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Education Material

1.What is forex?

Forex (also known as FX and foreign exchange) is the market where one national currency is exchanged for another one. Unlike other financial markets that operate at a centralized location (i.e., the stock exchange), the worldwide Forex market does not have a central location. A transaction in Forex market could be as simple as a tourist buying foreign currency or as complex as a multi-level strategy executed by the bank, involving different currencies and multiple settlement dates.

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It is a global electronic network of banks, financial institutions and individual Forex traders, all involved in the buying and selling of national currencies. A major feature of the Forex market is that it operates 24 hours a day, 5-6 days a week, corresponding to the opening and closing of financial centers in countries all across the world. At any time, in any location, there are buyers and sellers, making the Forex market the most liquid market in the world.

There is no central overseeing body which would oversee or control the forex market. In fact most governments have adopted a free-floating model for their currency, when the currency is not kept on any artificial level (pegged) against another currency, but is allowed to float freely and only the market determines the currency rate. However, that does not mean that currencies are immune from official attempts to influence the rates. From time to time the central bank of a particular country may decide that it is necessary to intervene in the market to achieve certain goals in the country’s economy or to make sure that the market performs in orderly fashion. Interventions are occasionally seen in practically all currencies and are one of the factors which affect the currency rates.

Why forex is easy for everyone

  • You can trade in the foreign currency market. It is available to anyone and everyone.
  • You don’t have to be a mathematical genius to trade in the forex market.
  • You don’t have to be an economist to trade in the forex market.
  • You simply have to learn what trading signals to watch for and how to respond when you see those signals.
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2. How to make money in the forex market?

What is being bought and sold (and for what).

Traders can generate profits (or losses) whether a currency is rising or falling by buying one currency, which is anticipated to gain value against another currency or selling one currency, which is anticipated to lose value against another currency. Taking a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. Alternatively, a short position is one in which the trader sells a currency that he anticipates to depreciate and aims to buy the currency back later at a lower price.

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Understanding some basics in forex

Leverage, Margin

You have access to leverage in the forex market. Leverage gives you the ability to trade a position larger than the amount of money in your account. For example, using leverage, you could place a $100,000 trade by only using $1,000 of your own money in your account.

Word of caution: leverage is a tremendous tool for traders. It allows you to make more money on trades than you normally would if you were using only your own money. However, it also allows you to lose more money on trades than you normally would if you were using only your own money.

When you trade with leverage, you have to post margin. Margin is the amount of money you have to set aside in your account when you enter a trade. For example, if you are using 100:1 leverage and you buy 1 mini lot—which is worth $10,000—you must set aside $100 as margin ($10,000 ÷ 100 = $100).

Pip

You will be using pips to determine your profits and losses in the forex market. A pip (percentage in point) or point is the smallest unit of measurement in the Forex market. Most currency pair quotes are carried out four decimal places—i.e. 1.4500. The last decimal place is called a pip. For example, if the exchange rate of a currency pair moved from 1.4500 to 1.4510, we would say that the price moved up 10 pips. You make money when the pips move your way in a trade.

There is an exception: Any exchange rate that contains the Japanese yen or the Thai baht as one of the currencies will only be carried out two decimal places. According to the International Organization for Standardization (ISO).

Currency Pair

We wouldn’t have a Forex market if we weren’t able to compare the value of one currency against the value of another currency. It is this comparison that drives prices. Forex contracts are always quoted in pairs.

One distinction you do need to make when looking at a currency pair is which currency is the base currency and which currency is the quote currency. The base currency is the first currency listed in the pairing. For example, the base currency in the EUR/USD pair is the euro because it is listed first.

The base currency is important because it is the strength or weakness of this currency that is illustrated on the chart. For example, as the chart of the EUR/USD moves higher, it means the value of the euro is getting stronger as compared to the U.S. dollar.

The quote currency is the second currency listed in the pairing. For example, the quote currency in the GBP/USD pair is the U.S. dollar because it is listed second. The quote currency is important because it is the currency in which the exchange rate is quoted.

For example: when you say the exchange rate between the British Pound and the U.S. dollar is 1.7533, you are saying it costs $1.7533 to purchase ₤1. The same principle applies to the USD/CHF pair or any other currency pair. The Swiss franc is the quote currency in the USD/CHF pair. So when you say the exchange rate between the U.S. dollar and the Swiss franc is 1.2468, you are saying it costs 1.2468 Swiss francs to purchase $1.

Bid and Ask

Each currency quote consists of two components: bid and ask, with bid always quoted first and appears on the left side of the price. For example, EURUSD is given as 1.5794/1.5796, where 1.5794 is the bid.

If you want to buy the base currency, you would trade at the ask price quoted to you. If you want to sell the base currency, you will trade at the bid price.

Stop-loss

Stop-loss function is exactly what it is – it is used to limit potential losses on your open position if the market moved against you. For example, if you opened a buy order, you can set a stop loss 20 pips less than the price of your open position. In that case, if the price of the currency pair moves down by 20 pips your position will be closed automatically.

It is recommended to trade 4 main currency pairs:

The individual trader attempts to determine trends in the price movements of currencies, and by buying or selling currency pairs, attempts to gain profits. The most often traded currencies, the major currencies, are those of countries with stable governments and respected central banks that target low inflation. Currencies that often trade along with the U.S. Dollar include the European Euro, the Japanese Yen, and the British Pound as they are the most liquid. A trader can trade these currencies in any combination.

The Euro was created on 1st January 1999 by uniting national currencies of 12 European countries. Other countries soon joined and adopted the Euro. Today the daily turnover of the EURUSD pair is 3 times larger than all equity markets (the stock exchanges) of the world combined. This makes the pair a particularly attractive trading instrument. The other 3 major pairs are:

GBP/USD, USD/JPY, USD/CHF

Another term you are likely to hear in relation to currencies is “cross”. Traditionally cross means a pair which does not include the domestic currency. However, it also means simply any pair which does not include the USD.

Depending on which time zone you are in, you may find that some regional currencies are more popular in your region then others. For example, the North American market hours usually see activity in Canadian dollar and Mexican peso, where the Asian market may concentrate on Australian dollar, New Zealand dollar and Japanese yen. In recent years, due to economic development in these countries, the Russian ruble, Chinese yuan, Indian rupee and Brazilian real became very popular among some traders.

However, let’s not forget that approximately 80% of the forex market turnover usually falls on the EURUSD pair. Especially if you are a trader with limited trading experience, you are highly recommended to concentrate on the four major pairs discussed above.

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3.Members of the Forex market

Commercial banks, Central banks, Investment funds, financial institutions and individual Forex traders – each member is interested in buying at lower price and selling at a higher price. Each member has his own function in the forex market. Central banks are responsible for the monetary policies, such as effecting currency intervention, change of the discount rates and reservation standards. Other market participants rapidly react to such measures and therefore influence the currency rates. Commercial banks provide liquidity for their own funds and execute clients’ orders. Brokerage companies allow individual traders to effect operations in the currency, stock and commodities markets.

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Why Brokers are needed

Traders receive the economic news, datafeeds and other valuable forex market information from the news agencies, such as Dow Jones, Reuters, Bloomberg and others in real time and make decisions regarding buying or selling currency. Today the individual trader can receive all this information from the forex broker. The broker provides the trader with the necessary software, the dealing platform, where the trader can make orders in real time, see the trading results on his/her account, use indicators, graphs and many other tools in order to succeed in the forex market. Brokers provide leverage trading for their customers, which allows them to trade larger positions then the value of the initial deposit.

Forex-Metal provides its customers with state-of–the-art Meta Trader 4 platform, live market datafeeds, low margins, various deposit and withdrawal options and great sign-up bonuses.

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4.Fundamental analysis

It is important for the traders to spend the time to understand the underlying forces moving the market (fundamentals) as well as what is happening in price, volume and volatility (technicals.)

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Fundamental analysis is the analysis of the economical and political condition of the countries, the currencies of which are traded in the forex market. The purpose of this analysis lies in the estimation of the possible influence by the economic forces on the currency rates fluctuation. And higher yields available in one economy should fundamentally strengthen its currency.

All information could be divided into two major categories: predictable and unpredictable factors.
Unpredictable factors include sudden political occurrences, military acts, natural and other force-major cataclysms. It is impossible to forecast nor to estimate the influence of such occurrences on the market. Unlikely a beginning trader should risk entering the market during strong rate fluctuations being influenced by the unpredictable factors.

Predictable factors contain the macro-economical news. The trader knows all about these factors: publication date and time, forecasted value of the indicators estimated by the market experts. But you can never be sure of the market reaction to the indicator factual value, if it eventually differs from the forecasted.

Here are some most important fundamental factors that play a role in the movement of a currency.

Economic Indicators

Economic indicators are reports released by the government or a private organization that indicate a country’s economic performance. These reports are published at scheduled times, providing the market with an indication of whether the economy has improved or declined. And any change from the normal range can result in the large price and volume movements.

The Gross Domestic Product (GDP)

The GDP shows the total market value of all goods and services produced in a country during a given year and it measures the country’s internal growth. Before the final GDP report is released the advance report and the preliminary report are published.

Retail Sales

The Retail Sales report measures the total receipts of all retail stores in a country. This is a timely indicator of broad consumer spending patterns and is adjusted for seasonal variables.

Industrial Production

This report shows the change in the production of factories, mines and utilities within a nation. It also indicates the degree to which the capacity of each of these factories is being used.

Consumer Price Index (CPI)

The CPI is a measure of the change in the prices of consumer goods across over 200 different categories.

Forex-Metal company provides its customers with weekly market fundamental analysis and news calendar free of any charge.

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5.Forex Psychology

Here are a few essential psychological principles for successful trading.

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  • The most significant principle is trading with a regimented plan and system. This plan should include sophisticated research and examination of the currencies as well as stop and limit levels of the trade. This prepared plan should have an analysis of the expected upside along with the downside.
  • The next principle is cutting your losses at an early stage and being loyal to your profit earners. Do not be caught in the belief that every trade should be profitable. If half the number of your trades are earning, you are on the right track. The key to making sure you still get enough even if only half of your trades are winners is to allow your winners to run and to minimize your losses.
  • Another principle is not let your emotions rule in trading and to be objective with your decisions. Be sensitive enough to see the factors that may have influences the changes that transpired against the original analysis you had mapped out. If the substantial signs are there, reconsider your losing position.
  • One more principle talks of the most common mistake traders commit - overtrading. Leveraging your account too high by trading far larger than before puts you in a very vulnerable position. Always analyze the charts correctly and use this information to derive at a sensible trading decision.
  • Lastly, the basic and most essential principle is awareness. Never follow blindly by entering the market first, figure things out before plunging in. Do not be greedy—be patient and set realistic targets daily. Admit your mistakes and never commit them again—be open to learning. Be confident and radiate a winning aura. Invest your valuable time to truthfully and completely comprehend the complexities and fundamentals of Forex trading.
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6. Technical Analysis.

Technical analysis is a method of predicting the price of a financial instrument based on mathematic (not economic) calculations. Another words, unlike in fundamental analysis, economic factors are not taken into the account in technical analysis. At first glance it may look absurd to try and predict the prices without taking into account interest rates, unemployment data, GDP levels, trade balances and so on. But those traders who rely on technical analysis only when buying or selling think that the price itself reflects the economy. They analyse the price movements in the past using various methods and predict what would be the price in the future. The results of such prognosis are usually correct. There are a vast number of theories and methods to analyse them. We use here one example only to illustrate that.

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Let’s look at the intraday chart of EURUSD for 2007.

Tut_graph

There are two lines on the chart that indicate sliding medium prices of the pair: blue – 100 days and red – 50 days period. The strategy would be to buy when the price is approaching the red line from below (blue arrows on the chart) and to sell when the price returns to red line from above. As you can see, this very simple indicator may help to make a profit on the rising trend. Of course the same indicator is used on the down trend also when the red line is below the blue one.

Many traders end up loosing money because they simply do not learn how to use technical analysis indicators. It is not enough just to call up a chart on your screen, it is important to know how to read it. There are plenty of indicators available in your MT4 terminal. If you still do not have one, you can download a free demo. It is important to know that you do not need to learn all the indicators. It is recommended to choose a few and to learn them inside and out. Once you have a deep understanding of an indicator you should be able to anticipate what it will look like when you apply it to the chart. You would be surprised if you new that some major traders use a very simply and straight forward techniques for their analysis.

These are the most commonly used indicators:

Moving averages
Parabolic SAR
Directional movement index (DMI)
Relative strength index (RSI)
Slow stochastics
MACD

Moving Averages are technical tools designed to measure the momentum and direction of a trend. Different types of Moving Averages can be used to help traders make future decisions about their trades. Moving Averages are clear and simple to use and they can be easily incorporated into any overall strategy.

Simple Moving Average

The simple moving average is formed by computing the average price of a security over a specified number of periods. For example, a 3-day simple moving average is calculated by adding the closing prices for the last 3 days and dividing the total by 3. The averages are then joined into moving average line. Once a price has crossed a moving average line, it might indicate an upwards or downwards shift.

Exponential Moving Average (EMA)

The exponential moving average gives greater value to the most recent prices and the weighting is done exponentially. For example, the past values of the security receive the much less weighting and the most recent prices are more significant in determining the value of the indicator.

Smoothed Moving Average

The smoothed moving average is similar to EMA, but it considers all available data. The earliest price values receive a lower weighting. In addition, the smoothed moving average is mostly used to smoothen the price action, removing short-term volatility, allowing a better understanding of the long term momentum of the market.

Here are a few typical methods that lie at the basis of most of the strategies and methods, based on Moving Averages.

  1. Crossovers - arise when the price rises or falls below the moving average, signaling the end or the beginning of a new trend. They are usually used in combination with other techniques of evaluation of the price action.
  2. Divergence/Convergence - A divergence occurs when the trend has an upwards direction, but the moving average is decreasing. A convergence happens when the market trend is bearish, but the moving average is increasing. These conditions could lead to a future market reversal and it is advisable to open a counter-trend position..

Head And Shoulder Patterns

A head and shoulders pattern consists of a peak followed by a higher peak and then a lower peak with a break below the neckline. The neckline is drawn through the lowest points of the two intervening troughs and may show the upward or downward direction.

Oscillators

Oscillators are a group of indicators that were developed due to the difficulty of identifying a high or low value in the course of trading. Oscillators are aimed to identify the indicator level that hint at tops or bottoms of the price action. Oscillators can be used in ranging and trending markets. Some oscillators are very sensitive to the price action (Williams Oscillator) and they reflect market movements accurately. Some oscillators, like RSI are less volatile and are more precise in their signals, but less sensitive to the price action. Some oscillators are aimed to determine various oversold/overbought levels of the asset.

Another extremely important tool is Bollinger Bands. It is used to detect periods of low volatility in the market, reflected by drawing together bands. Low periods are usually followed by sharp breakouts and sudden increase in volatility, which is an excellent opportunity of the trader to enter the market that offers potential significant profits with well defined risks. It is also recommended to have at least a basic understanding of Elliot Wave. The applications of the technical analysis in the forex market would be to determine the overall currency trend as well as for short term timing of trades.

It is a good idea to set up your screen layouts in such a way that you see intraday charts of 4-6 major pairs at the same time. This is possible to do in your MT4 trading terminal. For intraday trading you may want to use 30 minute charts although other periods are also available. You will notice that sometimes currency pairs move in unison and may be tempted to trade a few pairs at the same time. If you are a beginning trader you should avoid doing that and try to trade one pair at a time. Stick to tried and trusted simple techniques available on the market. Do not try to invent the bicycle. It will save you time and money and will help you to trade successfully.

Understanding Candle Stick Charts:

Candlestick chart displays open, close, daily high and daily low prices. Different colors are used to show if the price went up or down during the day. Green bars indicate the price rise, and red bars indicate a decline.

Understanding Support and Resistance

Support and resistance are showing how supply and demand met. Supply is the indication for the bearish pattern and selling. Demand is the indication for the bullish pattern and buying. As demand increases, prices go up and as supply increases, prices go down. When supply and demand are equal, prices move sideways. Support level indicates the price at which buyers take control and prevent the price from falling lower. Resistance level indicates the price at which sellers take control and prevent the price from rising higher. Support levels show the price where most of investors believe that prices will move higher. Resistance levels indicate the price at which most investors expect that prices will move lower. A breakout above the resistance level shows an excessive demand as more buyers become willing to buy at higher price. The breakout below the support level shows that the supply line has shifted downward.

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7.Trading strategies.

Like in the case with technical analysis, there are hundreds of trading methods and techniques. We will just mention the most well known and easy understood ones. These are:

Pivot Points
Forward Rolls
Forward Points
Carry Trades

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Some traders would also name options as a separate trading strategy, which of course it is. But to discuss options and futures we would need a separate study course.

Pivot points have been used by foreign exchange traders for many years. They use yesterday’s high low and close prices to project five levels of potential intraday support and/or resistance for the current trading day’s activity. To calculate a pivot point you need to add the yesterday’s high, low and close prices (H+L+C) and divide it by 3.

First resistance level = (2 x Pivot point) – L
First Support level = (2 x Pivot point) - H
Second Resistance = Pivot point + (H - L)
Second support = Pivot point – (H – L)

Each level can be put on the intraday chart as a horizontal line. 30 minute chart may be used for that. It is likely that the trade will initially start between first support and first resistance levels. Of course on some days when the market is moving quickly and away from yesterday’s levels these points will not help you. However, on most days the market will appear as it is influenced by projected pivot points levels and it may show you for example when buying a particular currency pair should be delayed. We would not go through other strategies here as there are hundreds of books and a lot of free material available on the Internet which discusses all the strategies in details. Like with technical analysis, we recommend concentrating on 1 or 2 strategies and perfecting your trading using them. Only with knowledge and experience you can achieve substantial results.

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10:11 GMT   Bid Ask
EURUSD 1.38334 1.38359
GBPUSD 1.67885 1.67911
USDJPY 102.319 102.341
USDCHF 0.87947 0.87969
USDCAD 1.1003 1.10053
AUDUSD 0.93407 0.93431
NZDUSD 0.8595 0.85977
EURJPY 141.536 141.563
GBPJPY 171.789 171.833
XAUUSD 1300.77 1301.27
OIL 110.04 110.11
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