Tuesday, January 26

Understanding Forex Trading

Understanding Forex Trading

For many people trading seems to be a get rich quick scheme but in actual fact, it very far reality from that.
A lot of understanding and hard work has to be put into this whole thingy called FOREX. I shall attempt to explain some of the basics in forex trading. Or at least my understanding of the whole forex thing.
The following 3 charts
all relate to the same currency pair of USDJPY. They look so very different, don't they?

Time frames
Unlike the stock market which generally starts at 9 am and ends at 5 pm, trading in forex is a 24/7 thing. You can trade at any time of the day or deep in the middle of the night. You can watch the market in various time frames of M1, M5, M15, M30, H1, H4 to MN. It basically means there is a chart which updates by a minute, 15 minutes, hourly and up to monthly. I generally look at H1 (hourly chart), H4 (4 hourly chart) and D1 (daily chart).

I believe the reason why they are called candlesticks is probably due to them resembling candles with a wick at the top and bottom. In the above picture, there are 2 such candles.

Green candle - This indicates that the price is going upwards (bullish) with the bottom green as the opening price and the top green as the closing price.

Red candle - This indicates that the price is going downwards (bearish) with the top red as the opening price and the bottom red as the closing price.

Candle wicks - The thin line that protrude from the green and red candles indicates the highest or lowest price it ever went to during that time frame.

Try and see if you can figure out the trend from the above time frame charts.

Similar to shares trading where you are required to pay a commission every time you place buy or sell a share, it is the same when you trade in forex. But over here it is called a 'spread' and can range from 3 to 12 depending on which currency pair you are trading. Example in the below picture, the spread for NZDUSD is 3 and NZDCHF is 10, meaning you need to earn more than the spread of 3 or 10 pip before it's considered your profit.

Forex trades up to 4 decimal points and every increase or decrease of 1 point is equivalent to 1 pip. Using the same picture above for illustration, if i were to buy the currency pair of NZDUSD at 0.6371, hoping that the price will go up, it would have to reach a price of at least 0.6375 which is an increase of 4 pips before it's considered a profit 1 pip (0.6375 - 0.6371 = 4 pips increase less spread of 3).

Ok, that's about all for the basics, i will be back with more as i learn more.
I am currently updating my trades here, so check it out!

1 comment:

  1. hello! this blogpost is great and simple for beginners to forex trading!
    looking forward to more of your posts :)
    care to share how beginners can start forex trading locally? eg the administrative work and procedures.