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Education / Forex Guide

Forex Guide

A Guide to the World of Forex

AGM Markets places great emphasis on Forex Education. Our Forex guide gives a detailed explanation regarding the terms and notions applied on the international foreign exchange market. Our aim as a company is to enlighten you and increase your knowledge based on everything you need to know in order to trade with confidence.

We believe that before jumping into the unpredictable and exciting forex market, people must learn the basics of how to trade forex. This section can be used as a leading light which will help traders develop their trading skills through education and training. It will be a great use for both experienced traders and beginners in their daily trading in Forex.

What is Forex?

Forex stands for "Foreign Exchange" and it is the largest financial Market in which currencies are traded. Currency Trading is the world’s most traded market, consisting of more than 5 trillion Dollars in daily volume. In the Forex Market, currencies are traded in pairs against each other. Opening a trade involves the buying of one currency and selling of another currency simultaneously. The value of one currency is determined by its comparison to another currency. Ex. EUR/USD, GBP/USD. Forex offers some unique opportunities such as the massive trading volume, its geographical independence, the use of leverage to maximize profits and the low margin requirements in comparison with the big profits that could be made.

Why Trade Forex?

What makes Forex that interesting? Simply because it's the World’s largest financial market with over 5 Trillion USD traded a day!

  • Trading is exciting!
  • 24h trading – 5 days a week
  • Low investment required – 250 USD deposit with AGM Markets
  • Trading can be done from anywhere
  • With new technologies, trading can also happen while sleeping
  • Trading both rising and falling markets are allowed – Unlike the equity markets
  • Transparency - No hidden costs
  • Quick and easy entry - An account can be opened and approved in maximum 24h
  • Free trading software packages - AGM Markets offers MT4 platform
  • Leverage - a small deposit can control a much larger total contract value
  • Learning is now easy and quick - Online information available to help everyone
  • Free Demo accounts to learn and practice trading - Open a Free Demo account 

Currency Pairs

In each Currency Pair there is a Base Currency and a Secondary one. The prices as well as the charts on a currency pair usually refer to the Base currency. Example. If you read somewhere that the EUR/USD is getting stronger, it means that the EUR is getting stronger against the USD. If you look at the EUR/USD chart, it shows an upward trend which means that the EUR is getting stronger over the USD. There are 3 categories of currency pairs: the Major currencies, the Crosses and the Exotic.

Majors

Majors are the most traded currency pairs in the Market. These pairs are listed below:  

Currency pairs:
  • EUR/USD
  • GBP/USD
  • USD/JPY
  • USD/CHF
  • USD/CAD
  • AUD/USD
  • NZD/USD

Crosses

The Crosses are the currencies that are traded against each other and do not include the USD. An example of the cross currency pairs is GBP/JPY and EUR/GBP.

Exotic

Exotic Currencies are the ones that are traded in very low volumes and they lack market depth. The Mexican Peso and the South African Rand are examples of the Exotic Currencies.

Bid and Ask / Spreads

In every currency table you will find quotes that refer to the currency pairs. The quotes (prices) always refer to the Base currency in the pair. Bid is the selling price of the Base Currency and Ask is the buying price of the Base currency.

Example: If you would like to buy 1 Euro, you would buy it at the Ask price and if you would like to sell 1 Euro, you would have to sell it at the Bid Price.

For every 1 Euro we want to sell, we will use the Bid price or the selling price, expressed in U.S. Dollars. Thus, 1 Euro to sell is worth 1.4000 USD. When opening a trade, either to buy or to sell, it is usually referred to as a position. An open position indicates that the client has positioned himself in the market. A closed position indicates that the client exited the market. A LONG position is when you are buying and a SHORT position is when you are selling a currency. When a currency is moving up, it is also referred to as Bullish; if a currency is dropping then the movement is Bearish.

Spreads

The Spread is the difference between the Bid and the Ask price. 

Example:

Symbol Bid Ask
EUR/USD 1.4000 1.4003

The spread is the commission charged by the broker for using their services and it is measured in Pips.

Pips

The smallest movement in the price of a currency is calculated in pips. The pip is the 4th digit, after the decimal point in the price of a currency.

1 pip equals to 0.0001 of the currency price, unless you are trading with the Japanese Yen, where 1 pip is equal to 0.001 of the currency price.

Lots

In the Forex market, contract sizes are calculated in LOTS.

A standard lot equals to 100,000 units of the Base currency in a pair.

In AGM Markets the minimum lot size is 0.10 lots of a standards lot size which is equal to 10,000 units of the Base Currency.

Margin & Leverage

Margin

Margin is usually calculated in percentage and it is the amount you are opening positions with by using leverage.

Leverage

The leverage is used to increase the buying power of your capital in the market.  In AGM Markets, any amount you invest in your account is leveraged up to 200 times, which means that you can open trades with amounts up to 200 times more than your actual investment.

Example 1

1 lot of EUR/USD = 100,000 EUR
With a Leverage of 1:100
Your required Margin will be 1000 EUR because 100,000 : 100 = 1000
The calculation of the value of 1 pip is important so you can measure your profits/losses.

Example 2

For 1 lot (100,000) the value of the pip will be calculated as follows:
The value of the pip is always calculated in the secondary currency.
(0.0001/1.4055)*EUR100,000 = EUR7.12 * 1.4055 = 10.01 (rounded up will be $10)

Types of orders

Market Orders

A Market Order is an order of the execution of a trade; either buy or sell, at the best available price.

Limit orders

Such limits are called Stop Loss and Take Profit.

A Stop Loss is the limit that the client chooses below the rate at which he buys or above the rate at which he sells. This will automatically close the transaction from the system in order to minimize any losses.

A Take Profit is the limit that the client chooses above the rate at which he buys or below the rate at which he sells. This will automatically close the transaction from the system in order to get the desired profits.

Almost all traders are working with these limits which work as a reassurance that the transaction is being taken care of by the system/broker.

Example:

Leverage: 1:100 
Contract size (Lot): 1.00 Lot (100,000 EUR) 
Currency Pair: EUR/USD 
Margin 1%: 1,000 EUR 
Take Profit: 1.4100 
Buying Rate: 1.4041 
Stop Loss: 1.3950

If the leverage is 1:100; we buy EUR/USD with 1.0 lot size which equals to 100,000 EUR. The margin requirement is at 1%; therefore, we have a 1,000 EUR margin requirement.

As you can see, the buying rate is 1.4041 (which is the rate we entered the market with). The Stop Loss Rate is at 1.3990 and the Take profit rate is at 1.4100. Therefore, you are willing to lose 91 pips to gain 59 pips.

Using the calculated formula, for EUR/USD currency pair the USD value per pip on a 100,000 lot size is $10.

So, the maximum you can lose with your Stop Loss is 910 USD (91x10), and the maximum you can gain with your Take Profit is 590 USD (59x10).

Remember, once your trade is closed to 1,000 EUR margin, it will be returned to your account.

Pending Orders

Market Execution is a trade on Current price. Pending order is a trade at a future price, either a stop or limit order.

If you choose Pending Order the following options will appear:
  • Buy Limit: The current price level is higher than the value of the placed order. Orders of this type are usually placed in anticipation of that the currency price, having fallen to a certain level, will increase 
  • Buy Stop: The current price level is lower than the value of the placed order. Orders of this type are usually placed in anticipation of that the currency price, having reached a certain level, will keep on increasing; 
  • Sell Limit: The current price level is lower than the value of the placed order. Orders of this type are usually placed in anticipation of that the currency price, having increased to a certain level, will fall; 
  • Sell Stop: The current price level is higher than the value of the placed order. Orders of this type are usually placed in anticipation of that the currency price, having reached a certain level, will keep on falling. 
  • Buy Stop Limit: this type is a stop order for placing Buy Limit. As soon as the future Ask price reaches the stop-level indicated in the order (the Price field), a Buy Limit order will be placed at the level, specified in Stop Limit price field. The stop-level is set above the current Ask price, and the Stop Limit price is set below the stop-level; 
  • Sell Stop Limit: this type is a stop order for placing Sell Limit. As soon as the future Bid price reaches the stop-level indicated in the order (the Price field), a Sell Limit order will be placed at the level, specified in Stop Limit price field. The stop-level is set below the current Bid price, and the Stop Limit price is set above the stop-level

Margin Call

Traders will receive a Margin Call from their broker in the event their Margin falls below the Margin requirements in order to keep a position open in the market. The broker will usually ask you to add funds to your account, otherwise they will start closing some of your positions. With AGM Market, in order to avoid a Margin call you need to keep your Margin above 100% of your Margin requirements. 

Example:

You open an AGM Forex account with 2,000 EUR deposit. For opening a 1.0 lot of the EUR/USD, with 1% margin, the margin requirement will be 1,000 EUR. Remember that free margin is the money available to open new positions or sustain losses to your trading open positions. Since you started with 2,000 EUR, your free margin is 2,000 EUR; however, when you open the 1.0 lot, which requires a margin of 1,000 EUR your free margin is now 1,000 EUR.

If your losses exceed your free margin of 1,000 EUR you will get a margin call, after which a stop-out may occur where the broker will close your position to limit your risk and his risk. Hence, the 1,000 EUR margin requirement will be returned to your account. As a result, you can never lose more than your deposit.

Rollover/SWAP

Rollover/SWAP are calculated when a trade is kept open overnight. A cost or income will be calculated via the overnight interest rate differential between the two currencies pending on long/short open positions. Calculations take place at 23:59 GMT will be shown on client account statements by the next trading day. Please note that any position held open overnight from Wednesday to Thursday the rollover is charged at a triple rate.

In order to understand a negative and positive effect on your rollover charges, please see the examples listed below:

Positive rollover Charge calculation:

Current Interest rates of central banks: 
EUR = 1.25%; USD = 0.25% 

Open Transaction: long position EUR/USD - 1.0 standard lot (buy 100 000 units of the base currency ‘EUR’) 

EUR/USD exchange rate: 1.4330 

SWAP/rollover calculation: 

(Base Interest rate – Quote Interest rate) * (position size * exchange rate)/360 (days) 

(0.0125 – 0.0025) * (100,000 * 1.4330) / 360 = 3.99 USD interest received per day 

When opening a long position (buy) on EUR/USD currency pair you take a credit in USD at 0.25% per annum and make a deposit in EUR at 1.25 % per annum. Since the deposit (EUR) interest rate is above the credit (USD) rate, you will receive 3.99 USD on your trading account. 

For Negative rollover Charge calculation, when opening a short position (sell) on EUR/USD currency pair you take a credit in EUR at 1.25% per annum and make a deposit in USD at 0.25 % per annum. Since the deposit interest rate is lower than the credit one, 3.99 USD will be charged from your trading account.

Please Note: When placing a trade in the spot Forex market, the actual value date is two days forward. Therefore when executing trades on Wednesday, there will be a triple SWAP/Rollover charge in order to compensate for the following weekend (during which time swap is not charged because trading is stopped for the weekend).

Emotions

How can you control your Emotions in Trading?
  • Majority of traders fail in their trades because of uncontrolled emotions. These 3 emotions are fearhope and greed
  • Traders who are fearful are mainly scared from losing and therefore, they always close their trades too soon, right even before their stop loss is reached. As a result, they lose all their profit
  • Traders who are hopeful let bad trades get worse or good trades turn bad. They constantly hope that the market will turn to their expectations. This type of traders never follow any trading strategy
  • The greedy trader is the trader who is never satisfied with what he gets and is always expecting more until he gets burnt down. These type of traders risk more than they should and trade more than they should


How to suppress all the emotions?
  • Have a plan before entering the market by setting an entry and an exit level
  • Stick to your plan and enter your take profit and stop loss level in the system
  • Never trade to win back what you lost - Never over trade otherwise you're putting yourself at risk
  • It is known that the trend is your friend so never try to go against it
  • Fundamental and Technical analysis are both very important
  • Keep record of your previous trades to repeat successful ones and avoid mistakes that occurred in the bad ones 


How to avoid common mistakes in trading?
  • Learn about Forex and practice on a Demo account before you open a Live account
  • Set a plan and stick to it - Set your take profit and stop loss positions
  • Understand the difference between gambling and trading forex - Forex should be viewed as "risk management"
  • Never trade with unrealistic expectations
  • Never let your emotions interfere in your trades
  • Be patient
  • Never trade the news or straight after the news - There will be high volatility with no clear direction of the market
  • Never stumble across averaging down - Never add money to a losing position 
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