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FOREX TRADING COURSE

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Table ofCONTENT

• An Introduction To FOREX TRADING

• What Is Traded In FOREX TRADING?

• Influencing Factors Of FOREX TRADING

• How Does FOREX TRADING WORK?

• All You Need To Become A FOREX TRADER

• FOREX QUOTES

• How to Read FOREX QUOTES

• CONTACT SIZE (LOT) AND POINT/PIP

• Meaning of The Terms “LONG” & “SHORT”


• TYPES OF ORDER

• COMPARING MARKET ORDER AND PENDING ORDER

• LEVERAGE AND MARGIN

• TAKE PROFIT, STOP LOSS, AND TRAILING STOP

• Calculation of MARGIN CALL

• COMPUTING INTEREST/ SWAP/ROLLOVER

• HEDGING AND AVERAGING METHODS

• VITAL POINTS TO NOTE

• RISK WARNING

An Introduction ToFOREX TRADING

Before we proceed, let us understand the meaning of Forex

WHAT IS FOREX TRADING?

Foreign Exchange Trading is the exchange of one currency for another. The Forex market exists anywhere

a currency is traded for another. This market is known to be the biggest financial market globally, and this

market deals with transactions between government and central banks of different countries,

international institutions, and corporations, as well as other financial markets.


According to statistics, the global forex market currently has an average

daily trade of over 2 trillion US dollars. Private individuals who trade in

this market makes up a little fraction of the market and may only transact

deals indirectly through banks or brokers.


What Is Traded In FOREX TRADING?

Solely currencies! Currencies are usually traded in pairs like GBP/USD, EUR/JYP, etc. Forex traders

exchange currency for the other at the same time. This means while they buy a currency, they sell the

other at the same. Profit is earned from the difference between the rates of the currencies.

Trader’s Action Meaning

Buy EUR/USD Buy EUR by Selling USD

Sell EUR/USD Selling EUR to Buy USD


Illustration

When you BUY GBP/USD, it simply means that you are buying GBP and selling USD at the same time.

When you SELL GBP/USD simply means that you are selling GBP and buying USD at the same time.

Currency Pair

The term relates to a quotation of two currencies. In the pair, the first currency is referred to as Base

Currency, while the latter is called Counter/Quote Currency. The quotation reveals the number of units

of the quote currency that is needed to obtain one unit of the base currency.


The current foreign exchange quote shows GPB/USD = 1.8500. This means that 1.85 USD is

needed to buy 1 GBP.

Here is another quote; EUR/USD 1.2500

Here, it means that 1 EUR equals 1.25 USD. If there is a shift, say from EUR/USD 1.2500 to

EUR/USD 1.2510, it means the euro is being strengthened, while the dollar is getting weaker. If the

reverse is the case; say EUR/USD shifts from 1.2500 to 1.2490, it simply means the euro is getting

weaker, while the dollar is gaining strength.


Cross Rate: This term is used to describe an exchange between two countries that takes place in a country

whose official currency is not involved in the exchange.

For instance, when a USD/JPY transaction is taking place in Britain, USD/JPY will be considered a cross

rate for Britain.

Pair Price Chart is Moving EUR (Base) USD (Counter)

EUR/USD Upward Stronger Weaker

EUR/USD Downward Weaker Stronger


Here is another illustration

Pair EUR/USD:

If your prediction is that the EUR will get stronger than USD, then you should Buy EUR/USD.

If your prediction is that the USD will be stronger than EUR, then you should Sell EUR/USD.

Pair USD/JPY

If your prediction is that the USD will be stronger than the JPY, you should Buy USD/JPY.

If your prediction is that the JPY will get stronger than the USD, you should Sell USD/JPY.


Major Currency Pairs

By Major, we refer to the most commonly traded currency pairs globally. Exchanges which involve the

majors amounts to about 90% of the overall Forex trading.

The Major currency pairs are GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CAD and USD/CHF.


Symbol Country Pair Nickname

USD United States Dollar Buck

EUR Euro Union Euro Fiber

JPY Japan Yen Yen

GBP England Pound Cable

CHF Switzerland Franc Swissy

CAD Canada Dollar Loonie

AUD Australia Dollar Aussie

NZD New Zealand Dollar Kiwi


Typically, the exchange rates are influenced by several factors, and currency rates are determined by the

forces of demand and supply. The determinants of demands and supply are not fixed, and the price of a

currency is determined by that of another.

The Foreign Exchange Market gives a reliable summary of the economic happenings across the globe

at every point in time.

Influencing Factors OfFOREX TRADING


Currency demand and supply, as well as their value, are determined by several factors. These elements are

classified into 3 basic categories:

Economic Factors

This involves the economic conditions and policies as stipulated by the government agencies and its

central banks and other economic indicators.

Economic Policy includes fiscal policy - government budget and practices, monetary policy which the

central banks use to regulate supply and the value of money - determined by interest rates.


Political Factors

The currency markets are greatly hit by internal and international political factors and events.

Where there is political chaos in a given country, it will negatively impact the nation’s overall economy.

However, the emergence of a fiscally responsible political faction will most likely give a positive effect

on the economy. Also, events in a neighboring country may also affect the economic activities of the

country, and this will definitely have an effect, either positive or negative, on their currency.


Market Psychology

Market psychology, as well as trader's point of view, cause significant impact in the Forex market in

several ways

Flights to quality: When there are threatening global events, it can result in a "flight to

quality" as investors run for safety. This situation will lead to higher demand, and

eventually, a dramatic increase in prices of currencies that are believed to be stronger than

their counterparts which are perceived to be weaker.


Long-Term Trends: Financial markets often have clear long-term trends. Unlike

physical commodities, currencies do not have seasons, but the business circles have a way of

showing themselves. Cycle evaluation considers longer-term rate trends that could be influenced by

political or economic factors.


Buy The Rumour, Sell The Fact

This applies to a lot of currency situations. Currency price tends to be influenced by a specific action

before its occurrence and when the prediction eventually happens, it tends to take an opposite turn.

Such a situation is referred to as an Overbought or an oversold market.

Selling the fact or buying the rumor is termed Anchoring - this is when traders focus on the influence

of external forces on currency prices.


Economic Numbers

Although economic numbers certainly determine economic policy, some numbers become relevant to

market psychology and may have a direct effect on short-term market decisions.

The determining factors to watch out for might change over time. Recently, employment, trade balance

figures, and inflation numbers have all become relevant at a point in time.


Technical Trading Considerations

Similar to other markets, the price shift over time in a currency pair such as EUR/USD may result in

consistent patterns that the traders can utilize for the purpose of coming in or exiting the forex market,

which may lead to short-term price fluctuations.

Price charts will help traders to spot out such patterns.


As explained earlier, Forex simply means exchanging one currency to another, to get the difference in the

currency rates as profit. For example, a Forex trader earns profit by Buying GBP.

How DoesFOREX TRADING WORK?

Trader’s Action Great Britain Pounds (GBP) US Dollars (USD)

A trader Buy GBP/USD (purchased 10.000 GBP with USD) in

the beginning of February 2007 when GBP/USD rate was

at 1.9800

+10.000 -19.800*

The next day, the trader Sell GBP/USD (sold back 10.000

GBP to USD) when GBP/USD rate was at 2.0000

-10.000 +20.000**

In this example, the trader earned a gross profit of US$200 0 +200


Forex Market Schedule

Forex Market operations run all round the clock (24 hours), 5 days weekly. Forex major trading centers

are located in New York, London, Singapore and Tokyo; however, banks all over the world participate in

forex trading. London has the biggest trading center, closely followed by New York York, Tokyo, and

Singapore respectively.

Forex trading sessions run through the day, excepting Saturdays and Sundays: When Forex markets in

Asian Countries end, those in the EU begins, then the US sessions takes over, when the US market ends,

it goes back to the Asians and it goes on and on.


Trader’s Action Great Britain Pounds (GBP) US Dollars (USD)

A trader Buy GBP/USD (purchased 10.000 GBP with USD) in

the beginning of February 2007 when GBP/USD rate was

at 1.9800

+10.000 -19.800*

The next day, the trader Sell GBP/USD (sold back 10.000

GBP to USD) when GBP/USD rate was at 2.0000

-10.000 +20.000**

In this example, the trader earned a gross profit of US$200 0 +200


Why Trade Forex?

Are you still wondering why you should trade Forex? Then check out these benefits:

Forex Trading Presents Two Ended Opportunities

Forex trading, unlike the stock market, offers you the chance to make a profit from both rise and fall in

price levels. If you BUY (go LONG), and the currency gets stronger, then you are making a profit. On the

other hand, if you SELL (go SHORT), and the currency gets weaker, you will be making profits.


Extended Trading Hours:

As stated earlier, the Forex market give traders an opportunity to operate throughout the day (24 hours

non stop), except on Saturdays and Sundays.

High Liquidity

Forex is obviously the most liquid market globally; this means you can turn your currencies to cash

anytime you wish.

No Middlemen

In Forex trading, there are no middlemen. Traders have complete autonomy over their trade, and they

are responsible for making decisions. They are not regulated by any Dealing Quotes.


No Likely Market Intrusion

As the biggest Financial Market in the world, no single entity can regulate the Forex Market.

Zero Commissions or Trading Fees

Forex Brokers do not charge commissions or any form of trading fees: Brokers are paid from Spread.

Spread means Bid Price/Trader's Selling price to brokerage as well as Ask Price/Trader's buying Price

from the brokerage.

Flexible lot sizes:

Virtually all Online Forex Brokers provide both standard and Mini Lots sizes for traders (Standard and

Mini Lots. This is to enable private traders with low equity Buy currencies in smaller volumes.


For instance, A small scale trader with just US$500 equity can afford to trade mini lots of 0.1

incremental lot volume, while traders with bigger equity (say, US$5000 equity) can trade both mini and

standard lots of 1 and 0.1 incremental lot volume.

Leveraged Trading Volume

A Forex trader may not have up to $100,000 before he can start 1 standard lot volume (100,000 units).

With the leverage function, a trader can trade 1 standard lot volume of 100,000 units with just a portion

of his trading volume (margin or good faith deposit). With 1:100 leverage, the trader may only require

about a percent of his overall trading volume to get locked for margin. This means, the temporal

amount locked is 1% x 100.000 = $1000.


Now, you will observe a trader's potential profit is calculated with his trading

volume, 100.000 rather than his margin of 1000.

Demo Accounts to Practice Forex Trading Without Risk


Personal Computer, PDA (optional)

The major device you need to begin trading forex online is your PC or Notebook. PDA, though optional,

is an added advantage for mobile trading.

Reliable and consistent internet connection:

You also need a high-speed internet connect of a minimum of dial up - 56 Kbps connection. However,

broadband connect -3.5 G(HSDPA), wimax, or ADSL is most recommended.

All You Need To BecomeA FOREX TRADER


Limited Fund

It is highly recommended that beginner traders should test run with demo accounts before they invest. If

you eventually get ready to trade with real money, then the least you can start with is US$300 - for mini

lot volume, i.e 10.000 units, or USD 3000 as minimum for standard lot accounts which is equivalent to

100.000 unit.

A Trustworthy Forex Brokerage

A trustworthy Brokerage is a very important thing to consider before participating in Forex trading.

Beware of phony promotional bonuses; ensure you do your homework, especially on your broker's legal

aspect. Reputation is very critical here.


Currency pair quotes typically have two rates;

BID AND ASK

The Bid, which normally lower than Ask, is referred to as the trader's selling price. This is the rate at which

a brokerage or market maker offers to exchange the base currency for the quote currency.

The Ask/Offer; This is usually greater than the Bid. This is referred to as the trader's buying rate. It is the

rate at which a brokerage is ready to sell the base currency in exchange for the quote currency.

FOREX QUOTES


The Bid Is The Trader's Selling Price

The Ask/Offer Is Simply Trader's Buying Price

The Ask Is Normally Greater Than The Bid

Spread It Is The Difference Between Ask/Offer And Bid. Hence, The Lesser The Spread The More The Profit.

SUMMARY


From the image above, you will notice that GBP/USD has 1.9899 Bid and 1.9902 Ask. Simply

put, 1.9899/02.

How to ReadFOREX QUOTES

Symbol Bid Ask High Low

GBP/USD 1.9899 1.9902 1.9950 1.9835

EUR/USD 1.5720 1.5722 1.5735 1.5627

USD/JPY 102.57 102.59 102.85 101.48

USD/CHF 1.0135 1.0138 1.0172 1.0054

AUD/USD 0.9262 0.9265 0.9263 0.9177


Hence, the Spread GBP/USD from the above is:

1.99.2 - 1.9899 = 0.0003 (3 pips/points)

When Fractional Forex Platforms have 5 decimal digits, then 3 points is equal to 0.00030)

NB: When you open Buy (go Long) you purchase with Ask price, so when selling, it is required that you

use Bid Price. When you open Sell (go Short), you use the Bid price to sell, so when buying back, it is

required that you use Ask price.

Position Open With Close With (TP & SL)

Buy (Long) Ask Price Bid Price

Sell (Short) Bid Price Ask Price


Where: TP = Take Profit SL = Stop Loss

Although we buy (go Long) with Ask, we have to watch out for Bid at the Quote list/table. For a trader to

earn profit, Bid must be greater than Ask price at which we started the position.

When selling (going Short) with Bid, we have to watch out for Ask at the quote list/table. For a trader to

make profit, Ask, must be weaker than Bid price- at which we started the position.

Symbol Bid Ask High Low

GBP/USD 1.9899 1.9902 1.9950 1.9835

EUR/USD 1.5720 1.5722 1.5735 1.5627

USD/JPY 102.57 102.59 102.85 101.48

USD/CHF 1.0135 1.0138 1.0172 1.0054

AUD/USD 0.9262 0.9265 0.9263 0.9177


If a trader opens BUY (long) GBP/USD at 1.9902 (Ask), and the present Bid rate still stands at 1.9899, it

implies that the trader's position is presently at a floating loss of 3 pips.

For the trader to make profit, he has to be patient for the Bid price to go over 1.9902. You would

observe that every time you begin a new position, you find previous negative pips at similar amount as

the spread of corresponding pair used. This previous negative pips are as a result of the spread charges.


Contract Size (lot)

Lot is known as the least trading quantity/amount for exchanging currencies. Standard and Mini lots are

the common sizes. While the Standard lot is worth 100,000, the Mini is equal to 10,000 units.

For instance, if a Forex broker provides you with a mini lot account, it means you can buy and sell in

incremental of 10, 000units i.e 20, 000units, 110,000units etc. While a standard lot account allows you buy

and sell with incremental of 100,0000 units 1.e 300, 000 units, 1,000,000 units etc.

Contract seize lot Volume

1 Lot = 100,000 unit or 1 Standard lot

0.1 Lot = 10,000 unit or 1 Mini Lot

0.01 Lot = 1000 unit or 1 Micro lot

CONTACT SIZE (LOT)AND POINT/PIP


Point/Pip

This is the least quantity in a currency quotation. For instance, in a situation where the quotation of

EUR/USD is 1.2025, a point is equal to 0.0001. To determine the pip value of your expected earnings per

pip, here are some other information to first figure out: the pair used and contract size (lot).

Illustration

EUR/USD contract size: 100, 000 units = 1 standard lot, 1 pip profit or loss = $10. While a trader ends 10

points of profit, he earns a total profit of $10 x 10 = $100. The same calculation should be used for loss.


Warning

In the case of fractional forex platform, there are specific currency pairs that have an additional decimal

digit. For instance: In the case of major pairs likeEUR/GBP, EUR/USD, AUD/USD,NZD/USD, GBP/USD and

GBP/CHF, 1 point equals 0.00010 rather than the normal 0.0001.

This is also applicable to pairs with JPY like GBP/JPY, EUR/JPY or USD/JPY: 1 point equals 0.010 rather

than the usual 0.01)

For the above pairs, you may add a zero at the end of the trading price.


Example

BUY GBP/USD at 2.0005 with TP of 45 pips. Here, at the Buy order price field, you will have to enter

2.0005(0) and TP at 2.0050(0)

NB: Do not enter in 2.0005(0) for TP 50 tips, as 2. 0005(0) is the same thing as 5 points Take Profit

Here is another illustration

SELL USD/JPY at 110.55, in the SELL order price field, ensure you enter 110.55(0). TP 50 pips at 110.05(0)

. Take note that 0.050 does not mean 50 points, but 5 points.

For simplicity, we are using common and standard digits of 0.0001 and 0.01 in this presentation. Please add 1 more zero (0) decimal digit at the

end of price (for the pairs mentioned above) if you are using 5 Digits Fractional Platform


Long or Open Buy

This is when a trader acquires a currency with the hope of selling it in the future at a higher rate. Traders earn

their profit by selling at a price higher than the rate they bought. In other words, they make profit from an

upward movement of the chart or an increasing market.

Illustration

A trader opened BUY EUR/USD at 1.1500 and sold same at 1.1525. In this situation, the trader earns profit of

25 points. It is noteworthy that for the trader to earn the profit, he has to sell what he bought.

Upward Movement

This is used to refer to a rise in the base currency above the quote currency. For example, An increase in the

EUR/USD chart means that the Euro appreciates against the dollar, while a decrease shows that the Euro is

getting weaker.

Meaning of The Terms“LONG” & “SHORT”


When there is a downward shift of currency pairs, it shows that the Base Currency is decreasing in

value than the quote currency.

For example, a downward shift in the USD/JPY chart reveals that the USD is losing value against the JPY.

USD/JPY increase shows that the USD is gaining strength over the JPY.

The rate of Opening Sell/Short is referred to as Selling Price (BID) while the close price is called the

Buying Price (ASK).

Short Position is simply known as SELL.


Market Order

This refers to an order made at the present market rate. Opening Buy/Long Position at current market

rate means that traders will open at the present Ask price. Opening Sell/ Short position at current market

rate means that traders will open at the present Bid Price.

Illustration

If a dealer purchases EUR/USD at current market price, the present forex quote reveals Bid/Ask

=1.2934/1.2938. From this illustration, it means brokerage agrees to buy EUR/USD from Trader at

1.2934 and then sell to another trader at 1.2938.

Stop and Limit Order (pending order)

These are orders to open Buy or Sell when the set price is attained.

TYPES OF ORDER


All pending orders are still active until the price ordered is attained. Forex traders can adjust the date of

expiration as it pleases them.

Pending Orders are of two types: Stop order and Limit Order.

Pending orders come in Four Pairs: Buy Stop, Sell Stop, Buy Limit, Sell Limit.


BUY STOP

Buy stop is used when a trader wants to buy higher than the current Market Price.

Here, the Buy order price must exceed the current Market Price.

Example

If the market current price stands at 1.2000, and you wish to wait until the market hits 1.2050 before

you Buy LONG), you can adjust the Buy Stop to 1.2050.


SELL STOP

Sell Stop is recommended for selling lower than current Market Price.

Here, the Sell order rate must be lesser than the current Market Price.

Example

If the Current Price is valued at 2.0000 and you wish to wait until the market value hits 1.9550 before

you Sell (SHORT), you can adjust Sell Stop at 1.9550.


BUY LIMIT

Buy Limit is used to buy for less than the current Market Rate.

Here, the Buy order rate must be less than the current Market rate.

Example

For example, If the current market price is valued at 2.0000 and you wish to wait until it hits 1.9950

before you Buy (LONG), you can adjust the Buy Limit to 1.9950.


SELL LIMIT

Sell Limit is recommended for traders who wishes to sell higher than current Market Price.

Example

If current price is valued at 1.2000 and you wish to wait until it hits 1.2050 before you Sell(SHORT), you

can adjust the Sell Limit to 1.2050


Expiration of Pending Order

COMPARING MARKET ORDERAND PENDING ORDER

Order Type Buy (Long) Sell (Short)

Market Buy at current Ask Price Sell at current Bid Price

Stop Order Buy Above Current Price

(Open with Ask)

Sell Below Current Price

(Open with Bid)

Limit Order Buy Below Current Price

(Open with Ask)

Sell Above Current Price

(Open with Bid)

Good Till Cancelled (GTC)

This means that, except a pending order gets canceled, it remains active. This is the default state of

Pending Order Expiration.© 2017 FOREX22.COM ALL RIGHTS RESERVED

Good Till Date (GTD)

This means that until a pending order reaches a set time, it remains valid. The pending order will only

get canceled when reaches the set date.

Order Cancels Other (OCO)

Forex traders make two pending orders at a time. The second order is canceled as soon as one order is

executed.


Leverage

This is the capital borrowed to increase trader's potential profit.

With this, a trader may not have $10, 000 for him to trade $10, 000. He may offer $100 (a percent of

contract size) as a deposit in good faith to trade $10,000 while he trades at a brokerage that provides

1:100.

Leverage is usually stated in ratio. such as : 1:500, 1:250, or 1:50.

LEVERAGE AND MARGIN


Let us examine a Forex trader who trades without leverage. Such a trader must own nothing less than

$10, 000 for him to be able to trade $10,000 lot (1:1).

From the above, you will observe that although the traders in both cases have the same value of potential

profit, the trader with leverage has a far smaller margin requirement than the one without.

Final Word

Leverage causes the potential profit of both a trader with smaller and bigger equity to be equal.

Margin

This the good faith deposit which is needed to start an order.


The Brokerage holds the margin for a time pending when the order is settled/closed. Remember that

the margin remains with your broker, pending the close of the order. Following the end of the

position, the margin value is added back to your balance.

The margin is usually calculated in percentage and influenced by Leverage given by forex broker.

For example: Leverage 1: 100= 1% Margin Requirement, Leverage 1: 50 = 2% Margin Requirement

etc.

For instance, if you have deposited $1000 to your broker with Leverage 1:100, the highest contract

size (lot) possible to be traded is about 1 lot of $100.000, the broker requires 15 x 100,000 = $1000

margin.


In this case, your broker will temporarily lock your margin of $100 while the remaining $400 can be

put aside for any likely loss. As floating loss approaches $400, you gradually run out of margins, and

where this is the case, your broker will simply close open positions to avoid you getting a negative

balance.

The Upside of Leverage

It gives Forex traders an opportunity to trade larger size contracts with a relatively smaller cash.


Trader Leverage Contact Size Margin Requirement (%) Margin Requirement ($) Profit

A 1:100 $100.00 %1 $1000 $10/pip

B 1:200 $200.00 0.5% $1000 $20/pip

C 1:500 $500.00 0.2% $1000 %50/pip

From the above illustration, Trader C, using Bigger Leverage, gets the chance to use Higher Contract

size ($500.000) but with the same Margin Requirement ($1000).


How to Calculate MarginCurrency pairs are of 3 categories

Direct rates: Any currency pair that has USD as the counter currency . E.g GBP/USD, NZD/USD,

EUR/USD, JPY/USD.

Indirect Rates: Any Currency pair that has USD as the base currency E.g. USD/GBP, USD/NZD, USD/EUR,

USD/JPY.

Cross Rates: Any Currency Pair that does not involve USD. E.g. GBP/CHF, EUR/GBP, AUD/JPY, EUR/JPY.


Direct Rates Calculation

% of Margin x Contract size x Lot x Current Price = Margin

Example

Sell 3 mini lot GBP/USD at Bid 2.0000 (Note : Open Sell uses bid price !) 0.01 x 10.000 x 3 x 2.0000 = $600

(Leverage 1:100)

0.002 x 10.000x3x2.0000 = $120 (Leverage 1:500)

1:500 Leverage has lower Margin Requirement than 1:100 Leverage


Indirect Rates Calculation

Margin Perccentage x Contract Size x Lot = Margin

Example

Buy 2 mini lot USD/JPY at Ask 110.00

Note: Open Buy With Ask Price

0.01 x 10.000x 2=$200 - Leverage 1:100

0.002 x 10. 000 x 2 = $40 - Leverage 1:500

1:500 Leverage has lower margin requirement than 1:100 Leverage


Margin of Cross Rates Calculation

Margin Percentage x Contract Size x Lot x Current Median Price* = Margin

Current Median Price: Average of currency's current Bid and Ask

Median Price = (Bid + Ask ) / 2

Example

If a trader Buys 1 mini lot EUR/GBP at Ask 0.8020. Quote of EUR/USD: 1.5800/02

Since Euro is the Base Currency, we have to use the Base Currency Pair of EUR i.e., EUR/USD


EUR/USD Median = (1.5800 + 1.5802)/ 2 = 1.5801

0.01 x 10.000 x 1 x 1.5801 = $158.01 (Leverage 1:100)

0.002 x 10.000 x 1 x 1.5801 = $31.60 (Leverage 1:500)

1:500 Leverage has lower margin requirement than 1:100 Leverage

From the illustration above, we observe that the bigger the Leverage Ratio, the lesser the Margin.


Calculating Profit and Loss of Direct Rates

0.0001 x contract size x lot = Pip Value

0.0001 x 100.000 x 1 = Pip Value = $10/pip

(Selling Price – Buying Price) x contract size x lot = Profit or Loss

Example

Sell GBP/USD 5 lot at 1.9100, Buy (Liquid) at 1.9050.

(1.9100 – 1.9050) x 100.000 x 5 = US$ 2.500


Calculating Profit and Loss of Indirect Rates

(0.01 / current price) x contract size x lot = Pip Value

(0.01 / 120.50) x 100.000 x 1 = Pip Value = $8.3/pip

[(Selling Price – Buying Price) / Liquidating Price ] x contract size x lot = Profit or Loss

Example

Sell USD/JPY 5 lot at 110.5, Buy (Liquid) at 110.0

[(110.5 – 110.0) / 110.0] x 100.000 x 5 = US$ 2.272,7


Calculating Profit and Loss of Cross Rates

(Base Currency Price x contract size x lot) / Current Cross Rate = Pip Value

Example

EUR/GBP Rate : 0.6750, EUR/USD Rate: 1.1840 (EUR/USD is the basic currency of EUR/GBP, as the left

side of EUR/GBP Pair is Base Currency)

(1.1840 x 100.000 x 1) / 0.6750 = $17,54/pip

{(Selling Price – Buying Price) x Current Base Currency Price] / Current Price of Cross Pair} x contract size

x lot = Profit or Loss


TAKE PROFIT, STOP LOSS,AND TRAILING STOP

TAKE PROFIT

This is a focus point where you want to automatically close your position in profit as soon as the market

price reaches it.

For Buy/Long position, the take profit level is placed higher than the opening price of Buy/Long position.

(Note ! Open Buy/Long is based on ASK, Take Profit or Stop Loss is based on BID)

Example : Buy EUR/USD at 1.2000, Take Profit at 1.2050 (50 points take profit)


For Sell/Short position, the take profit level is placed under opening price of Sell/Short positions.

(Note ! Open Sell/Short is based on BID, Take Profit or Stop Loss is based on ASK).

Example

Sell EUR/USD at 1.2050, Take Profit at 1.2000 (50 points take profit).

Stop Loss: This is an order meant to reduce likely losses, where the market shifts against the trader's

position. In the case of Buy/Long position, stop loss level is normally placed below the opening price of

Buy/Long position.

Remember: Open Buy/Long is determined by ASK, Take Profit or Stop Loss is being determined by the BID.


Remember that open Sell/Short is determined by BID, Take Profit or Stop Loss is determined by ASK.

Example: Sell EUR/USD valued at 1.2000, Stop Loss at 1.2050 results in stop loss of 50 points

STOP LOSS

This may also be used to secure (lock) the profit made. To secure your earned profit, you may set your

stop loss to a level above the amount of profit you wish to lock or secure. Do an upward shift of the stop

loss (for Buy/Long Position) or shift it downward in the case of Sell/Short Positions.

Illustration

If a trader Open Buy at 2.0000, Take Profit at 2.0050, Stop loss at 1.9970. After some few hours, the market

price shifts upward to 2.0040. The trader gets a floating profit position of 40 points.


It is noteworthy that for Buy/Long position, the lock profit level must be less than current floating profit

level, i.e., 2.0020 < 2.0040 and the locking profit level must also be larger than opening price level i.e.

2.0000 < 2.0020

Where the market eventually shifts upward to 2.0060, the Forex trader can reset his stop loss to 2.0040

(securing 40 points). This method is also referred to as the basic of Trailing Stop function.

N.B.: Following the completion of the Take Profit and Stop Loss level, the figures are stored in the Broker's

serve. The trader may have no need to go online, since take profit and stop loss level will actively run in

the Broker's server.


TRAILING STOP

This is a programmed stop order setting feature which helps to secure earned profit. The Trailing stop

shifts stop loss higher (Long Position) or Lower (Short Position), as most suitable for trader.

Trailing Stop will become active any time the opened positions have grown higher than a fixed minimum

profit level. For instance, Trailing Stop for a broker with 15 points as the minimum trailing stop level,

trailing stop remains pending until current floating profit grows higher than 15 points.

Position Take Profit (TP) Stop Loss (SL)

Buy (Long) Higher than Open Price (TP based on Bid) Lower than Open Price (TP based on Bid)

Sell (Short) Lower than Open Price (TP based on Ask) Higher than Open Price (TP based on Ask)


NB: The Trailing stop function is usually done with the trader's PC. Without a fast speed internet

connection, trailing stop may malfunction.

It is worthy to note that traders in this position are in a risky position when their profit is still below the

minimum acceptable training stop level. Besides, traders may integrate stop loss and trailing stop to curb

potential loss.

For instance, Buy EUR/USD 1.2050, Stop Loss 1.2000, Trailing Stop 15 points.

As current BID price hits 1.2070 (20 points profit), trailing stop will shift stop loss to 1.2055 (1.2070 minus

15 points). Here the trader has +5 points profit locked by stop loss, i.e 20 points profit - 15 points trailing

stop= +5 points locked.


First Case Scenario

If the market experiences a downward shift from 1.2070 to 1.2055, the position is closed at +5 points

profit. Here, the trailing stop will avoid a position, dropping to a loss.

Second Case Scenario

If the market experiences an upward shift from 1.2070 to 1.2095 (instead of dropping to 1.2055) the

traders earns 45 points profit (1.2050 first opening price to the current price level at 1.2095.) In this case,

trailing stop will shift stop loss to 1.2080. I.e 45 points profit minus 15 trailing stop level = +30 points

locked.


Calculation ofMARGIN CALL

MARGIN CALL

This is a closing process done by a broker when trader's margin drops below broker's lowest margin limit.

Margin call is very important in protecting trader’s investment from dropping to a minus balance when

there is low margin, to avoid losses. Normally, Brokerage will immediately liquidate open positions one

after the other, until trader's margin has grown big enough to cover up for losses.

Margin Call is determined in two ways:

MARGIN LEVEL

This method is employed at Meta Trader Platform.


Recommendation

Kindly Check out MetaTrader's demo accounts to fully understand how margin level is calculated

Formula for calculating Margin Level

Margin Level (%) = Equity / Used Margin

Equity = Used Margin + Free Margin

Equity = Balance + Profit – Loss

At a point where no positions were opened, Balance will be equal to Equity. While profit/Loss will be

equal to 0, Balance will be same as Equity. Check out the formula for Equity calculation above


FREE MARGIN

This is free withdrawable margin when positions are still open. It is noteworthy for traders to leave back

some margin large enough to cover losses and avoid Margin Call.

For instance a broker determines Margin Call by 5% Margin Level, if Equity is equal to Margin x 5%, it will

result in a Margin Call. Open positions instantly begin to liquidate bit by bit until the trader's margin is

big enough to hold losses.

With the MetaTrader Platform, the trader does not need manual calculation of Margin Level. Anytime

position is opened, the percentage of Margin Level can be controlled at the "trade" option, which makes

current Margin Level percentage easier to detect. All that is needed is to maintain the margin level at a

point above Broker's lowest Margin Level.


Example

Margin Level ought to be above 5%. Margin Call will occur if Margin Level is same or lower than Broker's

minimum requirement.

Equity is equal to Used Margin (Equity -Used Margin + Protit - Loss = 0)

Margin Level ought to be above 5%. Margin Call will occur if Margin Level is same or lower than Broker's

minimum requirement.

Equity is equal to Used Margin (Equity -Used Margin + Protit - Loss = 0)

Example

Trader's open deposit $300. He opened 1 mini lot (10.000 units) GBP/USD. The Margin requirement will

be: 10000 (mini lot) x 0.002 (leverage 1:500) x 2.0000 = $40.


The good faith deposit (margin) currently held (temporarily) by the broker is $40.

Calculating Margin Level System

Broker's Margin Level = 5%

When Equity reaches 5% Margin Level = 5% x Used Margin = 5% x $40 = $2. Margin Call will be created

when trader's equity depreciates below $2. This simply means $300 - $2 = $298 margin remaining to

cover losses.


COMPUTING INTEREST/SWAP/ROLLOVER

Interest Rollover and swap can be used interchangeably to refer to interest which traders may either earn or

pay for making open position exceed 24 hours.

Forex market computes interests due traders at the close of trading (5:00pm New York Time zone) every

day. Traders see the interest charged or credited to their accounts.

When opening forex transactions, note that the value date is not that of the current date, but two days

forward. For instance, when a deal is done on Monday, it is calculated by Wednesday's value. Thursday's

deal is for Monday's value - since the weekends are not added.


SWAP CALCULATION

Traders earn positive swap when the currency purchased has higher swap than borrowed one.

Example

EUR/USD pair. EUR Swap Rate = 5.25%, USD Swap Rate = 0.5 %

Buy EUR/USD connotes that a trader borrowing USD to Buy EUR. Since the bought currency (EUR) has

greater swap rate than the borrowed currency (USD) swap rate, the trader earns interest incomes: 5.25% -

0.5% = 4.75%


When you Sell EUR/USD (borrowing EUR t Buy USD) the trader is charged by interest fee: -5.25% + 0.5%

= -4.75%

Example GBP/EUR pair. GBP swap rate = 3.75%, GBP Swap Rate = 5.25%

Buy GBP/EUR, it means the trader is borrowing EUR to Buy GBP. Since the bought currency (GBP) has a

smaller Swap rate than the borrowed currency (EUR) Swap Rate, the is charged a fee:3.75% -5.25% = -

1.5%

When you sell GBP/EUR (borrowing GBP to buy EUR) the trader earns interest income: -3.75% + 5.25% =

1.5%


Forex Brokers normally offer a highlight of daily swap rates for all available currency pairs. It is easy for

traders to find earnings/ interest fee, which is determined by the Sell or Buy positions they decide to

trade. Swap normally comes in dollars or pips value.

Where the swap value is represented in pips, traders will have to convert pip to dollar worth, by

computing pip value of similar currency pair.

Trader’s Action Meaning Sell

EUR/USD $3.82 -$5.02

USD/JPY $6.9093 -$8.7093

GBP/USD $12.81 -$15.21


From this image, you will observe that when a trader holds Buy GBP/USD for a period exceeding 24 hours,

he will earn $12.81/days (Standard Lot).

If you wish to check out swap rate for a particular currency at Metatrader Platform, right-click on Forex

Quote List then click on Symbols, select your desired currency pair, and then click on properties.

Trader’s Action Meaning Sell

EUR/USD $3.82 -$5.02

USD/JPY $6.9093 -$8.7093

GBP/USD $12.81 -$15.21


HEDGING ANDAVERAGING METHODS

HEDGING

This is a method used to curb unwanted risk by opening contrasting trading positions.

Hedging is normally used to reduce potential risk while maintaining losing positions; however, traders may

not want to use the Stop Loss.

Hedging helps traders to maintain loss mount at fixed rate (locking)

For example, if a trader Buy GBP/EUR 1 lot. Sadly, market went against trader's downward position.

Currently, his position hits -20points floating loss, h can Sell GBP/EUR 1 lot in order to lock losing position

at -20 points.


The action above is termed hedging and whether the market shifts upward or downward, his loss will

be locked at -20 points: where there are no spread charges.

AVERAGING

This is a method used to reduce unwanted risk by opening a different position with similar direction

but at different rates.

The objective of the averaging method is to reduce risk by getting the average of multiple positions

that are opened at different rates.

Example

A trader Buy GBP/EUR 1 lot at 2.0100, sadly market shifts downward against trader's position to

2.0000. Here, trader runs 100 points floating loss.


In such case, a trader may use the Average Technique to reduce the risk by opening Buy GBP/EUR 1

lot at 2.0000. At this stage trader has two open trades: Buy GBP/EUR 1 lot at 2.0100 (-100 points loss)

and Buy GBP/EUR 1 lot at 2.0000. (o point). where there is zero spread charge

After some hours, market shift to 2.0050, the trader now has 1 trade at -50 points loss, while he still

has another one at +50 points profit. The 2.0050 point is called the Break Even Point(BEP) of the two

trades. If the price exceeds 2.0050 the trader makes profit.


VITAL POINTS TO NOTE

• Forex trading should be done on reputable platforms. The platforms on this link http://forex22.com/ are highly

recommended.

• Before investing your real fund, it is recommended that you try out how the system works with demo accounts – they are free.

• Take advantage of leverge as much as possible.

• Be careful in your calculation of contract size and free margin used.

• Take Note: Ensure that you do not exhaust your margins, as that may easily lead to a Margin Call which may cost you a huge

sum of money. We suggest that you use your available equity up to 50% .

• For instance, for a $1000 investment, the highest number of lot you can use is (1000 x 50) / 100.000 = 0.5 lot.

• Use Stop Loss. For Forex trading beginners, you cannot do without stop loss; don't even try to.

• Be alert when trading while the News Announcement is on. Always do a routine check on "Economic Calendar" timetable

found online to know about some avoidable news.


http://forex22.com/

RISK WARNING

• Forex trading comes with a lot of risks which may cause traders to lose all their investments, so this is

not ideal for everyone; you may want to stay off if you can't take the risk.

• The high-level leverage can be to your advantage and can as well be detrimental. Before investing in the

Foreign Exchange market, critically examine your investment objectives, experience as well as your ability to

take risk.

• Above all, if you cannot afford to lose the money you are about to invest, kindly have a rethink. Now,

you know about the high risk associated with this business model. Consult an independent financial expert

if you are not so sure what to invest.


forex trading course · • hedging and averaging methods ... forex market operations run all round...

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