to use my system for free here. What is a currency pair? All currencies are traded in pairs and these pairs tell us which to countries currencies are being traded. The pair is defined as the Base/ Quote. We read the the currency pairs as follows. EUR/GBP (Euro / British Pound) USD/CAD (US Dollar / Canadian Dollar) EUR/CHF (Euro / Swiss Franc) GBP/USD (British Pound / US Dollar) ETC. When we buy a currency pair we are buying the first part of the currency pair which is called the base. We are also simultaneously selling the other currency called the quote. When we sell a currency we sell the base and buy the quote. The base is always a fixed amount. The base is always 1. Forex pips explained - What is a pip? A pip is the 4th decimal place when looking at a currency pairs price. A pip is 0.0001 move in the currency. So if we are trading EUR/USD at 1.2984 and the currency moves to 1.2985 it has moved 1 pip. This is important as profit and loss are calculated using pips. Let’s say we have a pip worth $10 and we have a profitable trade of 10 pips. $10 X 10 pips would give a profit of $100 on the trade. The exception to the rule When trading the Japanese Yen (JPY). In this case the 2nd decimal point is the pip. A Yen pip is a 0.01 move in the currency. Let’s say we are trading USD/JPY at 78.15 and the currency moves to 78.14 it has moved one pip. 4 or 5 digit broker? Depending on which forex broker you choose we may have either a 4 decimal place price feed or a 5 decimal place feed. We know that pips are the 4th decimal place on most currencies. The 5th decimal place offered by some brokers is called a pipette and is 1/10th of a pip. Let’s say a pip is worth $10. If on a 5 digit broker the currency moves 0.00001 which is the smallest move in any currency. This move is worth $1. What about the Yen? On a five digit broker the yen (JPY) has 3 decimal places and the 3rd decimal is the pipette. Again it is 1/10th of a pip. Forex Lots Explained - What is a lot? A lot is often called a Standard Lot, but there is also a Mini Lot and a Micro Lot. A Standard Lot is 100,000 units of currency. A Mini Lot is 10,000 units and a Micro Lot is 1000. CBT means this lot size is unavailable and Cannot Be Traded. As we can see lot size and the lot size we choose to trade can affect how much of a currency we are trading. This in turn controls our risk profile. It is worth noting that 0.01 of a standard lot is the same as 0.1 of a mini lot and 1 of a micro lot. They are all 1,000 units of currency. It doesn't matter which we choose for our account however be careful when selecting lot sizes as some trading platforms ask us to select the scale we are using. We must select the scale which is either standard, mini or micro. However when we us a lot size of 0.1 with different scales it produces different results. It means 10,000 when using a standard lot, 1,000 for mini and 100 for a micro lot. If we are using the micro lot scale and are using 1 lot (1000 units) and we change the scale to trade mini lots instead. If we forget to change the lot size from 1 to 0.1 we will be trading (10,000 units) which is 10 times more risk. This can be an easy though expensive mistake. Choose the lot size that is right for us. I have provided free calculators on my site that have all 3 scales available. Leverage Most forex brokers will offer you leverage, this can be as low as 1:1 or as high as 1:500. There are 2 types of leverage, margin leverage and real leverage. Margin leverage When you open any trade you have to give you broker a deposit from your trading account. If you wish to open 1 standard lot you are buying 100,000 units of currency. Let’s say we want to open 1 standard lot USD/CAD and we trade with a dollar account. Without leverage we would have to deposit $100,000 with our broker to open a single trade. To trade safely we would need account size in excess of $4,000,000. Without margin leverage it is almost impossible for private traders to trade the forex market. The leverage offered by brokers allows private traders to open trades that would normally be too large for their accounts. Say we open 1 standard lot of USD/CAD but this time we have a leverage of 1:100. Now instead of needing $100,000 we only need 1% to open our trade, which is $1,000. Margin leverage allows private traders access the forex markets. Real Leverage Margin Leverage can be a double edged sword. This happens because margin leverage allows you to open lot sizes far in excess of what your account can manage. Therefore we have to be careful to not over trade and blow up our accounts. Real leverage is the amount of risk you are taking per trade. Example 1 $10,000 account $10 per pip per standard lot. USD/CAD Stop loss 200 pips We open 1 trade with 5 standard lots and we are using 1:500 leverage on our account. This means we are buying 500,000 units of currency. To open the trade we would need to deposit only $1,000. This would leave $9000 dollars for our account margin. (See margin section for more detailed explanation). The trade goes against us and hit its stop loss of 200 pips $10 (per pip per lot) x 5 (lots) = $50 per pip for this trade. $50 x 200 pips = $10,000 loss. A margin call would have happened when the losses hit $9,000. On this trade Real leverage combined with margin leverage has wiped the trader out. Example 2 $10,000 account $10 per pip per standard lot. USD/CAD Stop loss 50 pips with a 5% maximum account loss. ($10 pip x 50 stop loss) We open 1 trade with 1 standard lots we are using 1:100 leverage on our account. We buying 100,000 units of currency. To open the trade we would need a deposit of only $1,000. This would leave $9,000 dollars for our account margin. Again we hit our stop loss. This time however the result is different. $10 (per pip per lot) x 1 (lots) = $10 per pip for this trade. $10 x 50 pips = $500 loss for trade This time the trader has managed their real leverage risk to a maximum of a 5% loss. Even though we have a losing trade this trader has survived and is able to make another trades. How to control your real leverage. This is what this book and companion website is about. Controlling your risk while keeping you trading. Take a look at money management, risk of ruin and forex margin explained to see how you can reduce your real leverage whilst making the most of margin leverage. By controlling our trading risk we are allowing our trading systems the time to make money. Forex margin explained - What is forex margin? When we trade currencies we are effectively trading very small amounts of a currency. So small that if we were to trade a single unit of currency we would find it extremely difficult to make any money. [...]... commercial trading programs can be re-tuned and to make money we need to find the ones that can To be able to re-tune a commercial trading program we need to use a trading platform Most commercial forex trading programs use the Metatrader 4/5 platform To be able to re-tune a trading program correctly we need to use historical market data This data has past prices for a currency pair and this data comes in many... always need to be sat at our trading terminal otherwise we will miss the trades Many traders do not have time to spend all day in front of the computer We are either employed or have other commitments When time is short traders often look to automatic trading to solve this problem because with automated trading we use our computer to make trades for us Here I will show you how to use auto -trading to make... providers and currency pairs It is our framework, control and protection For more information please see the money management section Forex investing part 2 – How to use a signal provider to make money Now we have used money management to protect our trading account we need to understand how to use signal providers to make money First we need to choose which signal provider we wish to follow We need to choose... entered the inputs into the calculator we get an answer of $3178.93 for 1 standard lot As we only wish to risk $500 dollars per trade (5% risk) $3178.93 (1 standard lot) is far too large To find the correct lot size for our trading risk we need to use the calculator We need to enter multiples of 1000 units as each 1000 equals 1 micro lot In the calculator we enter the number units to see if the capital... units of currency The initial margin is a percentage of this amount Leverage size to initial margin NOTE the initial margin is in the base currency If we open USD/CAD it would in USD If you opened EUR/GBP it would be EUR etc We have a free margin calculator with this e-book The calculator stops over trading and margin calls To start we enter our leverage into the calculator Remember the currency. .. understand why this happens and how to avoid it My aim is to teach traders how to make sustainable realistic returns of between 20% to 100% + every year I will give you no hype, lies or BS and I will show you how you can make these returns even if you have no trading experience What is auto -trading Auto -trading is when we trade the forex market automatically We do not choose when we trade our computer... have included a FREE calculator on my companion website to help with the calculations First work out the initial margin for each currency pair we are trading To do this we will need to know our leverage and the exchange rates for the base currencies to our trading account currency Example Account currency USD Leverage 1:100 EUR/GBP GBP/AUD Etc In the example we would need to know the exchange rate for... of risk for your trading account is 0% Anything other than 0% will result in a blown account and a serious loss of money You may be thinking that this will not happen to me Remember unless you have a risk of ruin of 0% it is just a matter of time How to find the win loss % and how to work out number of units of money? The website shows you where to find the information you need to be able to use all...We need to trade large volumes of a currency to make any meaningful gains For instance a 1 standard lot is 100,000 units of currency To trade this we would have to buy 100,000 of the base currency e.g $100,000 if trading 1 standard lot of USD/CAD As most private traders could not afford to buy $100,000 worth of currency our forex broker offers us a margin trade Let’s say we wish to open 1 standard... of 30% You will know what is right for you Whatever the amount that you have chosen, this is the amount that you use when working out your risk of ruin Example £10000 trading account and the trader is willing to risk 33% then £3333 is used to work out our risk of ruin £10000 trading account and the trader is willing to risk 50% then £5000 is used to work out our risk of ruin Risk of Ruin Calculator Above . Currency Trading Basics Everything you need to start profitable trading today Published by Dean Watt at Smashwords Copyright. shows you where to find the information you need to be able to use all of the 3 calculators provided. On the risk of ruin calculator you will be asked to