FOREX Trading - an Easy Explanation (2)

 

 

Understand what you see:

 

 

Trading can be very confusing when you first start.

 

I'd like to help you to get rid of this confusion as quickly as possible by explaining some of the basic concepts.

 

 

The EURUSD graph above is showing us the value of the EURO against the United States Dollar.

 

The Blue, Red and Green lines in the graph are called Candles.

 

Each candle depicts how much the price (value) changed within a period of 5 minutes.

 

A candle consist out of 2 main parts:

 

- a thick part called the body of the candle.

- a thin line at the top and / or bottom called the wick of the candle.

 

A candle shows us 4 values:

 

 

  • The Open Value is the place (price) where the market was at the start of the period.

  • The Close Value is the place (price) where the market was at the end of the period.

  • The High Value shows us the highest that the market moved in the 5 minute period.

  • The Low Value shows us the lowest that the market moved in the 5 minute period.

 

The Colour of the Candles:

 

They can be any colour. The colour does not really matter.

The purpose of the colours is to show the direction that the market moved.

 

I use Blue, Red and Green colours to easily distinguish between the different directions the market is moving.

 

 

 

 

 

If the price moved upwards, the colour of the candle will be blue.

 

 

 

If the price moved downwards, the colour of the candle will be red.

 

 

The Blue candle opened (started) low and finished (closed) high, showing that the market moved upwards.

 

 

 

The Red candle opened (started) high and finished (closed) low, showing that the market moved downwards in this period.

 

 

If the market moved upwards, it means that the first currency in the combination (in this situation the EURO) got stronger and that the second currency in the combination (in this situation the USD) lost some value.

 

 

 

If the market moved downwards, it means that the first currency in the combination (in this situation the EURO) lost some value  and that the second currency in the combination (in this situation the USD) got stronger.

 

 

 

If the price at the end of the 5 minute period is the same as at the start of the 5 minute period then the colour will be green.

 

The green candles are called Doji's.

 

 

The first thing you will notice about the Doji candles is that they do not have a body.

The open value and the close value are the same.

 

You will find Doji's in graphs in places where there is not a lot of activity going on.

Doji's can also tell us that the market is uncertain.

You will often find it doji's places where the market may change direction.

 

 

By looking at graphs like this you have to determine if the graph is moving upwards or downwards.

 

If it is moving upwards, you will do a Buy transaction.

If it is moving downwards, you will do a Sell transaction.

 

 

New traders often gets confused with the Buy and Sell and the direction of the market.

 

The reason I changed the colours of the candles to Blue and Red is because it can help new traders to get rid of the confusion.

 

 

 

If you see Blue candles, click the Blue Buy button.

If you see Red candles, click the Red Sell button.

 

If you still gets confused, please check if you are not colour-blind!

 

You will see above the Buy and Sell buttons two different prices: 1.2375 / 1.2378

 

The first price (the lowest value) is the price you get when you sell.

The second price (the highest value) is the price you pay when you buy.

 

 

Why so many numbers?

 

Let's look at the number 1.2378 as is shown in the picture above.

This was the Buy price at the time the screen capture was done.

 

The price of the EUR USD is 1.2378

 

This means that for every 1 EURO, you get $1.23 (78) United States Dollars

Or

You have to pay $1.23 (78) United States Dollars to get 1 EURO

 

If we break up the number 1.2378

  • The 1 before the . is 100 American cents which is equal to $1.00

  • The second number the 2 represents 20c (= 2 x 10c)

  • The third number 3 represents 3c (= 3 x 1c)

  • The fourth number 7 represents 7/10 of a cent

  • The fifth number 8 represents 8/100 of a cent

 

Every 1/100 of a cent is called a Pip.

 

In Spot Forex trading market moves are measured in pips (= one hundreds of a cent)

 

You will see 2 prices, namely a buy and a sell price.

 

If you buy, you pay the buy price.

If you sell, you get the sell price.

 

  • It is like a transaction on a car where you have a market value and a book value.

  • If you buy a car from a car dealer, you will pay the market value.

  • If you sell a car to a car dealer, they will not give you the market value of the car, but the book value which is a lower value.

  • The dealer will then sell the car to another person at the market value again.

  • The difference between the market value and the book value is his profit.

 

In forex the difference between the buy and sell price is the dealer's

(broker) profit. It is called the Pipspread.

 

Whenever the graphs are moving upwards (blue candles), you will do a buy trade (click the Blue Buy button).

Whenever the graphs are moving downwards (red candles), you will do a sell trade (click the red Sell button).

 

If you buy, you must wait for price to change before you get out.

If the sell price can go above the price at which you bought, you make a profit.

 

If you sell, you must wait for price to change before you get out.

If the buy price can go below the price at which you sold, you make a profit.

 

Naturally we use Technical Analysis to determine the best places to activate Buy and Sell trades.

 

I hope this information will help you to get rid of some of the confusion.

 

Johan van As AFP

Forex Masters

 

 

Ps. Send me a message if you find these articles valuable. Ask questions and make suggestions.

 

 

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Disclaimer

 

Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.

 

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