Forex trading: the complete guide
The largest financial market on earth is the Forex or currency market. The Forex market allows you to speculate on rising and falling exchange rates. But how exactly does currency trading work and what factors influence the exchange rates? In this complete Forex guide you will learn everything you need to know to start investing on the Forex market.
What will you learn in this guide?
- Exchange rates: how do exchange rates work?
- Trading in Forex: how can you invest in currencies?
- Predicting the rate: how can you predict the exchange rate?
- Base & quote currency: what are they and how to use them?
- Types of currencies: which currencies can you trade in?
- Trading in practice: how does Forex trading work?
- Forex terms: important Forex terms are explained.
- Price movements: why and how do prices move?
- Brokers: which brokers are active on the Forex market?
- Dollar: why is the dollar so important?
- Some tips and pointers for trading in Forex
The exchange rate is essential when you start trading in Forex. The exchange rate indicates the value of one currency in relation to another. When trading in currencies, you usually trade in several currencies concurrently. When you invest in the euro/dollar, you are investing in the value of the euro against the dollar.
If the price of the euro against the dollar is 1.10 then you can buy 1.1 dollars for 1 euro.
Globally, many people speculate on different currency pairs. There are always two options when you invest in currencies. You can either buy a currency pair or short sell a currency pair. When you trade in EUR/USD you would have two options:
- When you buy, you are betting on a rise in the euro against the dollar.
- When you short you are betting on a fall in the euro against the dollar.
Because you can bet on both rising and falling prices, you can make a profitable trade in any market. In order to achieve a positive result you will have to predict the future market developments. But where can you actually start trading Forex as a beginner?
You can trade Forex by opening an account with an online broker. It is important to select a low-cost broker. When you choose an expensive broker, you spend an unnecessary amount of money on transaction fees, thus subtracting from any gains you make. Do you want to know at which broker you can trade Forex? In our comparison you can discover which brokers are best suited for trading Forex:
If you want to trade successfully in currency pairs such as EUR/USD, GBP/USD and AUD/USD, you need to be able to predict price changes. You should always try to determine whether one currency is overvalued or undervalued against the other currency. When a currency is undervalued you buy and when it is overvalued you go short.
Using a variety of analyses you can determine whether a given currency’s price will fall or rise. The most common analyses are:
- Technical analysis: viewing and predicting patterns using graphical analysis.
- Fundamental analysis: predicting the change in a given currency using economic analysis.
When you trade in Forex, you always have to deal with a base and a quote currency. At EUR/USD, the euro is the base currency and the dollar is the quoted currency.
- The base currency is the currency you buy when you trade in the currency pair.
- The currency quote is the currency you sell when you trade in the currency pair.
The pair EUR/USD thus indicates how many dollars you get for a euro. There are three different situations that can occur in any currency pair:
- 0.9 EUR/USD: this means that one euro is worth 0.90 dollars.
- 1 EUR/USD: this means that one euro is worth one dollar.
- 1.1 EUR/USD: this means that one euro is worth one dollar and 10 cents.
When you think the base currency is getting stronger, you buy the pair (long) and when you think the quote currency is getting stronger, you sell the pair (short).
For many brokers, the currency pairs are divided into the following categories:
- Major pairs: seven currencies responsible for 80% of global Forex trading: EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD and AUD/USD.
- Minor pairs: less often traded. Often major currencies without the dollar. Examples are EUR/CHF and GBP/JPY.
- Exotic pairs: from emerging or small countries. Examples are the Polish zloty and the Mexican peso.
You can trade forex using all kinds of derivatives. However, the starting point behind forex trading is always the same. You buy one currency and you sell another currency. This allows you to benefit from the difference in value between the currency pairs.
With a broker, the results you achieve are automatically tracked. It is always wise to try your hand at Forex investing using a free broker trial. With the button below, you can open a free demo account immediately:
When you start trading in Forex, it is imperative you gain an understanding of the terms below.
What is a lot at Forex?
Currencies are traded in fixed sizes. When you trade Forex we call these fixed amounts lots. A standard lot has a size of 100,000 units of the basic currency. Most CFD brokers also allow you to trade in mini (10,000 units) and micro (1,000 units) lots.
What is a pip?
Pips are used to display changes in the price of a currency. If the price moves from EUR/USD 1.0000 to 1.0001, there is an increase of one pip. For some brokers, the price is also tracked to the fifth number after the comma: these changes are called pipettes.
In some currency pairs, pips work slightly differently. This is the case with currencies that are recorded with fewer numbers after the comma. This is the case with the Japanese Yen. With the Japanese Yen, the second number after the comma is a pip.
What is leverage?
With many brokers, you have the option to apply leverage to your trades. A leverage makes it possible to open a bigger trading position with a smaller amount of money. The maximum leverage for many brokers is 1:30. With an investment of $10,000 you can then trade with $300,000. But how does leveraging affect your potential return with a 1 percent increase?
- Without leverage, your profit is 1%.
- With 1:30 leverage, your profit is 30%.
However, when you use leverage, you also stand to lose more if the market moves in the opposite direction:
- Without leverage, your loss is 1%.
- With 1:30 leverage, your loss is 30%.
A leverage makes it possible to achieve a high return in a short period of time. At the same time, you have to be careful. You can also quickly lose your entire deposit with a leverage.
How does the margin work?
When you put a lever on your Forex investment, you are trading by a margin. The margin indicates how much money you need in your account to open your position. With a leverage of 1:30, you only need $3,300 in your account to trade with an investment of $100,000.
You should always have enough money in your account to maintain your open positions. If you no longer have enough money in your account, you may face a margin call. When you face a margin call, you can lose the full amount in your investment account.
When you want to invest successfully in Forex, you need to understand why the prices are moving and what drives these changes. There are several reasons why the exchange rate of one currency can change against another currency. In this section we will discuss the main causes of currency price fluctuations.
Inflation has a strong impact on the value of a local currency. If inflation rises faster within a country than within other countries, the currency of the country with higher inflation will become less valuable. When this happens within Europe, the buying power of the euro falls. The value of the euro against the dollar then decreases and the price falls.
Interest rates also have a strong influence on the exchange rate. If the central bank has a relatively higher interest rate, the value of the currency will increase. After all, people are more in demand for a currency that yields a higher return. Banks can adjust interest rates to ensure that a currency does not become too expensive or cheap in relation to other currencies.
Speeches by the chairmen of central banks often cause volatility in the currency market. Day traders can benefit from the price movements that coincide with interest rate decisions.
The need for investing (+)
A strong economy will often boost a currency’s value. This happens, for example, when there is a high demand for investments. Foreign companies will then exchange money to invest in the country in question. Due to the increased interest, the exchange rate will rise.
Money revolves around trust. The only reason we value an otherwise worthless piece of paper is because we have faith in the institution behind it. When this confidence rises, the exchange rate of the currency increases. Are we losing confidence? Then the exchange rate can collapse quickly.
Fleeing capital (-)
In some countries the economy is not performing well. When this happens people often exchange their money for other currencies. In many African countries inhabitants prefer the dollar over their local currency. When the trust in the local economy is low and people exchange their money in other currencies, the local currency falls considerably.
A cheap currency can be beneficial for a country’s economy. After all, when the currency is cheap, foreign companies can purchase products and services for less money. Governments can therefore choose to intentionally devalue a currency. Devaluation can be achieved by lowering the interest rates.
Before you trade in Forex, it is wise to remember that there are many entities constantly buying and selling currencies. The value of a currency such as the dollar is dictated by supply and demand. When you can understand and predict the actions of a large group of people, you will be better able to predict the future exchange rate.
Investors in shares
When you invest in U.S. stocks you need dollars first. Before you can buy an American share you will first have to exchange your local currency for dollars. All stock trading combined will affect the exchange rate of a currency.
Speculators are individuals and organizations that try to take advantage of the many daily currency fluctuations of currency pairs. When many speculators buy or sell a currency, this can affect the exchange rate.
Multinationals do business in different regions. When they buy or sell products and services in other countries they have to exchange currencies. The demand for products from a given region can therefore significantly influence the demand of a particular region’s currency.
Central banks often try to influence the value of currencies. They can do this by printing more money. When a central bank prints more money the supply increases which can lower the currency rate. However, central banks can never influence the entire exchange rate: the Forex market is simply too big for that.
Which institutions should you look out for when trading Forex?
When you invest in Forex, there are several institutions that you should keep a close eye on. Below we discuss the main parties that are active on the Forex market.
The news can affect the price of a currency. When positive news emerges about a region, it can affect the price of the currency used there. Therefore, always think carefully about how the news will affect both the supply of and demand for a given currency.
Sometimes there may be a self-fulfilling prophecy. If the majority in the market believes that a particular development will take place, it will likely come true. If the majority believes that the euro’s value will increase, people will continue to buy the euro until this price level is reached. It is therefore wise to keep an eye on the general sentiment within the market surrounding currencies.
Economic data tells you how the economy is performing. For example, you can keep an eye on inflation. When inflation within the euro area rises above 2%, the ECB usually raises interest rates. With higher interest rates, the currency becomes more attractive, which presents an opportunity to make a frugal investment.
Investors want to know if it's wise to lend money to a country. Several agencies therefore give countries a credit rating. The credit rating indicates how likely it is that a country can meet its debts. If the credit assessment develops positively, it can increase the currency rate behind it. Trust plays an important role in the financial markets.
The availability of a currency is determined by the central bank. After the economic crisis, for example, you saw central banks doing quantitative easing. They then print more money, which can fuel spending within the country. If supply increases in the case of equal demand, the price of the currency will decrease.
When you start trading Forex you might notice that the dollar is often seen as the dominant currency. This is partly because the economy of the United States is the largest of the world. It is an open economy that many parties can participate in. When the value of the dollar decreases, it can reduce profits for companies around the world.
The dollar is widely used for trading and investing. Many stocks, but also commodities such as gold and silver are listed in dollars. Some countries have even linked the exchange rate of their currency to the dollar.
In the end the dollar is more than a currency. The dollar is the glue that holds the entire system together. Increases and falls on the dollar have a strong impact on the global markets.
When you start speculating on the Forex market, you must take some tips in to account. Firstly, use a stop loss. With a stop loss, you make sure you don't lose more than a determined percentage of your position. By doing so, you can protect yourself against unexpected events.
Forex price patters are often more predictable than the price patterns of stocks. Forex patterns are easier to spot and the movements are often less extreme. Forex can therefore be very lucrative for day traders. However, it is important to practice before you start working with large amounts of money. Many brokers allow you to try out the possibilities for free with a demo.
Finally, it is wise to manage your risk and return well. If an investment in a currency pair can yield $100 but has a risk of $1000 then you should look for a better opportunity. Look for trading opportunities where you have a chance of a high potential gain and a low potential loss.
Try trading risk free?
What are pips and how do they work?
When investing in Forex, you often come across the term pips. But what are pips and how do you calculate the value of a pip?
What are pips?
The word pip stands for percentage in point. Pips are used to represent the smallest possible changes in the exchange rate of a currency. For most currency pairs, this number is displayed with four digits after the decimal point. When the EUR/USD pair rises from 1.1210 to 1.1211, the currency pair rises by one pip.
How much is one pip worth?
You can calculate the value of a pip by multiplying the position size by the last digit after the decimal point.
For the EUR/USD currency pair, you can calculate the value of one pip as follows: 100,000 × 0.0001 = $10. One pip is then equal to ten US dollars.
Do you want to know the value of a pip in euros? Then multiply the value of one pip by the exchange rate with the euro. If the exchange rate of EUR/USD were 1.1, you would divide $10/1.1 = €9.09. By using this formula, you can calculate the value of a pip in your own currency.
The difference is 2 pips or 0.0002
How do you determine transaction costs with pips?
At many Forex brokers, transaction fees are indicated in pips. For many new investors, it can be difficult to determine how much you actually pay. For the EUR/USD currency pair, you sometimes have to pay one pip in transaction costs. Fortunately, you can easily calculate how much your transaction costs are.
One pip in transaction costs is equal to 0.0001. You can then multiply this amount by the total value of your transaction.
For example, if you invest $1,000, your transaction costs will be $1,000 * 0.0001, which amounts to $0.10. As you can see, transaction feesfor currency investments don’t have to be high. In this article, you can read more about transaction costs for Forex investments.
Pips with two decimals: Japanese Yen
For most currency pairs, pips are determined based on four digits after the decimal point. There are also currency pairs that are quoted with fewer digits after the decimal point. The most well-known example of this is the Japanese Yen.
The value of the Japanese Yen is tracked to two digits after the decimal point. A rise from 90.20 to 90.30 is an increase of 10 pips.
What are pipettes?
Investing costs are decreasing: with many providers, transaction costs have decreased to, for example, 0.5 pips. We also call these small amounts of pips pipettes. A pipette is a fraction of a pip. 0.5 pips or 1/2 pip can also be referred to as 5 pipettes.
For the Japanese Yen, we call the third digit after the decimal point a pipette.
What is the Forex pip value for each currency pair?
The value of a pip differs per currency pair. The quote currency is the determining currency when determining the value of a pip. Below we list how much a pip is worth for each currency pair when investing 100,000:
- EUR/USD: $10
- GBP/USD: $10
- USD/JPY: 1000 Japanese yen
- USD/CAD: $10 Canadian dollars
- USD/CHF: $10 Swiss francs
- AUD/USD: $10
- NZD/USD: $10
Why are pips important?
Pips are especially interesting when you want to compare investments with different volumes and in different currencies. With most modern brokers, profit and loss are simply indicated in your currency so that you don’t face unpleasant surprises.
In addition, everyone invests with different amounts. When you invest $1000, a profit of $100 is more impressive than when you invest $10,000. In pips, you always see the result of changes in the exchange rate without the volume playing a role.
Calculate your profit or loss with pips in 3 steps
With this step-by-step plan, you can quickly determine how much profit or loss you have made.
Step 1: Calculate how much of the quote currency each pip represents. When you trade 100,000 in EUR/USD, the value of one pip is 100,000 x 0.0001 = $10.
Step 2: Then calculate the amount in the base currency or your currency. You do this by dividing the amount by the prevailing exchange rate. At the time of writing, this is 0.9: the value of a pip in euros is then €9.
Step 3: You can then easily calculate the result. If you have made a profit of 100 pips, your total profit would be 100 x €9, which amounts to €900. Of course, you can also calculate any potential losses in the same way.
Opening and managing Forex & stock positions
In this article we will look at how and when it is best to open a position when trading Forex. We will deal with the timing, and we will also look at how you can best manage an open position.
When do you open a position?
It is best to open a position on a swing high in a downtrend and a swing low in an uptrend. A swing high is the moment when the sellers take over from the buyers within a downtrend. A swing low is the moment when the buyers take over from the sellers within an uptrend.
Subsequently, you open a position on this swing high or swing low when it coincides with for instance a horizontal level. In the article Executing a successful trade you’ll see exactly what you need to open a position.
By timing your position correctly, you can maximize your profits from Forex trading. But how can you actually recognize these moments?
- Candlesticks are the most important and must be the deciding factor.
- Horizontals & trend lines: often form a resistance or support level.
- Moving averages often form a resistance or support level. (extra)
- Fibonacci levels form additional resistance and support levels. (additional)
Setting your position
When you have found a nice currency pair or share on which you want to take a position, it’s sensible to do this by means of an order. In case of a swing high in a downtrend you place the order 5 pips below the current candlestick, when the position hasn’t been opened on the following day, you remove the order, and you check if there is a new opportunity. Don’t you know what pips are? Then first read the article What are pips?
In the case of a swing low in an uptrend, place the order just 5 pips above the last bar so that the position is triggered as soon as the upward movement resumes.
Manage your position safely
Always use a stop loss! That way you can limit your losses, and you’ll be able to gain profitable results. At first, place the stop loss 5 pips above the candlestick in case of a swing high and at first place the stop loss 5 pips below the candlestick in case of a swing low. By doing so a false break-out can be quickly closed with a limited loss.
When the price does move in the right direction, you can raise the stop loss as soon as a new bar has been formed in the direction of the trend. So in case of an uptrend, you raise the stop loss after a bullish candlestick has been formed the next day and in case of a downtrend, you lower the stop loss after a bearish candlestick has been formed the next day. You don’t change the stop loss when the next bar is moving against the predicted trend.
When the price is moving in the right direction, you can move the stop loss to 5 pips below the lowest point of the last candlestick in case of an uptrend and 5 pips above the last candlestick in case of a downtrend. This way you’ll secure the profit without stopping a potential higher profit.
Trading successfully according to a system
If you want to trade successfully, you will have to work according to a system that suits you. Within the system two ratios play an important role, the reward to risk ratio and the ratio that determines how big a position you have to take.
Reward: risk ratio
This ratio can be used to calculate the (potential) reward to risk ratio.
Calculate the reward by subtracting the target value (the value you expect with technical indicators as the moment at which you take profit) from the price at which you entered.
The risk can be calculated by subtracting the price at which you entered the market from the stop loss.
The ratio between the reward and the risk is then calculated by dividing the reward by the risk.
With this ratio, a value of more than one is required (you must be right in more than 50% of cases) and a ratio of more than two is desirable (you then have a wider margin for error without becoming loss-making).
How to determine your potential profit
You can determine your potential reward by looking at the next level that is in the way. This is the most likely moment when the position will be closed. You can do this by looking at the next resistance or support level that is in the way.
Ratio for taking your position
If you want to trade consistently and relatively safely, it is sensible to risk a maximum of one to two percent of your account size on a single trade. This way you’ll have space to breathe in case of a series of losing trades.
To determine how much money you have to risk on a position, first multiply the amount on your account with the percentage that you want to risk. Then you divide this value by the difference between the opening price and the stop loss of your position: now you know how much money you can put on the trade in order not to lose more than X percentage of your account.
Consistently achieve good returns?
If you want to keep making money, it is important to keep following your system. Like a company has a business plan, trading has a trading plan. By properly handling the risks and by effectively managing these risks you’ll be able to trade profitably and consistently. So don’t forget:
- To check whether there is a good entry point.
- Calculate your profit/risk ratio
- To calculate how much money you are risking on the position
Opening a position
At Plus500 you can open positions with a click of your mouse. This is done by moving to the desired security and pressing the Buy or Sell button. Here you can find the Buy Only option, where you can enter a value at which you automatically buy or sell the currency pair.
Within MetaTrader you can take a position on a currency pair by right-clicking on the desired currency pair and choosing the option New Order. First fill in the volume, 0.01 = 1000 0.1 = 10,000 1 = 100,000. Then choose the option pending order under type.
Use buy stop to buy with an order and use sell stop to sell with an order. Do not forget to enter your stop loss! Once the order has been executed you will see the lines automatically appear on the chart.
What is Forex?
The term Forex is increasingly used in all kinds of advertising campaigns and that is not surprising because Forex is a booming business! Forex stands for FOReign EXchange and is also known as currency trading. The Forex market is the largest market in the world. But what exactly is Forex and what should you consider when investing in Forex yourself?
What is Forex?
Forex or Foreign exchange is the exchange of one currency into another currency. Currency exchange happens constantly and for many different reasons. For example, a company can exchange euros for dollars when they do business abroad. The foreign exchange market is the largest market in the world with a total daily volume of over 5 trillion dollars!
Where to trade in Forex yourself?
Did you know that you can also trade Forex currency pairs yourself? You can do this at an online broker! That way you can speculate on price increases and price drops of certain currencies. Do you want to know where you can try out the possibilities of Forex trading completely risk-free? Have a look at the overview of the best Forex demo accounts:
What is the Forex market?
The Forex market is the place where currencies are traded. Unlike share trading, there is not one central place where currencies are traded. The exchange rates of currencies are created by the constant flow of international transactions that are carried out. If you buy a French cheese in the supermarket in London, the supermarket must have bought it in France. In France, they use the euro while in England, they use the British pound. For a similarly simple transaction, two currencies had to be exchanged.
The Forex market is therefore an over-the-counter (OTC) market. The market is always open as people should be able to exchange currencies at any time. This allows you to trade in currency pairs at any time.
How did the Forex market originate?
The Forex market as we know it today has only emerged quite recently: in the year 1971 following the Bretton Woods agreement. This agreement stipulated that the major currencies could move freely against each other. This made it possible to trade in currencies.
Large investment banks are the most active in the foreign exchange market. However, this does not mean that as a small investor, you cannot benefit from trading Forex. The great thing about the Forex market is that it is accessible to everyone!
Which Forex markets exist?
There are three Forex markets in which you can trade in the price developments of currencies. We discuss these markets briefly on this page.
The spot market
The spot market is also called the cash market. In this market, currencies change hands immediately. You, too, have undoubtedly been part of the spot market: when you exchange your euros for dollars on holiday, you make direct use of this market.
Within the forward market, a contract is drawn up in which two parties determine under what conditions a particular currency may be bought or sold.
Futures are often freely traded on a stock exchange and have fixed characteristics. It is a binding contract that allows you to buy a certain amount of a currency on a certain date at a set price. Certain elements, such as the delivery time and the minimum capital required, cannot be adjusted.
Hedging on the foreign exchange market
Large companies typically use the forward & futures market to hedge large risks. A multinational can see a large part of its profits evaporate when a currency moves in the wrong direction.
Companies therefore buy a contract that allows them to set an exchange rate. This way, they are sure that they can sell their European products in euros for a fixed amount, despite possible fluctuations in the dollar exchange rate.
Speculating on Forex
Demand for currencies worldwide is constantly fluctuating. Factors that positively influence demand for a currency can increase the price, while factors that negatively affect the demand for a currency can reduce the price.
If interest rates on the euro rise, this could increase the demand for the euro since the euro would yield a higher return. If a monetary zone does better socio-economically, it can also attract more activity. By looking at these types of figures, you can determine whether it is smart to speculate on a price increase in a specific currency.
Do you want to know exactly how investing in foreign currencies works? Then read our guide to currency trading:
How to make money with currencies?
There are two ways you can make money with currency. The first way is by taking advantage of the interest difference between two currencies. By buying the currency at the higher interest rate you can get a positive return on this. This is also called a carry trade. However, it is important that there is a strong interest rate difference between the currencies.
Another possibility is to speculate on a rate rise of a currency. When the currency you buy becomes more valuable, you can make a nice profit.
Are there risks associated with trading Forex?
Trading Forex is certainly not without risk: trading currencies is quite complex. For example, it is important to remember that Forex trading is by no means regulated everywhere. Therefore, investigate whether the broker you want to trade with is trustworthy.
An advantage of Forex trading is that there is hardly any price manipulation possible. The market is simply too large, which makes it exceedingly difficult for individuals to influence the price. However, you may encounter price manipulation with a rogue broker. For example, some brokers trade against their customers and influence the price.
It is therefore advisable to investigate whether a Forex broker is reliable. Do you want to know which brokers are reliable when it comes to currency trading? Browse through our list of the best Forex brokers:
What are the benefits of Forex investing?
A major advantage of investing in Forex is its high liquidity. You can open a position on a currency pair at any time, and you never have to worry that you will not be able to close the position. Due to the high liquidity of the Forex market, transaction costs are also low.
Another advantage of the Forex market is the fact that you can trade in currency pairs 24 hours a day. Because of this, it does not matter where in the world you are; you can always open and close new investment positions.
What are the disadvantages of Forex trading?
A challenge for trading Forex are the high levers. Leverage can be attractive: when you use a lever wisely, you can greatly improve the profitability of your investment position. It is important to pay attention: if you take too big a risk you may have to deal with a margin call. You then run the risk of losing the full amount in your account.
Another challenge is that you need enough knowledge to be able to trade well in Forex. For example, pay attention to the economic indicators that can affect currency pairs and study how to apply technical analysis. Knowledge is power, which certainly applies to trading Forex!
What is an exchange rate?
An exchange rate indicates the relative price of one currency versus another currency. Understanding the exchange rate is essential when you want to invest in Forex yourself. Do you want to know how exchange rates work when trading Forex? Then read this article:
What does Forex mean?
Forex literally stands for Foreign Exchange. In this market you can trade all currencies, but most people trade in the euro, dollar, pound, and Japanese Yen. Forex trading is always done in a currency pair: you measure the value of one currency in the value of another currency. Forex trade is mainly done in large economic centres located in London, New York, Sydney, and Tokyo.
When can you trade in currencies?
On holiday, you can exchange your currencies at a currency exchange at any time. When you start investing in currencies yourself, there are some more restrictions. You can invest in Forex with most brokers from Sunday evening 11:10 PM to Friday evening 11 PM. Every day there is a short break from 11 PM to 11:15 PM during which trade stops.
Which Forex currencies are most popular?
The dollar plays a dominant role and is involved in most currency transactions. When we look at the pairs, EUR/USD is the most traded: 25% of all transactions are carried out on this pair. In addition to the euro dollar, USD JPY and GBP USD are also popular currency pairs.
How to make money with Forex?
The value of a currency is not stable and is expressed in comparison to another currency. For example, with Forex you can trade in EUR/USD, you then buy euros with dollars. When the euro’s price rises against the US dollar, you earn money.
Incidentally, it is also possible to short sell a currency pair like the EUR/USD. You then earn money as soon as the euro’s price falls against the dollar. The value of currencies is determined by a variety of external factors: these include interest rate decisions by Central Banks, transactions carried out by large companies, and the monetary policy of the relevant governments.
High profit with Forex?
With Forex, you can make high profits by making predictions based on the available data. It is never possible to predict the price development with certainty: it is however possible to determine what is most likely to happen.
I prefer to do this myself by studying the graphs. By identifying levels where the price does not move any further, you can build a good strategy by placing orders. Managing your maximum risk against your profit plays an important role in becoming successful.
Get started with Forex too?
How to invest in foreign currencies?
Investing in currencies is more popular than ever. When you start investing in currencies, you use one currency to buy another currency. When the currency you buy then increases in value you earn money. But how does investing in currencies work, and how can you make money from trading currencies?
Why is currency trading so popular?
- You do not pay set commissions: You can invest with little money.
- The foreign exchange market is the largest market on earth: this makes it very stable.
- The foreign exchange market often moves through fixed patterns and is relatively predictable.
- You can also make money at declining exchange rates by short selling.
- Using orders, you can easily manage your strategy & maximize your profits.
How to trade in currencies?
Trading foreign currencies is normally done by a broker. A broker is someone who makes it possible to buy and sell various currencies. This is normally done by using derivatives: for example, CFDs are very suitable for trading various currencies.
A good party where you can invest in CFD currency pairs is eToro. With eToro, you do not pay set commissions when you trade in a currency. Use the button below to try currency trading for free with an unlimited demo:
How does currency trading work?
A currency such as the euro always changes in value compared to another currency. Therefore, currency trading is a matter of interrelationships. For example, an illustration of an exchange rate is the value of the euro measured in dollars: we call this combination a currency pair, and we denote it as EUR / USD.
It is possible to go both long and short. When you go long, you predict that the euro will rise against the dollar. When you take a short position, you predict that the euro will fall against the dollar. As soon as you become adapt to analysing charts you recognize the different patterns, and you can earn money trading the currencies.
What are the known currency pairs?
When you invest in currencies, in many cases you trade in one of the seven majors. The majors are the most popular and most used currencies in the world. You can trade in combinations of:
- USD or American dollar
- AUD or Australian dollar
- GBP or British pound
- CAD or Canadian dollar
- EUR or Euro
- JPY or Japanese Yen
- CHF or Swiss Frank
You never trade only in dollars or only in euros. No, you always trade in a currency pair. The first currency is called the base currency and the second currency is called the counter currency or quote.
If you trade in the EUR/USD pair and the price is 1.1, you can buy $1.1 for one euro. On the Forex market you always invest large amounts: for example, you buy 1100 dollars for 1000 euros.
Take note of the spread
When you start investing in currencies, you will see that there is always a difference between the bid and the ask price. The bid price is the amount you receive when you sell the currency pair, and the ask price is the price at which the currency pair is sold. The difference between these two prices is the transaction cost or spread. Transaction costs on major currency pairs are typically low: for example, at EUR/USD, they can be 0.0001.
When you invest in currencies, these costs are often expressed in pips. A pip indicates the minimum price change of a currency. For almost every currency, one pip is 0.0001. The only difference can be found in pairs involving the Japanese Yen where one pip has a value of 0.01. When the EUR/USD rises from 1.1 to 1.11, the price is up by 100 pips.
How is the exchange rate of a currency pair determined?
When you want to invest in foreign currencies, it is important to understand how the exchange rate works. The exchange rate indicates the value of a currency. There are two possibilities:
- Appreciation: when the price of a currency rises.
- Depreciation: when the price of a currency falls.
Whether the price of a currency falls or rises depends entirely on the amount of supply and demand. For example, if people need more dollars, but fewer euros, the dollar will rise against the euro. Only when a balance is found between supply and demand, the price movement stops.
By predicting how the supply and demand for a currency will develop, you can consequently decide whether it is smart to buy or sell the currency.
What are variable and fixed exchange rates?
When you start investing in currencies, you may be dealing with both floating and fixed exchange rates. Most exchange rates are floating exchange rates. Floating exchange rates can move freely, and the government does not actively manipulate the exchange rate.
A fixed exchange rate is subject to strict government supervision. If the exchange rate rises or falls sharply, the government can intervene. If you invest in a fixed exchange rate, you will not achieve a substantial profit quickly. After all, this exchange rate fluctuates less and as an active trader, you can benefit from strong price fluctuations.
What does it mean to go long or short on a currency?
When you invest in currencies, you can take both long and short positions. With a long position, you indicate that you expect the base currency to rise in relation to the counter-currency. On EUR/USD, you can then speculate on a rise in the euro against the dollar.
With a short position, you indicate that the base currency will fall in relation to the counter-currency. In that case, you speculate in EUR/USD on a fall in the euro against the dollar.
Successful currency trading
The exchange rate of currencies is influenced by countless factors: think of, for example, the Central Bank’s policy, the balance of payments, the economic situation… Price is also continuously influenced on a smaller scale. When Panasonic receives its profits from America in dollars, they will most likely trade these dollars (at least in part) for the Japanese Yen. Because US dollars are sold and the Japanese Yen is bought, the price of the Yen rises compared to the dollar.
Of course, as a small party, you have little influence on the exchange rate: this means there is a certain degree of stability in the foreign exchange market. The price regularly moves in predictable patterns where there is a clear upward or downward trend. Quite often, it also happens that the exchange rate mainly moves between two levels.
Currency rates often move in predictable patterns over an extended period of time
It is virtually impossible to interpret all the news correctly on the foreign exchange market: it is possible to recognize these general movements. Once you recognize these movements, you can take positions with higher certainty, and you are more likely to win than to lose. In any case, if this is the case, you can achieve good results in currency trading.
How to invest in currencies?
Fortunately, investing in currencies does not work by exchanging large amounts of money. This would be very impractical: you would pay high transaction costs that way and the continuous transfer of large amounts of money is not very pleasant.
Most people invest in currencies using CFDs. CFDs are derivatives that make it possible to trade price differences between currency pairs. When you invest through a CFD in, for example, the dollar, you never actually own dollars.
With a CFD, you only make the agreement to buy a certain currency at a certain price. This allows you to take full advantage of the currency fluctuations, but you do not have to constantly buy and sell currencies. Do you want to find out more about how CFDs work? Read all about it in our section on CFDs!
How to hedge currency risk?
There certainly are some investors who invest in currencies to achieve immediate exchange gains. However, there are also plenty of investors who want to hedge their currency risk. Let us explain with a simple example.
When you live in a European country using the euro you would pay international stocks in euros. In this example you buy an American stock, and the price rises 10 percent in a year. The value of the euro against the dollar fell by 10 percent over the same period. This eliminates your entire return. When you sell the share, you want to get the money back in euros.
When you sell the stock, you get 10% more dollars because the stock has become more valuable. Then you get 10% less euros because the dollar is now stronger against the euro. This way, returns can go up in smoke! You can hedge these types of risks by taking short positions on currencies through, for example, options.
How to apply a lever to currency investments?
When investing in the foreign exchange market, you can apply a lever. If you simply go to a currency exchange office, you will receive the comparable dollar amount for $100. This does not have to be the case when you actively trade in currencies.
When you start trading in currencies, you can apply a lever. Applying a lever increases the amount of your investment without having to put in more money yourself. You can apply a lever from one to thirty. This means that with an investment of $1000 you can open a position of $30,000.
But what is the consequence of applying a leverage? As a result, both your profit and loss increase a lot faster. When the euro’s exchange rate against the dollar rises by one percent, your result using a lever of 1:30 is as follows:
- 30% profit when you have bought the euro.
- 30% loss when you buy the dollar.
Consequently, you must be careful with a lever! Keep in mind that when trading currencies you can always determine the level of the lever you use.
Improved currency investing
Do you want to strengthen your skills at investing in currencies? The following articles can help you build the right skills:
- Recognizing trends: Learn how to recognize a trend in a currency pair.
- Reading candlesticks: learn when to open a position.
Can you get rich from trading currencies?
Currency trading is often cited as a way to get rich quickly. In practice, this is not true. However, in the long run you can build good capital through currency.
When you want to achieve good results, it is important to start calmly. Learn from your mistakes and build a good plan. It is wise to practice extensively with a demo before starting to trade currency using a large amount. Would you like to start with a demo? Then use the button below to try out the best demos:
Investing in emerging markets
You can also choose to trade in emerging market currencies. Whereas the exchange rates of the major pairs are often very stable, with these types of pairs you see strong fluctuations. The trading volume of the currency is lower, and the socio-economic climate is often more uncertain. This allows the price to make stronger jumps up and down, making investing in emerging markets especially suitable for the advanced investor.
MACD explanation – Moving average convergence/divergence
The MACD (full Moving Average Convergence Indicator) is easy to use in markets with a clear trend and is calculated by combining moving averages. The MACD can confirm or cancel out the strength of a trend.
What is the MACD?
The MACD indicator is a so-called momentum indicator. The MACD combines several moving averages. Eventually two lines come out of this. You can then use the MACD to determine the direction of the trend and its strength. You can also use the MACD to find a good entry point for your investment. But how does the MACD work exactly?
How does the MACD work?
The MACD is based on the 12 and 26- day average. A new line is drawn from these averages by subtracting the 26-day average from the 12-day average.
The value of the MACD is positive when the 12-day average is above 26 days and negative when the 12-day average is below 26 days. When the line is above zero, there is a buy signal, and when the line is below zero, there is a sell signal.
A second line within the MACD is the so-called signal line. This is comparable to the exponential RSI. The second line measures the exponential average of the last nine days.
How can you set the MACD?
Plus500 is a good broker to use the MACD indicator. You can try investing in CFDs for free at this broker with a demo. Click here to get started or read more information about this broker first.
From the toolbar, go to the setup indicators button and choose the MACD/OsMA indicator with values 12,26 and 9. You can disable the signal line by turning it white.
Within the MetaTrader
Go via insert, indicators to oscillators and select the MACD option. Use the settings 12, 26 and 9, you can change the colour of the line from red to black to make it stand out more. We don’t use the histogram with the MACD, it’s the most important one, and you can give it a white colour, so it doesn’t stand out.
MACD and the trend
The direction of the MACD indicates the trend. When the MACD line rises, there is a rising trend and when the MACD line falls, there is a falling trend.
You can also use the MACD to determine the strength of the trend. You do this by looking at the distance between the MACD and the signal line. With a larger distance between both lines, there is a stronger trend.
The MACD is a good indicator to gain more insight into the trend. However, you cannot use the MACD to predict the bottom or ceiling of the price of a share. It is therefore wise to use the MACD in combination with candlesticks and horizontal levels.
The MACD as a signal
You can also use the MACD (in combination with other indicators) as a buy or sell signal. To do this, you must pay attention to crossing the MACD and the signal line. When the MACD crosses the signal line upwards, this can be seen as a buying signal. When the MACD crosses the signal line downwards it can be seen as a selling signal.
Finally, you can also use the MACD as an indication of a trend reversal. How does it work?
Convergence and divergence of the MACD
When there is convergence between the MACD and the price, it is safe to follow the trend. In the event of an uptrend, the MACD should therefore increase along with the further rise in the price. In case of a downtrend the MACD should follow the further decline of the price.
In case of divergence, the MACD does something unexpected and moves in the opposite direction of the price. During an uptrend the MACD moves downwards and in a downtrend the MACD moves upwards. In this case, there is a fairly large chance that a reversal will occur!
MACD and the RSI
The MACD and the RSI both indicate whether a market is overbought or under bought in relation to the latest price levels. However, both indicators do this differently, which can sometimes lead to opposing conclusions. It is therefore important to always use the full picture and not to open investments just because of the performance of the MACD indicator.
What are the limitations of the MACD?
The MACD is anything but perfect: the indicator regularly indicates that the chance of a trend reversal is high without anything actually happening. Also, divergence does not predict all reversals. As a result, the MACD is not completely reliable for predicting trend reversals.
Safe use of the MACD
Use the MACD in combination with other indicators. The MACD is a confirmation of the current trend rather than being used on its own to take a position. In the end candlesticks, moving averages and trend lines are more important!
Using Fibonacci at Forex & Shares
The Fibonacci sequence of numbers was discovered by Leonardo de Fibonacci. The number sequence has the necessary peculiarities and can be found everywhere. Similarly, in the financial markets: the Fibonacci series can be used to measure retracements and extensions of markets in both upward and downward movements. Put simply: with Fibonacci values you can predict to which value the price of for example a share could move.
What is the Fibonacci range?
The Fibonacci series was discovered by none other than Leonardo Fibonacci. This famous Italian mathematician discovered that the whole universe could be described by a series of numbers. These natural proportions appeared to recur everywhere! In plants, animals and also humans.
The sequence starts with 0 and 1. The next number is a sum of the two numbers before that. So, the Fibonacci sequence starts as 0, 1,1,2, 3, 5, 8 and so on. Now many investors also believe that this natural series of numbers can be used to predict the share price. The great thing is that when enough people believe it, this will indeed be the case!
You can therefore use the Fibonacci indicator to perform technical analysis when investing in, for example, Forex and stocks.
What are Fibonacci’s ratios?
As an investor, this seemingly random series of numbers says very little, of course. What is special about the Fibonacci series are the so-called ratios. These ratios are created by dividing two numbers within the series. The best-known ratio is 0,618, which is created by dividing 34 by 55. Also by dividing 34 by 89 you get the known 0,382 ratio.
These ratios are found everywhere in nature. Did you know, for example, that the distance from the ground to your navel is always 61,8% of your height? These ratios can also be found abundantly in plants. Anyway, back to investing with the Fibonacci indicator!
- Fibonacci retracements: good for predicting the end of a retracement and determining a good time to invest in line with the trend.
- Fibonacci’s extensions: with a Fibonacci extension you can predict when the impulse will come to an end and the retracement will start: very useful for determining an entry moment in a trend reversal.
Which numbers do you use
for measuring retracements?
And for measuring extensions?
The 50% retracement level is not a Fibonacci value. However, many technical traders use this value as well, as you will often see price action on this level.
Application of Fibonacci
The Fibonacci levels can be used as levels of support and resistance. By using Fibonacci levels, you can predict at which point there is a greater chance that the price will move in the other direction. It is wise to use the Fibonacci levels in combination with:
Determination of buy/sell moment in case of retracement
In case of a rising trend, you measure the upward wave movement until the moment of retracement. Connect the lowest point in the upward movement with the highest point. Values of 38%, 50%, 61.8%, 78.6%, 88.6% are moments when the price potentially rises again and these are sensible buying moments. (from swing low to swing high)
In the case of a downward trend, you measure the downward wave movement until the moment of retracement. Connect the highest point in the downward movement with the lowest point. Again the values 38%, 50%, 61.8%, 78,6 and 88.6% are drawn which are moments at which the price can continue to fall. (from swing high to swing low)
See if a Fibonacci level coincides with a horizontal level. When the price subsequently refuses this level by means of the right candlestick formation, you’ll have an extra confirmation of your trading positions.
Fibonacci with an extension
The Fibonacci range can also be used to estimate the length of the extension: either how far the price will overshoot compared to the previous high (in a rising trend) or low (in a falling trend).
The resulting values can be used to determine a new value where a retracement may occur. For a reversal, it is always wise to check whether this point coincides with a Fibonacci retracement. The values you use to find an extension are 1,13 1,272 1,618 and 2.
Within this consolidation, in addition to a horizontal level and a high test, there is also a Fibonacci extension… enough reason to take a short position.
Using Fibonacci with MetaTrader
Within MetaTrader you can find the Fibonacci Retracement button at the top of the toolbar, this option is used to determine the duration of a retracement. You can also use this button to draw a Fibonacci extension.
Before you can start using Fibonacci retracement properly, it is important to configure it properly. Draw the Fibonacci retracement somewhere on the screen and press the right mouse button on the indicator to adjust the Fibonacci properties. Enter the values 0.382, 0.5, 0.618, 0.786, 0.886 and delete the other values. Also change the colour of the Fibonacci lines to make them stand out more.
What should you watch out for with Fibonacci retracements?
The use of Fibonacci values is subjective: the traders who profit from the retracement indicate that it is an effective tool while investors who lose money indicate that it does not work. Moreover, the Fibonacci could work as a self-fulfilling prophecy: the indicator could be total nonsense, but only works because enough people use it. Therefore, there are no logical arguments for using the Fibonacci retracement. If you find it important to understand the theory behind the indicator, it is better to stay away from this indicator since there is none.
Getting started with Fibonacci
I myself had quite a bit of trouble making the indicator my own. It is therefore advisable to practise drawing the levels on the charts within MetaTrader. In this way you will develop a feeling for the indicator, and eventually, you will be able to apply it in combination with other indicators to look for setups. To be able to use Fibonacci levels properly, it is essential to properly recognize the retracements and impulses.
How do exchange rates work? Explanation of exchange rates!
When you’re abroad, you often have to exchange one currency for another. Even if you actively trade currencies or Forex, you’ll need to exchange currencies. It’s helpful to understand how an exchange rate works. In this article, I’ll explain in simple terms how exchange rates work.
What is an exchange rate?
The exchange rate indicates the price of a currency. It tells you how much you need to pay for, say, a dollar or a pound. The price of a currency is always displayed in terms of the value of another currency.
How does the exchange rate work?
You can’t display the individual value of one currency. The value of the euro, for example, means nothing on its own. When you go to a currency exchange office, the exchange rate is always displayed in relation to another currency; for example, the euro against the dollar (EUR/USD). This is called a currency pair.
An example of an exchange rate is:
What are currency pairs?
In Forex, you always trade in pairs. A pair indicates the price of one currency in terms of another. With EUR/USD, for example, you’re looking at the amount of dollars you can buy with one euro.
A currency pair is always displayed as a ratio. When the EUR/USD rate is 1.20, you get 1.20 dollars for one euro. This means that a laptop that costs 1000 euros will cost 1200 dollars. Any transaction fees are not taken into account, of course.
In the table below, you can see what happens when the euro becomes more valuable in relation to the dollar:
The following happens in this case:
- The euro rate (against the dollar) rises
- The dollar rate (against the euro) falls
Base currency & quote currency
The first currency in the ratio is called the base currency and is always one. The second number is the quote currency and indicates how much of the other currency you’ll get in exchange.
Here’s an example of a quote:
|Base currency||Quote currency|
The quote currency always indicates how much of another currency you can get. The exchange rate constantly fluctuates, which means the quote will change constantly.
What are the current exchange rates?
Do you want to know what the exchange rate is for the euro against the dollar? Or do you want to know what the exchange rate is for the euro against the pound? Use this tool to calculate the current exchange rate:
What is a currency markup?
When you physically exchange money at the bank, you always pay an extra markup. Banks are commercially oriented and want to make money. To be able to offer foreign currencies, they need to hold them. They then run the risk of these currencies becoming less valuable. They need to hedge against this risk. Of course, they also have to charge extra to make it possible to operate profitably.
You can see how much the currency markup is by looking at how much the rate deviates from the mid-market rate. This rate is also called the average market rate, middle rate, or interbank exchange rate. This is the rate between the price the bank pays to buy the foreign currency and the price it asks to sell the foreign currency.
Interested in trading currencies yourself?
Would you like to actively trade currencies yourself? You can do this by trading Forex. You then buy and sell currencies with the aim of making a profit.In this guide, you can read in detail how Forex trading works:
Examples of calculating with exchange rates
Do you find exchange rates confusing? We’ll use two small examples to show you how exchange rates work in practice.
In the first example, an exchange rate of EUR/USD 1.10 applies. This means that you receive one dollar and ten cents for one euro. You have 1000 euros and want to exchange this for dollars. You will then receive 1100 dollars.
In the second example, an exchange rate of EUR/JPY 120 applies. This means that you receive 120 Japanese yen for one euro. You decide to exchange 1000 euros for Japanese yen. In this case, you will receive 12,000 Japanese yen.
How can you make money with the exchange rate?
You can make money with the exchange rate by achieving price gains. You need to buy a currency which becomes more valuable compared to another currency.
In this example, you expect the dollar to become more valuable in relation to the euro. Currently, an exchange rate of EUR/USD 1.1 applies. You buy dollars for €1000 and hence receive $1100.
Then, the value of the dollar rises. As a result, EUR/USD falls to 1. You now exchange your $1100 back for euros. You will now receive €1100 in return. In this example, you would have made a profit of €100.
You can take advantage of the smallest exchange rate fluctuations via the internet. Please note that investing in foreign currencies is risky. When speculating on exchange rates, you can lose money.
What types of exchange rates exist?
There are two types of exchange rates: flexible and fixed exchange rates. Flexible exchange rates fluctuate constantly, while fixed exchange rates hardly ever change.
Flexible exchange rates
Flexible exchange rates fluctuate constantly due to the interplay of supply and demand. The government and central bank do not try to maintain the exchange rate at a fixed value. The policy influences the rate to some extent, but besides this the rate moves freely.
Fixed exchange rates
In some cases, governments want to keep their currency at a fixed value through their central banks. They do this by holding dollar reserves. By selling dollars and buying their currency, the supply of their currency decreases. This causes their currency to increase in value. Governments can manipulate their exchange rates as they wish. An example of such an exchange rate is the Saudi Arabian riyal.
How does the exchange rate move?
On a chart, a rising trend line means that the base currency increases in value and the quote currency decreases in value. For example, with EUR/USD, this means that the value of the euro against the dollar increases. This does not mean that the euro increases in value against all currencies at the same time. The euro can simultaneously lose value against the pound.
On a falling trend line, the base currency decreases in value and the quote currency increases in value. Keep in mind that a decrease in EUR/USD does not necessarily mean that EUR/GBP will also decrease; the opposite may be the case!
What influences the exchange rate?
The exchange rate of Forex is entirely influenced by the interplay of supply and demand. In fact, the exchange rate of currencies is not much different from the stock price of, for example, a share:
- When the supply of a particular currency increases, the value of that currency decreases.
- When the demand for a particular currency increases, the value of that currency increases.
What factors influence the exchange rate?
The value of a currency is determined by the interplay of supply and demand. On a larger scale, these factors play an important role in the exchange rate of a currency.
Factor 1: Economic situation in the region
Economic prosperity in a region often leads to an increase in the value of a currency. For example, when the US economy performs well, more products are purchased. People do this in the local currency and therefore have to buy dollars. This can cause the dollar to increase in value against, for example, the euro.
Factor 2: Interest rates
The interest rate also has a big influence on the exchange rate. When trading in Forex, it is critical to stay alert to announcements from Central Banks regarding interest rates. When interest rates rise, the demand for the currency typically increases. For example, if the ECB (European Central Bank) raises interest rates, there is a good chance that the euro will increase in value against the dollar.
Factor 3: money supply
The supply of a currency also affects the exchange rate. When a Central Bank prints a lot of money, the supply increases, which causes the exchange rate to drop. If too much money is printed, inflation can even occur.
Therefore, the exchange rate is 100% linked to the forces of supply and demand. If you want to be successful in investing in Forex, you will need to analyse the forces behind supply and demand.
Calculating pips in Forex
In the vast majority of currency pairs, a pip is the fourth digit after the decimal point. For example, if you read the EUR/GBP rate as 1.1234, the fourth digit, or 0.0004, is the current pip value. When the rate rises to 1.1235, it has moved by one pip, and when it rises to 1.1244, it has risen by 10 pips.
The big exception to this rule is the Japanese yen. In yen exchange rates, the second digit after the decimal point indicates the pip value. For example, in the EUR/JPY rate of 123.86, 0.01 is one pip value, and a rise to 124 would represent an increase of 14 pips.
Pips are used in Forex to easily compare different profits and losses. You can then compare the results of Forex investors neutrally. Do you want to know more about pips? Then read the article about pips:
How does the exchange rate affect your daily life?
The exchange rate of your currency has a big impact on your daily life. You will notice this when you travel to another country. When your currency is strong, you get more value for your money, and vacations become a lot cheaper.
The exchange rate also has many indirect effects. When your currency becomes less valuable, foreign products become pricier which can cause your purchasing power to decrease.
Frequently asked questions about exchange rates
Reading candlesticksCandlesticks can be used to predict the price of a currency pair. By reading bars carefully, you can ultimately decide whether it is wise to buy (long) or sell (short) a currency pair. In this article, we’ll discuss how to use candlesticks. We also show the most used & most popular candlestick patterns.
How do you read a candlestick?It is quite easy to read a candlestick. A candlestick contains a lot more information than a normal price line.
- Open: the opening price
- High: the highest point within the relevant period
- Low: the lowest point within the relevant period
- Close: the closing price
Candlesticks compared to a regular line on the daily chart, candlesticks provide more information.
The information from candlesticksCandlesticks display a lot of information. A large body shows a strong price movement, while a small body shows that there was hardly any movement. A short shadow shows that most of the activity took place around the opening and closing price. A long shadow, on the other hand, shows that prices have gone far beyond the opening and closing prices.
How can you use candlesticks?
Candlesticks are also called price action. With price action, you can see how the battle between buyers and sellers in the market develops. At all times, there is a balance between the number of buyers and sellers on the market. The price is constantly adjusted to ensure that this balance is maintained.When the number of buyers increases at a given price, the price rises to ensure that there is still enough supply. Candlesticks display these developments beautifully. When you understand how you can read candlesticks, you can analyse the battle between buyers and sellers.When the buyers have the upper hand, it makes sense to buy. If the sellers have the upper hand, it is wise to sell. However, it is advisable to always base your decisions on multiple sources of information. For example, see if the price action takes place on an important horizontal level. In this way, you increase the chance that you will achieve a good result with your investments!
Why should you use candlesticks instead of a line?
Professional investors prefer candlesticks over a line chart because it is easy to spot patterns with candlesticks. When you can analyse candlesticks properly, you can find the turning point in the graph. Investors want to sell at the highest point and buy at the lowest point. In the rest of this article, you can read how you can interpret candlesticks.
What can candlesticks indicate?
- Continuation: The trend continues without problems
- Trend reversal: the trend reverses from rising to falling or vice versa
- Indecision: The battle between buyers and sellers is undecided
Candlesticks that indicate a continuation of the trendBullish and bearish continuation bars indicate a continuation of the trend. We discuss the bullish continuation bar, with the bearish continuation bar the same characteristics apply but reversed.A bullish continuation bar is a strong indication that the trend will continue. After a bullish continuation bar, chances are that the price will move further in the same direction.The bar is stronger when the open is near the lowest point of the bar and the close is near the highest point. The upward movement is then strong and has hardly received any resistance from sellers. In the image, you see both an example of a bullish continuation bar and a bearish continuation bar.
Falling & rising three methodsThe falling & rising three methods show a progression of the bullish or bearish trend.The bullish pattern you see on the left is called the rising three methods candlestick pattern. It consists of three short red candlesticks sandwiched between two long green candlesticks. The pattern shows that despite some pressure from the sellers, buyers are clearly in control.The bearish pattern on the right is called the falling three methods pattern. Here you can just see three small green bodies between two large red candlesticks. Here you see that despite some pressure from the buyers, the sellers maintained control. Both patterns are continuation patterns.
Candlesticks that indicate an upward trendThese candlesticks indicate a rising or bullish trend. In this situation, it can be attractive to buy. Here we discuss the following bullish candlesticks: hammer, bullish engulfing bar, bullish train tracks, piercing line, morning star and three white soldiers.
Candlesticks that indicate a downward trendThese candlesticks indicate a downward or bearish trend. In this situation, it can be attractive to sell. Here we discuss the following bearish candlesticks: the high test, bearish engulfing bar, bearish train tracks, evening star, three black crows, and the dark cloud cover.
Candlesticks that indicate indecisionSometimes there is no clear trend. The candlesticks in this section can indicate indecision in the market. When there is indecision, it is likely that the market will continue to move in the same direction. In some cases, the price can also suddenly break out sharply in the opposite direction.
Inside barsInside bars are bars that fit within the high and low of the previous bar. Inside bars often indicate a degree of indecision: nobody knows in which direction the price will develop. The colour of the bars is not relevant in this case. After an inside bar, a strong move up or down can be expected.Sometimes there are also double inside bars. In this case, there is an even greater degree of indecisiveness on the market. The buyers and sellers could not bring the price further down or up, so the price has no clear direction at the moment. A strong outbreak can then be expected. On the left, you see an example of double inside bars.
Doji barsFor the Doji bar the open and close are almost symmetrical to each other, while the price has gone both up and down. This is an indication of a high degree of indecision in which the battle between buyers and sellers has not yet been fought. The colour doesn’t matter with this bar.A Doji bar alone is not a good reason to take a position. Therefore, wait for new candles before deciding.In combination with the bullish morning star or bearish evening star, a Doji bar can be used to open investment.
Spinning topThe spinning top is also a candlestick that indicates indecision. With this pattern, you see a small body with a large shadow. There is no clear price movement.You can see that within the period the buyers and sellers have both made the price rise and fall considerably. Yet, there is still no clear winner: there is a period of rest.
How can you use candlesticks?
It is possible to use candlesticks at almost every broker. In this part of the article, we’ll explain how you can add candlesticks to your chart.
Using candlesticks with Plus500Plus500 is a user-friendly broker where you can trade currency pairs and stocks with CFDs. Do you want to know more about this broker? Then read this article!Click on the button to switch between candlestick/line to use candlesticks at Plus500.
Candlesticks within MetaTraderBy default, MetaTrader displays the price as a smooth line. However, a line provides little information, and it is therefore wise to change this to candlesticks. You can do this easily by pressing the candlesticks button.
Tip: practice recognizing candlesticksBelow you can see a chart of candlesticks. Try to identify the different bars, name them, and think about what they mean imply. By practising you learn to recognize the candlesticks faster and faster, and you can predict the price more accurately.
1: low test 2: inside bar 3: Doji bar 4: dojo bar 5: high test 6: train tracksCandlesticks or price action are a good indication of the expected next price move. As can be seen in for example 1 (weak low test, almost a Doji bar) a candlestick is never decisive in a certain direction. It is essential to consider market conditions before opening an investment. Read directly how to recognize a trend or continue learning in our technical analysis course!Do you want to practice using candlesticks yourself? This can be done without risk! Download a free investment demo package and practice recognizing these patterns:
How can you use candlesticks to take a position?When you have found a good moment to open an investment, you can use candlesticks to plan your trading position. A position always consists of two important elements: an entry point and a stop loss. The entry point is the moment when you open an investment and the stop loss is the moment where you take a loss if the position nevertheless moves in the other direction.In this example, we open a position based on a hammer candlestick. The price of a currency pair has fallen for a while and is now touching a strong horizontal level. This is where this pattern is forming which may indicate that the price is now going to rise.You can then choose to place the entry point just above the candlestick. If the price unexpectedly moves in the other direction, you prevent opening a loss-making position.At the same time, you can place the stop loss just below the candlestick. If your position opens and the price moves in the other direction anyway, you prevent your losses from increasing further.You can therefore use candlesticks to plan your investments. That way you minimize potential losses and maximize potential winnings!
Where do candlesticks come from?Candlesticks have a rich history. Its origins can be found in the 17th century. The Japanese wanted to increase profits from rice sales. Candlesticks help analyse price patterns. Charles Down expanded this concept in 1900 and brought the instrument to the level we know today.Candlesticks focus entirely on ‘what’. Candlesticks show what is happening, but don’t try to explain it. You can therefore only use candlesticks for technical analysis. To perform such an analysis, we assume the following list of characteristics to be true:
- All information is displayed in the current market price.
- Expectations and emotions drive the markets.
- The markets are constantly changing.
- The current price does not have to be the actual or intrinsic value.
Extra: OHLC barsAn alternative way of displaying price action is the so-called OHLC bars. OHLC bars provide information comparable to candlesticks; the presentation is just a bit different. With an OHLC bar, the bend on the left is the price at which the period opened and the bend on the right is the price at which the period closed.
Support & Resistance with trend lines & horizontalsSupport and resistance play an important role in successful trading. These levels indicate at what moment the price of a share or Forex pair is likely to move in the opposite direction. You can use these levels to find a good time to open a trade or investment.
What are support & resistance?
- The support level is a low level that the price cannot seem to break through (bottom).
- The resistance level is a high level that the price does not seem to be able to break through (ceiling).
The struggle between buyers and sellersEvery second of every day buyers and sellers compete. This applies to all securities: it does not matter whether you trade in stocks or Forex. The price will therefore never move in a perfect, straight line.There is always a certain degree of resistance in a rising trend. People who take their profits and sell their positions put pressure on the rising trend.There is always a degree of support in a downward trend. At low prices, more people are interested in getting in, so that the price can rise again.You see this pattern in every price movement. The price is moving in a dominant direction. We also call these dominant movements impulses. However, the price regularly moves in the other direction in between. We call these movements in the other direction retracements.
How can you invest at these levels?There are two ways in which you can use support and resistance levels for your investments.
Trade on the bounce
- You open a position when the price falls to a support level.
- You open a position when the price rises to a resistance level.
Trade on the break
- You open a position after the price breaks through the resistance.
- You open a position when the price falls through the support.
Testing levelsResistance levels and support levels are not an exact science. It therefore regularly happens that a level is temporarily broken and then returns to the old pattern. We also call this a level test. Therefore, always pay close attention to whether a level has been broken, or whether there is a so-called false breakthrough.
Recognize the levelsBefore you start investing with support and resistance levels, it is important to understand a few things. You have to remember that after a breakthrough, a resistance level can become a support level. When a level is touched often without being broken, the strength of this level increases. It is advisable to practice with these levels so that you learn how these concepts work.You can use horizontal levels and trend lines to display these types of levels on the graph. In the rest of the article, we’ll take a look at how this works.
How do you use horizontals?Horizontal levels are powerful. A horizontal level is a level where the price has made multiple touches without breaking through. Horizontal levels are so powerful, because many people keep an eye on these levels. Professional investors monitor whether these levels are breached. When this eventually happens, many investors take a position. It is precisely because so many investors use these levels that they work. You can only use a horizontal level when there have been several touches.Only with a strong horizontal level in combination with the correct candlestick is it wise to open an investment position. In the example below, the USD JPY currency pair has been in an uptrend for a long time. In this situation you should look for a good moment to open a buy or long position on the currency pair.At a horizontal level, the chance of a bounce (the price bounces off the level) is high. When this horizontal level was tested by a low test and the price closed above the level again, there was enough reason to open a trade. This ultimately yielded a good result!
Waiting for a retest in case of a breakthroughHorizontal levels can sometimes be very strong and a false breakthrough is therefore not unlikely. Before you take a position because of a breakthrough, it is therefore, wise to wait for the retest. A retest is a second touch of the horizontal level, after which the price does not fall back to the old level, but continues to develop.After a break of the resistance level, the resistance level often turns into a support level. The other way around, this is also the case: if the support level breaks, there is a good chance that this level will now become a resistance level. Below you can see an example of a breakthrough and a retest on which I took a short position.The price clearly moved in a consolidation initially. The price broke the strong support level and has now tested this level with a train tracks candlestick pattern. The price closed below the level, so a short position seems like a good idea!
How do you trade with support & resistance?You now know you can use horizontal levels and trend lines to indicate the areas of support and resistance in price developments. But how do you achieve the best investment result with stocks and Forex by using these levels?
Trading the bounceThe best way to take a bounce position, is to place the order after you are sure the bounce is about to occur. Therefore, do not place the order blindly on the resistance or support line.It is wiser to wait for the price to hit the support or resistance level. You can then place an entry order a bit away from this level in the direction of the trend (E). Only when the price bounces off the level, you will open a trade by triggering the entry order. For protection, you can place a stop loss on the other side of the support or resistance level (SL). If the price moves in the other direction, your trade will automatically close protecting you from a potential loss.The breakthroughYou can also achieve good results with a breakthrough. If you are a more aggressive speculator, you can place an entry order (E) directly below the level. You then place the stop loss on the other side of the level (SL).The more conservative and safer trader only takes a position on a so-called pullback. A support level or resistance level is often tested before it is definitively broken. By applying a more conservative trading strategy, you may miss out on some profitable investments. At the same time, you also reduce the chance of losing money on your trade.It is important to remember that Forex pairs and stocks do not always move according to these predictable patterns. Therefore, it is smart to always use a stop loss! By doing so you avoid losing a good deal of your deposit because you trade on nothing but futile hope.
Trend lines: additional confirmationYou can use trend lines to determine the general direction of the price. By drawing a trend line, you can determine whether it is wise to buy or sell the currency pair. Trend lines can also be used to identify a potential bounce, which is an attractive moment to open a trading position.Trend lines in combination with other technical indicators can provide a strong basis for taking trades. Keep in mind that trend lines mainly indicate general movement, and that it is important to use other indicators as well when you open an investment. Trend lines are not strong on their own, so use them in combination with a horizontal level!
How do you draw trendlines?It is straightforward to draw a trend line within MetaTrader. To do this, press the oblique line in the toolbar and place it with your mouse on the line where a trend line can be recognized. The trend line must connect the lowest points in an uptrend and the highest points in a downtrend. A minimum of three touches is required to be able to speak of a strong trend.In a consolidation there is no clear trend. You cannot use trendlines in this case. A trend line is only useful when an up or downtrend can be identified. Within MetaTrader you can also draw horizontal levels: press the straight line at the top of the toolbar. You can use horizontal levels within a consolidation.
13 key economic indicators for Forex & sharesWhen you invest in Forex or stocks, the economic situation in a region is very important. For example, if the economy in England is doing well, there is a good chance that the British pound will become more valuable in relation to other currencies. UK shares will also increase in value. But what are the most important economic indicators to consider when investing? In this article we discuss them in detail!
How important are economic indicators?
We do not use the word indicator needlessly. An economic indicator only gives an approximation of the economic situation within the country. However, as an investor in Forex or shares, it may be wise to analyse the economic situation by using these figures. That way you have a better picture of the overall trend and this can help you make the right investment decisions.
What is gross domestic product (GDP)?
GDP is the total added value of a country or economic zone. Value added is determined by calculating the total market value of all goods and services within a given region. This gives you a solid overview of the economic situation within a country.The GDP indicates what happened within a zone during the past period. Before this figure is announced, a prediction is usually published. If the final figures differ from what is expected, it can greatly affect the exchange rate of a currency.For example, if America’s GDP is much lower than expected, the dollar is likely to decline in value against other currencies.Pay extra attention when GDP falls. When this happens, you can often expect a sharp decrease. Overall, GDP is one of the most important economic indicators and it is therefore important to keep a close eye on it.short position on the currency of the region. The value of the currency will then decrease considerably as you see in Zimbabwe, for example.Also, deflation is not a good sign. When the price of goods and services decreases, this is an indication that demand for goods and services is falling. This also has a negative effect on an economic region and on the value of the currency used there.The price level has a strong influence on all kinds of other decisions. For example, the price level is used to adjust wages, pensions, and tax rates.
Together with the CPI, the PPI is one of the most important indicators for determining inflation. The PPI indicates how much wholesalers pay for goods. Using PPI, you can determine how much producers receive for their goods. Any price increases in the PPI are often passed on to the consumer. An increasing PPI therefore often also leads to a higher CPI.An advantage of the PPI for the investor is that you can also see how prices are developing per industry. This can help you make decisions regarding equity investments.
How do you use economic indicators?
It is important to remember that economic indicators often do not act as soothsayers. It is better to think of the indicators as a puzzle. Each piece of the puzzle tells you part of the story. With the indicators, you can see the bigger picture and based on that you can make decisions.As a long-term investor, you can use indicators to step in at the right time. When the economic indicators predict future growth, this is a good sign.For the short-term trader, you can use the indicators to speculate in a smart way. Especially when certain figures come out, you can expect increased volatility. By responding smartly to this, you can greatly improve your investment results.
How do you find economic indicators?
You can easily find the economic indicators on the Internet. It may be wise to mark days in your calendar. This way, you avoid losing a lot of money by overlooking an important economic figure.
When I was 16, I secretly bought my first stock. Since that ‘proud moment’ I have been managing trading.info for over 10 years. It is my goal to educate people about financial freedom. After my studies business administration and psychology, I decided to put all my time in developing this website. Since I love to travel, I work from all over the world. Click here to read more about trading.info! Don’t hesitate to leave a comment under this article.