I will tell you how to become rich.
Close the doors. 
Be fearful when others are greedy.
Be greedy when others are fearful.

Warren Buffett

Lesson 4: How to Trade Forex?

We have come to the most exciting part of Forex trading – itself! 

There are several factors and tools we should learn and master to achieve success:

  • Which assets we should trade
  • When and how frequently we should trade them 
  • How to assess short-term and long-term market directions
  • How to determine price points to enter and exit trades
  • How to choose the position size
  • How to manage the risk we are exposed to

This lesson is divided into 4 parts:

  1. Basic Forex Terminology
  2. Step-by-Step Forex Trading
  3. Forex Trading Order Types
  4. Forex Trading Examples

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Part I: Basic Forex Terminology

Before we get deeper into how to trade Forex and learn to open and close a position, let’s learn some basic terms frequently used in Forex world. 

What is Bid and Ask?

In Forex trading platforms, we will see Bid and Ask prices for each asset. 

  • Bid Price: The “sell price” to open a short position on an asset.
  • Ask Price: The “buy price” to open a long position on an asset.

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What is Pip and Pipette?

A pip is the last decimal of an asset’s price. An asset price can include 4 or 2 decimals.

  • If AUD/USD currency pair is trading at 0.6306, the pip would be the “6” at the end. 
    • When the AUD/USD price rises to 0.6307, it would have increased by “1 pip”.
  • If USD/JPY currency pair is trading at 107.75, the pip would be the “5” at the end. 
    • If the USD/JPY price falls to 107.72, it would have decreased by “3 pips”.

Sometimes, instead of 4-digit and 2-digit pricing systems, 5 and 3 digits are used respectively. 

  • AUD/USD would appear as 0.63065
    • The fourth digit, “6”, is still called the pip; the fifth digit, “5”, is called pipette
  • USD/JPY would appear as 107.759
    • The second digit, “5” is still called the pip; the third digit, “9”, is called pipette.

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What is Pip Value?

Pip value is the monetary value of a single pip movement. 

In an open trade, each time the price moves by 1 pip, we will have pip value of profit or loss. 

Pip Value = (Position Size) x (Number of Decimals)

If we open a position on EUR/USD with 100,000 as the position size:

  • Pip Value = (100,000) x (0.0001) = $10. 

So, every time the price of EUR/USD moves by 1 pip, we would profit or lose $10, depending on the market direction.

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What is Spread?

Spread is the pip difference between Bid and Ask prices.

It indicates the fee charged by the broker to open the position. 

Spread isn’t reflected directly on the account balance, but instead as an initial loss when we open a position. 

Spread = (Ask Price) – (Bid Price) 

Spread Cost = (Spread) x (Pip Value)

If EUR/USD has a Bid price of 1.2983 and an Ask price of 1.2986: 

  • Spread = (1.2986) – (1.2983) = 3 pips

When our position size is 100,000:

  • Pip Value = (100,000) x (0.0001) = $10
  • Spread = 3 pips
  • Spread Cost = (3 pips) x ($10) = $30. 

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What is Leverage?

Leverage is what makes Forex trading so exciting! 
It’s a trading tool which multiplies our funds and gives us a larger trading capital in the markets. 
If we have $10,000 capital and our broker offers 100:1 leverage,  our margin will be multiplied with 100 and become $1,000,000. our maximum risk will be limited to the initial $10,000 we invested.
Using leverage, we can either increase our position size and pip value or maintain the same position size but allocate smaller margins. 
 

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How leverage works in Forex trading?

Leverage is a blessing and a curse at the same time…

Increased pip value means making larger profits faster, but the same applies for losses.  

Let’s say we have $10,000 capital: 

  • If we were to invest the entire $10,000 to EUR/USD, we would earn $1 per pip movement. 
  • With 100:1 leverage, our capital and pip value are multiplied by 100
    • We now trade with $1,000,000 instead of $10,000
    • We now earn $100 per pip instead of $1 
  • However, the loss per pip movement would be $100, as well

In other words, leverage increases our profit potential and loss potential at the same time.

So, when we are trading with 100:1 leverage and the markets turn against us, our available margin would deplete 100 times faster. 

Therefore, we must use it with caution and in accordance with our total capital. 

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How to choose leverage amount?

Leverage is a trading feature offered by brokers to reduce margin requirement.

Depending on the broker, leverage can vary in account types, assets, and market conditions. 

MiFID II-compliant brokers are obliged to classify traders as Retail or Professional.

Leverage restrictions for Retail traders are as follows:

Asset Type Maximum Leverage
Major Currency Pairs 30:1
Non-Major Currency Pairs, Gold, and Major Indices 20:1
Commodities other than Gold, and Non-Major Indices 10:1
Stocks and ETFs 5:1
Cryptocurrencies 2:1

As traders, we are bound to trade with the leverage provided by the broker. 

However, the way and the extent we utilise leverage is up to us and we’ll learn more about it in the risk management section.

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What is Margin?

Margin is the common term used for real trading capital

The account balance represents the total margin amount we have. 

When we open a position, we allocate a certain amount of margin to the position. 

Position margin is the position size in the base currency. 

  • If we open 1 Lot (100,000) EUR/USD position, the margin requirement is €100,000.
  • If we open 2 Lots (200,000) AUD/USD position, the margin requirement is AU$200,000.
  • If we open 0.5 Lot (50,000) USD/CAD position, the margin requirement is $50,000.

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What is Margin in Leveraged Forex Trading?

In Forex trading, margin requirement of a position is scaled down by the leverage.

Margin Requirement = (Position Size) / Leverage

If we are trading with a broker which offers 400:1 leverage in currency pairs:

Asset Lot Size Position Size Leverage Margin Requirement
EUR/USD 1 100,000 EUR 400 250 EUR
AUD/USD 2 200,000 AUD 400 500 AUD
USD/CAD 0.5 50,000 USD 400 125 USD

As you may have noticed, the currency of each margin requirement is different. 

However, our Forex trading account is based on a specific currency (USD, EUR, GBP, or AUD).

In order to understand the actual amount in our account currency, the calculated margin amount would be converted to our account currency from the current exchange rate.

Actual Margin Requirement = (Margin Req.) x (Current Exchange Rate)

Let’s say we have a USD trading account:

Asset Lot Size Margin  Requirement Current Exchange Rate Actual Margin Requirement
EUR/USD 1 250 EUR EUR/USD: 1.1250 281.25 USD
AUD/USD 2 500 AUD AUD/USD: 0.6185 309.25 USD
USD/CAD 0.5 125 USD USD/USD: 1 125 USD

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What is Equity?

In our trading platform, Equity tells us our final account balance if we closed all open positions. 

Each open position has its own floating profit or loss (P/L) amount. 

These amounts are summed into a single Floating P/L, which is then used to calculate Equity.

Equity = (Account Balance) – (Floating P/L)

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What is Free Margin?

Free Margin is the amount of available margin we have in our account to open new positions. 

It takes into consideration the floating balance (Equity) and deducts the margin amount in use.

Free Margin = (Equity) – (Margin)

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What is Rollover/Swap?

CFDs are intraday financial contracts in their nature.

When a CFD position is left open overnight, it is rolled over to the next day. 

Position rollovers generate an interest which is called swap.

The interest amount is based on the interest rate of the currencies in the pair. 

A currency’s interest rate is decided by its respective central bank. For example, European Central Bank (ECB) decides the interest rate of holding Euro (EUR), while U.S. Federal Reserve (Fed) decides the interest rate of holding U.S. Dollar (USD).

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How does Rollover/Swap work in Forex currency pair CFDs?

Since there are two currencies in a pair, there are two different interest rates in effect.

  • If the interest rate of base currency is higher than the quote currency:
    • In Long (Buy) positions: trader earns interest
    • In Short (Sell) positions: trader pays interest
  • If the interest rate of base currency is lower than the quote currency:
    • In Long (Buy) positions: trader pays interest
    • In Short (Sell) positions: trader earns interest 

Swap earnings and payments in an open position is not directly reflected in the floating P/L of the position. It is consolidated only after the position is closed. 

Rollover/Swap calculations for Forex currency pairs and non-Forex asset CFDs are explained in detail in Lesson 8: Forex Trading Calculations.

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What is Commission?

A commission is a fee charged by the Forex broker to open a position. 

Broker’s policy can be no commissions or commissions on specific assets like stocks. 

The broker’s trading conditions must be reviewed carefully to understand their commission scheme.

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Part II: Forex Trading Order Types

  • Market Order: A market order is the regular trading order to immediately open a buy or sell position at the best current available price.
  • Pending/Limit Order: A pending order is a conditional order to buy or sell an instrument at a specified future price, only if the market reaches that specific price.

Pending Order Window

Pending Order List

  • Buy Limit: A pending order to “buy” the asset when the price falls to a level below the current price.
  • Buy Stop: A pending order to “buy” the asset when the price rises to a level above the current price.
  • Sell Limit: A pending order to “sell” the asset when the price rises to a level above the current price.
  • Sell Stop: A pending order to “sell” the asset when the price falls to a level below the current price.  
  • Take Profit: Take Profit (TP) is a conditional order to automatically close a profitable position when the market reaches a favourable predetermined price. TP is often used to close the position when it yields the desired amount of profit.
  • Stop Loss: Stop Loss (SL) is a conditional order to automatically close a losing position when the market reaches an unfavourable predetermined price. SL is often used to close the position when the loss incurred by the position reaches to a certain amount.

Setting Take Profit and Stop Loss when Opening Position

Setting Take Profit and Stop Loss in an Open Position

When an Open Position approaches Take Profit or Stop Loss

  • Trailing Stop: A trailing stop is a moving Stop Loss order. As the market fluctuates positively, the trailing stop loss is carried along with a specific distance of pips. When the trend reverses, trailing stop remains fixed and gets activated once it is reached. Trailing stop allows to protect the unrealised profits in a position in case the markets reverse.
  • Partial Closure: Partial closure is to close a portion of an open position. If we opened 1 lot, in the “Edit Position” window, we can change the lot size (e.g., 0.4 lot) and close only that much of the position. If we close 0.4 lot of a 1 lot position; 0.4 lot equivalent profit or loss will be consolidated, and 0.6 lot equivalent profit or loss will remain floating. 

Partial Closure Modifications

Open Position after Partial Closure 

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Part III: Step-by-Step Forex Trading

Forex trading consists of six simple steps:

  1. Choose a financial asset
  2. Choose a market direction
  3. Choose a position size
  4. Open the position
  5. Set Take Profit and Stop Loss
  6. Close the position

1. Choosing a Financial Asset

There is a wide range of assets we can trade in the Forex markets. 

It’s usually best to focus on a few assets and understand them in-depth.

We go to the trading platform of our broker, and choose an asset from their asset list: 

2. Choosing a Market Direction

Once we determine the asset, we open its price chart and identify the market direction.

The trend of the asset price can be on upwards, downwards, recovery, or flat. 

If we expect the asset value to increase, we open a Buy position. 

If we expect the asset value to decrease, we open a Sell position. 

3. Choosing a Position Size

After identifying which market direction to trade, we decide on the position size. 

Our position size and leverage will determine the margin use and pip value of the position.

4. Opening the Position

We chose the asset, identified the direction, and established the amount we want to invest. 

Now, we are ready to execute the position by clicking Buy or Sell button. 

  • If we believe that the asset price will increase, we open a Buy position.
  • If we believe that the asset price will decrease, we open a Sell position.

5. Setting Take Profit and Stop Loss

While it is tempting to make the most of the move, the markets can reverse pretty quickly. 

That’s why, we should predetermine our profit target and loss capacity.

Like all successful traders, we use these to set Take Profit and Stop Loss orders to our position.

TP and SL orders automatically close our position when the market reaches a certain price. 

6. Closing the Position

TP and SL orders automatically close the position, but we can manually close it, as well. 

We can use manual closure to exit position before TP or SL is triggered. 

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Part IV: Forex Trading Examples

We are in the last part of Lesson 4: How to Trade Forex. So far, we have learned: 

  • The basics of financial markets, Forex industry, and trading
  • How we can become a professional Forex trader and choose the right Forex broker
  • Different asset types and their advantages and disadvantages
  • Important terms used in the Forex industry
  • Step-by-step procedure in the Forex trading

In Lessons 5, 6, and 7, we will focus on how to become a successful Forex trader and learn:

Before we proceed with that, let’s understand how everything we learned so far comes together when CFD trading each asset type. 

-o-

There is no single market secret to discover, no single correct way to trade the markets. Those seeking the one true answer to the markets haven’t even gotten as far as asking the right question, let alone getting the right answer.

Jack Schwager

-o-

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Forex Currency Pairs CFD Trading: EUR/USD

EUR/USD represents the exchange rate between Euro (EUR) and U.S. Dollars (USD). 

The exchange rate (i.e. price) of a Forex currency pair can be affected by:

  • Interest rate decisions, monetary policies, and economic reports from either party
  • Political, social, and national events and issues in either region
  • Other global events which drive traders to invest into or out of either currency.

EUR/USD price is positively correlated with EUR and negatively correlated with USD.

Market Event Result Asset Effect EUR/USD Price
German Employment Positive EUR Gains Value Increases
French Manufacturing Negative EUR Loses Value Decreases
U.S. Consumer Confidence Positive USD Gains Value Decreases
U.S. Consumer Price Index Negative USD Loses Value Increases

An Example Scenario

1. Identifying an Opportunity

On first Friday of every month, USA publishes Nonfarm Payrolls (NFP) employment report. 

  • Positive result: the number of new employments increase; USD gains value, EUR/USD drops
  • Negative result: the number of new employments decrease; USD loses value, EUR/USD rises

As a Forex trader, we first check the economic calendar to see the forecasts. 

  • Forecast: Negative result; USD can lose value, EUR/USD can rise when report is published.

2. Opening a Position

We wait until the report time comes, and 30 minutes before the report we open our position.

Asset Direction Position Size Leverage Current Price:
EUR/USD Buy 1 Lot (100,000) 400:1 1.1385

Let’s calculate our margin requirement and pip value.

  • Margin Requirement: (Position Size) x (Current Price) / Leverage
    • MR = (100,000 EUR) x (1.1385) / 400 = $284.64
  • Pip value: (Position Size) x (Number of Decimals)
    • PV = (100,000) x (0.0001) = $10

We will allocate $284.64 to open this position and profit/lose $10 on each pip movement.

By clicking Buy button on the platform, we open our 1 Lot EUR/USD position at 1.1385.

3. Setting Take Profit and Stop Loss

Next, we should set Take Profit and Stop Loss levels using support and resistance

Support and resistance are price levels which the asset struggled to break beyond in the past.

  • Support: below the current market price, will be approached when falling
  • Resistance: above the current market price, will be approached when rising

Since this is a Buy position, we will use resistance for Take Profit and support for Stop Loss.

We check EUR/USD price chart to determine the next support and resistance levels and find:

  • Next Resistance @ 1.1430 – our Take Profit is set here, at 45 pips distance
  • Next Support @ 1.1355 – our Stop Loss is set here, at 30 pips distance

With 45 pips TP and 30 pips SL, we have a 3/2 ratio between potential return and potential risk.

4. The Moment of Truth

NFP time comes and the report is published with a negative outcome. 

USD is losing value and EUR/USD price is increasing; our Buy position is becoming profitable.

What happened to our position?

10 minutes later, EUR/USD reaches 1.1430 and our position is closed automatically at TP. 

How much we earned? 

We had a pip value of $10 and set TP level at 45 pips. So, ($10) x (45 pips) = $450. 

We invested $284.64 and earned $450 only in 40 minutes!

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Commodities CFD Trading: Gold

Gold is the most popular precious metal and mostly traded in ounces against USD. 

It is famous for being the leading “safe haven” option when the markets are in chaos. 

Prices of Gold can be affected by:

  • Any market event that can affect USD value.
  • Any market event related with Gold-trading countries.
  • Volatility in major high-risk assets such as Crude Oil or Equities
  • Increase in risk sentiment towards low-risk assets such as Treasury Bonds
  • Global inflation, wars and natural disasters, political and social unrests, 

In Forex markets, Gold (XAU) is traded against U.S. Dollars (USD) as a pair: XAU/USD. 

XAU/USD is positively correlated with ounce price of Gold and negatively with USD.

Market Event Result Asset Effect XAU/USD Price
U.S. Consumer Confidence Positive USD Gains Value Decreases
U.S. Consumer Price Index Negative USD Loses Value Increases

An Example Scenario

1. Identifying an Opportunity

Coronavirus pandemic has shaken the global economy and financial markets tremendously. 

The U.S. has the most cases, and President Trump is going to give details about the situation.

However, what investors want to know is how soon economy can start recovering.

  • Positive Result: Cases are decreasing, economy will recover; investors feel less risk, Gold falls
  • Negative Result: Cases are increasing, economy struggles; investors feel more risk, Gold rises

Investors are interested in protecting their wealth by orienting towards safer options like Gold.

2. Opening a Position

An hour before the conference, we assess the Gold prices and open our position.

Asset Direction Position Size Leverage Current Price:
Gold (XAU/USD) Buy 0.5 Lot (50 ounces) 100:1 $1,615

Let’s calculate our margin requirement and pip value.

  • Margin Requirement: (Position Size) x (Current Price) / Leverage
    • MR = (50 ounces) x ($1,615) / 100 = $807.50
  • Pip value: (Position Size) x (Unit Price Change)
    • PV = (50 ounce) x ($1 for each ounce) = $50

We will allocate $807.50 to open this position and profit/lose $50 on each dollar movement.

By clicking Buy button on the platform, we open our 0.5 Lot Gold position at $1,615.

3. Setting Take Profit and Stop Loss

Next, we should set Take Profit and Stop Loss levels using support and resistance

Since this is a Buy position, we will use resistance for Take Profit and support for Stop Loss.

We check Gold price chart to determine the next support and resistance levels and find:

  • Next Resistance @ $1,645 – our Take Profit is set here, at $30 pips.
  • Next Support @ $1,600 – our Stop Loss is set here, at $15 pips.

With $30 pips TP and $15 pips SL, we have a 2/1 potential return and potential risk ratio.

4. The Moment of Truth 

When the press conference begins, we observe that Gold prices start fluctuating.

As Trump talks about the situation, the investors become more anxious about the future. 

They invest more into the precious metal, and Gold prices appreciate as high as $1653/ounce. 

At the end of the conference, Trump announces that they found the vaccination.

Market sentiment changes immediately, and Gold price rapidly drops to $1588/ounce. 

What happened to our position?

Since we had set Take Profit and Stop Loss, we were ready for any scenario.

When Gold was rising to $1653, our TP was activated at $1645/ounce.

Our position got closed automatically, and our profits were consolidated.

How much we earned? 

We had a pip value of $50 and set TP level at $30 pips. So, ($50) x ($30 pips) = $1500. 

We invested $807.50 and earned $1500 only in an hour!

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Stocks CFD Trading: Apple

Apple is the world’s most valuable brand and has an ever-growing customer base and revenue. 

Apple stocks are traded in the Nasdaq Stock Exchange with the ticker AAPL. 

Apple stock price can be influenced by:

  • Quarterly earning reports, new product launches, management changes, and innovations 
  • Tech and retail industry events like new inventions, manufacturing methods, regulations 
  • U.S. monetary policies such as interest rates and tax changes

In Forex markets, Apple (AAPL) is traded against U.S. Dollars (USD) as a pair: AAPL/USD. 

AAPL/USD is positively correlated with share price of Apple and negatively with USD.

Market Event Result Asset Effect AAPL/USD Price
Apple Earnings Report  Positive AAPL Gains Value Increases
U.S. Interest Rate Positive USD Gains Value Decreases

An Example Scenario

1. Identifying an Opportunity

Apple is expected to publish earnings report for first quarter (Q1) of 2020 after markets close.

Earnings reports reveal last quarter’s revenue, profit, dividends, and earnings per share (EPS). 

We open our position before the markets close and get results next day when markets open.

Stock analysts forecast that Apple’s revenue and EPS had dropped in Q1.

  • Positive Result: revenue and EPS increases; Apple stock prices gain value
  • Negative Result: revenue and EPS decreases; Apple stock prices lose value

If the results are congruent with forecasts, Apple stock prices can drop.

2. Opening a Position

Towards the end of the trading day, we open our position on Apple.

Asset Direction Position Size Leverage Current Price:
Apple (AAPL/USD) Sell 1 Lot (100 shares) 10:1 $285.00

Let’s calculate our margin requirement and pip value.

  • Margin Requirement: (Position Size) x (Current Price) / Leverage
    • MR = (100 shares) x ($285) / 10 = $2,850
  • Pip value: (Position Size) x (Unit Price Change)
    • PV = (100 shares) x ($1 for each share) = $100

We will allocate $2,850 to open this position and profit/lose $100 on each dollar movement.

By clicking Buy button on the platform, we open our 1 Lot Apple position at $285.00.

3. Setting Take Profit and Stop Loss

Now, we should set Take Profit and Stop Loss levels using support and resistance

Since this is a Sell position, we will use support for Take Profit and resistance for Stop Loss.

We check Apple price chart to determine the next support and resistance levels and find:

  • Next Support @ $240.00 – our Take Profit is set here, at $45 pips.
  • Next Resistance @ $300.00 – our Stop Loss is set here, at $15 pips.

With $45 pips TP and $15 pips SL, we have a 3/1 potential return and potential risk ratio.

4. The Moment of Truth

After the markets close, Apple releases the Q1 earnings report.

The results show that both revenue and EPS decreased even more than expected. 

Next day, when the markets open, Apple stocks start the day at $210/share, dropping 25%. 

In other words, there has been a $75 gap between previous day’s close and today’s open.

What happened to our position?

When the market opens, our Take Profit was activated at the price we set.

Our position was closed automatically and consolidated our profit. 

How much we earned? 

We had a pip value of $100 and set TP level at $45 pips. So, ($100) x ($45 pips) = $4500. 

We invested $2,850 and earned $4,500 over a night!

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Indices CFD Trading: S&P 500

Standard & Poor’s 500 (S&P 500) is a capitalisation-weighted stock index. 

It measures the performance of the top 500 most valuable public American companies.

S&P 500 companies derive revenue mostly from international trade, meaning S&P 500 indicates the power of American businesses in global trade, not domestic U.S. economy. 

S&P 500 index price can be influenced by:

  • Stock prices of high-rank companies like Microsoft, Apple, Facebook, and Amazon. 
  • Market events that affect largely represented industries like Oil and Finance
  • Economic and political events that affect U.S. businesses and trade.
  • Global events like U.S.-China trade war, regional conflicts like Brexit, and natural disasters.

In Forex markets, S&P 500 (SPX) is traded against U.S. Dollars (USD) as a pair: SPX/USD. 

SPX/USD is positively correlated with contract price of S&P 500 and negatively with USD.

Market Event Result Asset Effect SPX/USD Price
Apple Earnings Report  Positive SPX Gains Value Increases
Microsoft Earnings Report Negative SPX Loses Value Decreases
U.S. Consumer Confidence Negative USD Loses Value Increases

An Example Scenario

1. Identifying an Opportunity

The U.S.-China trade war had strong political, economic, and social impacts on both countries. 

President Trump is going to hold a press conference and inform about new trade measures. 

Analysts anticipate him to put the trade war on hold due to the damage caused by Coronavirus. 

  • Positive Result: Extra tariffs are paused, profitability will increase; S&P 500 price increases
  • Negative Result: Extra tariffs continue, profitability will stay low; S&P 500 price decreases

Pausing extra taxation can increase the American companies’ profitability and help S&P 500 rise. 

2. Opening a Position

An hour before the speech, we check S&P 500 technical chart and open our position.

Asset Direction Position Size Leverage Current Price:
S&P 500 (SPX/USD) Buy 0.5 Lot (50 contracts) 100:1 $2,930

Let’s calculate our margin requirement and pip value.

  • Margin Requirement: (Position Size) x (Current Price) / Leverage
    • MR = (50 contracts) x ($2,930) / 100 = $1,465
  • Pip value: (Position Size) x (Unit Price Change)
    • PV = (50 contracts) x ($1 for each contract) = $50

We will allocate $1,465 to open this position and profit/lose $50 on each dollar movement.

By clicking Buy button on the platform, we open our 0.5 Lot S&P 500 position at $2,930.

3. Setting Take Profit and Stop Loss

It’s time to set Take Profit and Stop Loss levels using support and resistance

Since this is a Buy position, we will use resistance for Take Profit and support for Stop Loss.

We check S&P 500 price chart to determine the next support and resistance levels and find:

  • Next Resistance @ $3,000 – our Take Profit is set here, at $70 pips.
  • Next Support @ $2,900 – our Stop Loss is set here, at $30 pips.

With $70 pips TP and $30 pips SL, we have a 2.3/1 potential return and potential risk ratio.

4. The Moment of Truth 

Trump’s conference begins with a spirited tone, emphasizing the greatness of the US. 

However, soon he implies that the tariffs would remain as they are, and more can be expected. 

The markets go sour and S&P 500 index falls as low as $2805, losing $125 in a few minutes. 

What happened to our position?

Our Stop Loss order was activated when the price dropped to $2900 and closed the position.

How much we lost? 

We had a pip value of $50 and set SL level at $30 pips. So, ($50) x ($30 pips) = $1500. 

If we didn’t have SL, the $125 drop of S&P 500 would cost us $6,250 in an hour.  

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Cryptocurrencies CFD Trading: Bitcoin

Cryptocurrencies promise anonymity, speed, and cost-effectiveness in digital transactions. 

However, real-life use of cryptocurrencies is still in question, making them risky investments. 

Cryptocurrency prices experience high volatility due to the low market liquidity.

Bitcoin is the flagship of the cryptos, and its daily price change range is $1,000 on average.

The prices of Bitcoin and altcoins can be affected by: 

  • Governmental and financial regulations on using and/or trading cryptocurrencies
  • Development of underlying blockchain technologies
  • Emergence of new altcoins. 

In Forex markets, Bitcoin (BTC) is traded against U.S. Dollars (USD) as a pair: BTC/USD. 

BTC/USD is positively correlated with coin price of Bitcoin and negatively with USD.

Market Event Result Asset Effect BTC/USD Price
Blockchain Improvements Positive BTC Gains Value Increases
New Legal Restrictions Negative BTC Loses Value Decreases
U.S. Interest Rate  Negative USD Loses Value Increases

An Example Scenario

1. Identifying an Opportunity

Rumours are spreading that eBay is going to start accepting Bitcoin payments on their platform. 

Their annual seller conference is due in a week, and the announcement is expected to be made. 

Since the rumours were spread about a week ago, Bitcoin prices are on a strong uptrend.

  • Positive Result: eBay announces accepting Bitcoin payments; Bitcoin value will increase
  • Negative Result: eBay doesn’t make such announcement; Bitcoin value will decrease

If the expected announcement is made, the prices can rise even further.

2. Opening a Position

A day before the beginning of the summit, we analyse Bitcoin charts to open a position.

Asset Direction Position Size Leverage Current Price:
Bitcoin (BTC/USD) Buy 1 Lot (10 Bitcoins) 5:1 $8,375

Let’s calculate our margin requirement and pip value.

  • Margin Requirement: (Position Size) x (Current Price) / Leverage
    • MR = (10 Bitcoins) x ($8,375) / 5 = $16,750
  • Pip value: (Position Size) x (Unit Price Change)
    • PV = (10 Bitcoins) x ($1 for each Bitcoin) = $10

We will allocate $16,750 to open this position and profit/lose $10 on each dollar movement.

By clicking Buy button on the platform, we open our 1 Lot Bitcoin position at $8,375.

3. Setting Take Profit and Stop Loss

Let’s set our Take Profit and Stop Loss levels using support and resistance

Since this is a Buy position, we will use resistance for Take Profit and support for Stop Loss.

We check Bitcoin price chart to determine the next support and resistance levels and find:

  • Next Resistance @ $8,975 – our Take Profit is set here, at $600 pips.
  • Next Support @ $7,925 – our Stop Loss is set here, at $450 pips.

With $600 pips TP and $450 pips SL, we have a 1.3/1 potential return and potential risk ratio.

Note: The extreme volatility in Bitcoin prices requires large SL distances to avoid early closure; but still allows strong profitability despite low return/risk ratio.

4. The Moment of Truth

eBay founder starts the conference with future innovation plans, but Bitcoin isn’t mentioned.

As a result, Bitcoin prices start falling and drop to settle around $8,100. 

Next, an eBay executive appears and explains how they will implement Bitcoin. 

The rumours are confirmed, and Bitcoin price shots immediately and finishes the day at $9265. 

What happened to our position?

Our position was initially at $2,750 (-275 points x 10 Bitcoins) floating loss. 

However, when the other executive finished his speech, Bitcoin was back on track. 

It reached beyond our TP level and closed the position automatically on the way. 

If our SL was too close to the opening price, we could have suffered an early loss.

How much we earned? 

We had a pip value of $10 and set TP level at $600 pips. So, ($10) x ($600 pips) = $6000. 

We invested $16,750 and earned $6,000 in a day!

– – – – – o – – – – –

ETF CFD Trading: Energy Select Sector SPDR

Energy Select Sector SPDR Fund (XLE) is the largest Energy sector ETF with over $8 billion assets.

It focuses mainly on the stocks of oil, natural gas, and alternative energy companies in the U.S.

XLE allows trading on the performance of the U.S. energy sector, instead of individual stocks. 

XLE prices are affected by: 

  • Energy industry events such as OPEC decisions or emergence of alternative energy sources
  • Oil-using industry events such as Tourism industry halting due to a pandemic
  • Political events such as environmental regulations, Oil price wars and geopolitical tensions 

In Forex markets, Energy Select ETF (XLE) is traded against U.S. Dollars (USD) as a pair: XLE/USD. 

XLE/USD is positively correlated with contract price of XLE ETF and negatively with USD.

Market Event Result Asset Effect XLE/USD Price
OPEC Production Cuts Positive XLE Gains Value Increases
Environmental Regulations Negative XLE Loses Value Decreases
U.S. Employment Data Positive USD Gains Value Decreases

An Example Scenario

1. Identifying an Opportunity

Coronavirus crisis brought Tourism and Industrial Manufacturing sectors to a halt.

Both industries had high Oil consumption; now, Oil demand decreases, inventories increase. 

Consequently, Crude Oil prices are driven down, along with stocks of Oil industry companies. 

OPEC is holding an urgent meeting to decide on measures to manage the Coronavirus’ impact.

  • Positive Result: Measures to decelerate the fall of Oil prices; stocks gain value, XLE increases
  • Negative Result: No significant measures; stocks continue losing value, XLE decreases

Their decision can slowdown the fall in Crude Oil prices, and even drive it higher. 

As a result, the profitability of Oil companies can be restored, and the stock prices can recover. 

2. Opening a Position

A day before the meeting, we analyse major components of XLE ETF like Chevron stocks.

Asset Direction Position Size Leverage Current Price:
XLE ETF (XLE/USD) Buy 1 Lot (1,000 contracts)  20:1 $42.50

Let’s calculate our margin requirement and pip value.

  • Margin Requirement: (Position Size) x (Current Price) / Leverage
    • MR = (1,000 contracts) x ($42.50) / 20 = $2,125
  • Pip value: (Position Size) x (Unit Price Change)
    • PV = (1,000 contracts) x ($1 for each contract) = $1,000

We will allocate $2,125 to open this position and profit/lose $1,000 on each dollar movement.

By clicking Buy button on the platform, we open our 1 Lot XLE ETF position at $42.50.

3. Setting Take Profit and Stop Loss

Now, we should set our Take Profit and Stop Loss levels using support and resistance

Since this is a Buy position, we will use resistance for Take Profit and support for Stop Loss.

We check XLE ETF price chart to determine the next support and resistance levels and find:

  • Next Resistance @ $43.15 – our Take Profit is set here, at $0.65 pips.
  • Next Support @ $42.10 – our Stop Loss is set here, at $0.40 pips.

With $0.65 pips TP and $0.40 pips SL, we have a 1.63/1 potential return and potential risk ratio.

4. The Moment of Truth

OPEC decides to make another large-scale cut in oil production to slowdown the stockpiling. 

Demand can’t be increased; but inventory growth can be geared down to maintain Oil prices. 

The market reacts positively and the financial assets of the U.S. Oil industry start rising. 

XLE price rises to $43.20 briefly but drops back below $43 mark to close the day at $42.80. 

What happened to our position?

Our Take Profit activated as XLE passed $43.15, and we narrowly took advantage of the move. 

How much we earned? 

We had a pip value of $1,000 and set TP level at $0.65 pips. So, ($1,000) x ($0.65 pips) = $650. 

– – – – – o – – – – –

Bond CFD Trading: 5-Year U.S. Treasury Note

5-Year U.S. Treasury Note (US5Y) is one of the preferred bonds due to its duration/yield ratio.

Bonds are government-backed securities and often considered as the safest investments. 

A bond’s return is based on the country’s interest rate and lower than other financial assets. 

The main risk is the issuing country’s bankruptcy; so, the risk level is incredibly low. 

US5Y prices are affected from:

  • Global crises like Coronavirus, large-scale geopolitical conflicts and trade wars
  • Political uncertainties and deteriorating national economic conditions
  • Investors’ appetite towards riskier assets like stocks and currencies

In Forex markets, 5Y U.S. Bond (US5Y) is traded against U.S. Dollars (USD) as a pair: US5Y/USD. 

US5Y/USD is positively correlated with contract price of 5-Year Note and negatively with USD.

Market Event Result Asset Effect US5Y/USD Price
Coronavirus Crisis Positive US5Y Gains Value Increases
Trade War Ends Negative US5Y Loses Value Decreases
U.S. Unemployment Rate  Positive USD Gains Value Decreases

An Example Scenario

1. Identifying an Opportunity

U.S. President Donald Trump is criticising the high interest rates and pushing an interest cut. 

Although Federal Reserve resists, they have to comply with the President’s request. 

Fed didn’t cut interest rates in their last two meetings but signalled that it may happen soon. 

This week, Fed has interest rate meeting, and a 0.25 base point interest rate cut is forecasted. 

  • Positive Result: Interest rates don’t change; bond yields remain same, US5Y price falls 
  • Negative Result: Interest rate cut; bond yields fall, US5Y price rises

2. Opening a Position

In the morning of the meeting day, we analyse 5-Year U.S. Treasury Note yields.

Asset Direction Position Size Leverage Current Price:
5Y U.S. Note (US5Y/USD) Buy 1 Lot (100 contracts)  20:1 $127.50

Let’s calculate our margin requirement and pip value.

  • Margin Requirement: (Position Size) x (Current Price) / Leverage
    • MR = (100 contracts) x ($127.50) / 20 = $637.50
  • Pip value: (Position Size) x (Unit Price Change)
    • PV = (100 contracts) x ($1 for each contract) = $100

We will allocate $637.50 to open this position and profit/lose $100 on each dollar movement.

By clicking Buy button on the platform, we open our 1 Lot US5Y position at $127.50.

3. Setting Take Profit and Stop Loss

Once we open, we should set our Take Profit and Stop Loss levels using support and resistance

Since this is a Buy position, we will use resistance for Take Profit and support for Stop Loss.

We check US5Y price chart to determine the next support and resistance levels and find:

  • Next Resistance @ $130.00 – our Take Profit is set here, at $2.50 pips.
  • Next Support @ $125.85 – our Stop Loss is set here, at $1.65 pips.

With $2.50 pips TP and $1.65 pips SL, we have a 1.5/1 potential return and potential risk ratio.

4. The Moment of Truth

At the end of the meeting, Fed released a statement and announced 0.25 base point cut. 

Bond prices started increasing, and a half hour later US5Y price reached $130.40. 

For the rest of the day, the price is maintained at this level. 

What happened to our position?

As it passed through $130, our Take Profit order was activated.

The position was closed automatically to consolidate our profit.

How much we earned?

We had a pip value of $100 and set TP level at $2.50 pips. So, ($100) x ($2.50 pips) = $250. 

– – – – – o – – – – –

Becoming a Successful Trader

Big congratulations! We completed the first part of the course!

We learned:

  1. What is Forex Trading
  2. How to Become a Forex Trader
  3. Asset types in Forex Trading
  4. How to Trade Forex

We acquired the necessary foundation to trade in the Forex markets.

Now, we are fully equipped to build on this knowledge and become a successful trader.

LET’S GO!