Forex, ETFs, CFDs, Commodities, Indices, Crypto – trading education
Trading is trading on the stock or currency market and profiting from price differences. The commodity is the currency of different countries and securities. The platform for trading is Forex or the stock exchange. To make a profit, you need to wait for the assets to rise in price and then sell them.
Forex (foreign exchange market) is a global market for exchanging national currencies. Forex markets are the most liquid asset markets in the world.
In the past, only big players were allowed to trade on the foreign exchange market: banks or institutional investors on behalf of a client. Nowadays, retail investors and traders take part in the market.
Currencies are traded against each other as currency pairs. For example, USD/JPY is a currency pair for trading the U.S. dollar against the Japanese yen.
Currency rates change every second, so markets are in constant motion.
What is the difference between the Forex market and the foreign exchange market?
The largest stock market in the world, the New York Stock Exchange (NYSE) trades about $22.4 billion a day.
The Forex market trades about 6.6 trillion dollars a day. This figure includes the whole foreign exchange market, the spot market accounts for 2 trillion dollars per day.
As for the trading volume of retail traders, it is much smaller and equals approximately 200-250 billion dollars.
Forex market works 24 hours a day and 5 days a week and closes on weekends.
Forex trading is usually designed for short-term profits, while investments involve long-term profits.
Online Trading
Nowadays, thanks to the Internet almost all trading takes place online.
There are platforms and applications where traders can make transactions on their own. If you compare it with the trading conditions in the past, everything has become easier and faster.
The trading platform is provided to the trader by a broker or a bank, which receives the data on the transactions instantly. The trader can also take advantage of the high leverage of the broker, thanks to which he can trade with a larger amount than he has available.
When they talk about the Forex market, they usually mean the spot market. Spot trade is a form of payment transaction, the settlement of which is carried out in a short time. It usually takes 1-2 days to settle. Forward and futures markets tend to be more popular with companies that need to hedge their currency risks to a certain date in the future.
How does Forex trading work?
The price of currency on the market reflects the national economy, its current and future state in relation to the currencies of other countries.
When you buy the Australian dollar, for example, you are buying a “stake” in the Australian economy. Selling the Australian dollar in the future, you expect to make a profit.
So, the first step to start forex trading is to set up an account with a regulated forex broker. You can start with not much money or you can use your leverage, but (!) you have to remember that the bigger your possibilities, the bigger the risk.
The next step is to decide which currency pair you will invest in. To make a successful decision, you will need to follow the economic situation in the world’s current news on financial sites, or follow the advice of experienced traders.
Major Currencies.
There are 8 major classes of currencies, which represent the most developed economies and are the most commonly traded.
Each currency has a code composed of three letters: the first two stand for the name of the country, the third for the name of the currency.
For example: JPY-Japan, Y-Yen.
These three-letter codes were established by the International Organization for Standardization back in 1973.
| CODE | COUNTRY | CURRENCY | NICKNAME |
| USD | USA | Dollar | Buck |
| EURO | Eurozone | Euro | Fiber |
| GBP | Great Britain | Pound | Cable |
| JPY | Japan | Yen | Yen |
| CAD | Canada | Dollar | Loonie |
| CHF | Switzerland | Frank | Swissy |
| AUD | Australia | Dollar | Aussie |
| NZD | New Zealand | Dollar | Kiwi |
Currency exchange is the payment of one currency to buy another. Just as a traveler traveling from his country to another one buys currency of that country, so does a trader, but only to make money.
An example of a quote on the EUR/USD currency pair = 1.05
The first currency in the pair EUR is the base currency,
The second currency in the pair USD is the quoted currency. So at this rate, you would need 1.05 of the quoted currency to buy 1 base currency.
Exchange rates are volatile, depending on which currency is stronger at the time.
Types of currency pairs:
- Major (always contains the U.S. dollar )
- Minor or cross currency pairs – those that do not contain the U.S. dollar, but consist of major currencies.
- Exotic – major currencies + emerging market (EM) currencies.
Major currency pairs:
EUR/USD- Eurozone/ United States
USD/JPY- United States/Japan
GBP/USD- Great Britain/ United States
USD/CHF- United States /Switzerland
AUD/USD- Australia/United States
USD/CAD- United States/ Canada
NZD/USD- New Zealand /United States
The liquidity of a currency pair is essentially the frequency with which it is traded. The most liquid currency pair is EUR/USD.
Cross Currency Pairs
They include any of the major currencies, but not the U.S. dollar.
For example:
EUR/CHF EUR/JPY GBP/NZD
EUR/CAD AUD/JPY GBP/AUD
EUR/GBP NZD/JPY GBP/CHF
and more.
Exotic currency pairs
Consists of one base currency and one emerging market currency. For example :
USD/SAR- United States/ Saudi Arabia
USD/BRL- United States / Brazil
USD/ HKD- United States / Hong Kong
USD/SGD- United States / Singapore etc.
Usually brokers offer about 70 currency pairs to traders, although there are about 180 of them.
When trading exotic currency pairs you should be aware that transaction fees can be significantly higher than when trading the major currency pairs.
Besides, exotic currency pairs are more susceptible to market volatility than other major currency pairs.
Apart from the three types of currency pairs, there are also several groups of currencies that a beginning trader should be aware of.
The most liquid currencies G10:
USD – United States dollar
EUR – European Union euro
GBP- Great Britain pound
JPY- Japan yen
AUD- Australia dollar
NZD- New Zealand dollar
CAD- Canadian dollar
CHF- Switzerland franc
NOK- Norway krone
SEK – Sweden krona
DKK – Denmark krone
The Scandies
The currencies of the three Scandinavian countries Denmark, Sweden and Norway have the same name, the krona.
And yes, this does not include Finland.
DKK– Denmark krone
SEK– Sweden krona
NOK– Norway krone
CEE Currencies:
These are the four major currencies of Central and Eastern Europe:
HUF- Hungary forint
CZK- Czeh Republik koruna
PLN- Poland zloty
RON- Romania leu
BRICS
BRICS is an acronym that refers to the developing countries of Brazil, Russia, India, China, and South Africa. The group showed great potential for economic growth.
BRL– Brazil real
RUB- Russia ruble
INR- India rupee
IDR- Indonesia rupiah
CNY – China yuan
ZAR – South Africa – rand
Margin and Leverage
In trading you can buy on margin. Margin is the small amount of money a broker needs to give you leverage.
Leverage is a loan that allows you to have a large position to profit from small price movements.
Choose a trading platform that suits your needs. Check the leverage terms and conditions, pay margin, and the broker will give you access to a larger leveraged position.
A simple example:
You want to open a position of 2000 units in the EUR/USD, and the leverage of the broker is 200:1, or 0.5%, then you have to deposit £10.
But you have to understand that leverage is a double-edged sword that can increase both profit and loss. There are some forex risk management strategies, which a trader should master in order to reduce losses on the forex market.
Maintenance margin is the account balance that you must maintain in order for the broker to keep a position open. Before you start trading, make sure that you are aware of the maintenance fees and other charges.
How can a retail trader trade forex ?
Methods of trading or financial instruments, as they are also called :
Spot FX is an over-the-counter or over-the-counter (“OTC”) market. That is, a private agreement between two parties.
The client trades directly with the counterparty, bypassing the centralized market.
The basic Forex market is the “inter-dealer” or “inter-bank” market. Dealer is an intermediary between clients for exchange of currency, in most cases bank acts as such intermediary. That is why the interdealer market is available only for big organizations, trading with big volumes.
These are banks, various funds, corporations, insurance companies and others.
At the spot foreign exchange market, an institutional trader buys and sells an agreement or contract that obliges him to buy or sell foreign currency at the current exchange rate.
It is important to understand that the trader does not trade the currencies themselves, but rather a contract that includes the base currencies.
Often, spot transactions are not processed immediately, and the trader will have to wait 2 days from the transaction date. The value date is the delivery date of the purchased currency.
Retail Forex
It is a secondary market for retail traders, that is small players.
Trading is done by the forex broker on your behalf, who finds the best price and gives the trader the price with “his markup” on the trading platform.
The trader trades a contract and not the currency itself, and the contract itself is a leveraged contract.
A retail forex transaction is when a trade is postponed indefinitely until it is closed. It is also called “rolling spot forex transaction”.
Such transactions are closed by entering into an equal but opposite transaction. This is called trade liquidation or netting.
For example, if you bought Euros for U.S. dollars, you can close the transaction by selling Euros for U.S. dollars.
Swap fee – a fee for a spot contract to be rolled over until it is closed, if you have an uncovered position left at the end of the day.
The rollover process is called Tomorrow- Next, and the interest is paid or earned by the trader .
The commission is calculated by the forex broker and adds to or deducted from your balance.
Currency futures
Contracts to buy/sell an asset at a specific price in the future are called Futures. The contract sets the price and exchange date.
All contracts are traded on a centralized exchange and are well regulated and standardized.
Options
Options give the trader the right to buy or sell an asset on a specific date in the future at a specific price.
Options are also traded on centralized exchanges, but their liquidity is low compared to futures, and market hours are limited.
Currency ETFs
ETF is an Exchange Traded Fund.
It is a basket of assets that may include stocks, bonds, commodities and currencies. Instead of trading stocks one at a time, currency ETFs allow you to trade a basket of stocks available on exchanges like regular stocks.
Basket allows to diversify risks of one’s portfolio having several different stocks, currencies, etc. Also, the transaction fee is smaller the smaller the transactions. Some brokers offer zero commission for inexpensive asset baskets.
ETFs are popular with novice retail traders as they are affordable and tax transparent to the max.
Most ETFs do not require tracking assets on a daily basis, meaning they are passively managed.Those ETFs that are actively managed often charge more expensive fees.
Types of ETFs:
- Index or market ETFs track a specific index.
- Industry ETFs track the performance of a sector, such as the e-commerce sector.
- Commodity ETFs track the price of a commodity, such as gold.
- Leveraged ETFs provide access to large positions.
- Reverse ETFs help you profit from a falling market by focusing on short positions.
Betting on the Forex spread:
Spread betting is speculating on the future price direction of a currency pair, which is either up or down.
A trader’s profit depends on how close the market is to your bets before you close your position and how much money is bet on a price movement point.
Spread betting is allowed and regulated by the FSA in the UK and EU, but is banned in the USA where it is known as a retail forex transaction, so before you start you need to read the laws in your country regarding the legality of the procedure.
Spread betting is also done with the help of intermediaries.
CFD – what is it?
CFD stands for Contract for Difference and is a financial product that gives you the opportunity to speculate on whether an asset’s price will rise or fall.
You open a short position or sell if you think that the price of an asset will fall. This means that if it does, you have opened a CFD position which will bring profit.
You open a long or buy position if you think that the price of the asset will rise. If it does, you have opened a CFD position which will yield a profit.
CFDs are risky trades, so it is important to be aware of any brokerage commissions before you start trading.
The risk lies primarily in the fact that CFD transactions are leveraged transactions, which means the possibility of both excellent profits and large losses.
The broker provides both a deposit margin, which is the capital required to open a position, and a maintenance margin, which is the balance required to keep the position open.
The purpose of the contract is simply to speculate on price movements without physically holding the currency.
CFDs should be started by practicing in simpler markets. Choose your CFD trading platform carefully and learn all of the commissions before you start trading.
What are the advantages of CFD?
- CFDs are more profitable than assets
- The markets fluctuate significantly due to the pandemic restrictions and the unstable macroeconomic situation, and there is money to be made
- Leverage that allows you to multiply your profits
- Experienced traders use CFDs to hedge or insure the risk. For example, an investor who is in possession of an asset and it is highly probable that the price of the asset will fall, in which case he can open a short position and profit from the fall in price, thereby minimizing his losses from the fall of the asset.
What are the disadvantages of CFDs?
- The need to pay for the difference between buying and selling, and brokerage fees, which can take a large part of your profits.
- The need to keep an eye on your maintenance margin .
- Along with profits, losses can also multiply.
What is a pip in Forex and why is it very important?
A pip is the smallest value of the exchange rate of a currency pair, in other words, it is the last decimal place in the price quote.
If EUR/USD moves from 1.1050 to 1.1051, this increase of 0.0001 is the standard unit of ONE point.
For almost all currency pairs a pip is 0.0001 (0.01%), only the Japanese Yen (JPY) is 0.01 (1%).
Pips are used in forex trading because price movements are insignificant and the profit will depend on the size of the position.
For example, if EUR/USD=1.0424, and you bought 1,000 units, one pip would cost you 1,000 * 0.0001 = $0.1.
If you bought 10 000 units, then one pip will cost 10 000 * 0,0001 = 1 dollar. If the price moves one pip lower (to 1,0423) or higher (to 1,0425), you would lose or earn one dollar respectively.
Almost everything is calculated automatically by forex brokers, there are special pip value calculators, so everything is a little bit easier than it may seem.
How does stock trading work?
Companies sell shares to raise money.Whoever buys shares owns a share in the company and is entitled to a portion of the company’s profits in the form of dividends, paid once a year. The shareholder can also sell shares when they rise in value.
Trading stocks is one of the most profitable markets if you invest for the long term and competently.
You need to choose an online stock trading platform, open an account and start buying stocks. However, the choice of stock should be based on many parameters and not always on the state of the company at the moment, but often on the likely prospects in the near future.
Many investors receive dividends annually, and there is a practice to reinvest dividends into growth in order to multiply your profits from the sale of shares when their price is high enough.Reinvestment can be made by a private investor and the company itself, then it does not pay dividends to investors. These and other conditions, such as the right to vote at shareholders’ meetings, or the right to higher assets without the right to vote, can be found out by taking a closer look at the rules of stock trading.
Also keep in mind CFDs, contracts for difference, which allow you to profit from changes in the stock price without having to buy the stock itself.
What do the key indices and ratios mean when trading stocks?
There are hundreds of thousands of companies in the world that trade on stock exchanges. It is impossible to track changes in prices of all securities, therefore stock indices were invented, which show how much the value of a certain group of securities has changed on average. With the help of the stock index you can assess the state of the market as a whole.
The stock index is calculated on the basis of the most liquid stocks or bonds. With the help of a stock index you can estimate the state of the market as a whole.
There are different kinds of stock indices, and they reflect the direction of the market.
Dow Jones Industrial Average (DJIA) is an index of the New York Stock Exchange. It includes 30 stocks of industrial companies.
NASDAQ 100 – Calculated based on the stock quotes of Internet holdings, technology companies, a significant share of it is taken by the most famous companies Apple, Microsoft, Amazon, Facebook ,Alphabet.
FTSE 100– is an index that includes the 100 largest companies of the London Stock Exchange.
S&P 500 ( SPX) – is calculated by Standard & Poor’s on the quotations of the world’s 500 largest companies.
Nikkei 225 (N225) is an index of the Tokyo Stock Exchange, calculated as an arithmetic average of prices of 225 most liquid shares.Shanghai Composite ( SSEC ) – Shanghai Stock Exchange.
CAC 40– French stock index. It includes the 40 largest companies of Euronext Paris – Europe’s second largest stock exchange.
DAX– the stock index of Germany, which tracks the shares of the 30 largest German companies.
It is possible to invest in a stock index by buying all the securities included in the index or ETF funds, their portfolio repeating the composition of the respective indices.
The smallest possible change in the value of an index is called a tick, a tick is unique for each index. The S&P 500 moves in ticks of 0.25, the Dow Jones moves in ticks of 1.00. But to describe fluctuations, the term point is used. When the number before the decimal point changes by 1, the index shifts by one point.
There are also three indices of individual stocks:
EPS – earnings per stock, the total profit of the company, divided by the total number of shares.
P/E – ratio of share price to earnings. The lower the ratio, the better.
DY- dividend yield, the ratio of the annual dividend per share to the share price. If a company pays dividends, it is easy to find it by this indicator.
What is cryptocurrency trading?
Cryptocurrencies are digital or virtual currencies. They are not issued or regulated by state authorities. For example, Bitcoin is the largest currency: ownership is recorded in a ledger, protected by cryptography, and distributed across multiple computers. Miners check transactions and get paid in new bitcoins .
Miners are people who mine the cryptocurrency, that is, they add digital blocks (information about completed transactions) to the blockchain. In order to add a new block, a miner needs to get proof of compliance with blockchain requirements.
The blockchain system is peer-to-peer, anonymous, and is essentially a decentralized, distributed and public digital ledger that is responsible for storing a permanent record (the blockchain) of all previously validated transactions.
Blockchain transactions take place in a peer-to-peer network of globally distributed computers (nodes). Each node stores a copy of the blockchain and contributes to the functioning and security of the network. This means that bitcoin is a decentralized digital currency that does not require third-party intervention.
At the moment there are many different cryptocurrencies besides the largest Bitcoin and Ethereum. These are Binance coin ( BNB ) , Cardano ( ADA ) , Ripple ( XRP ) , Solana ( SOL ) , Litecoin and many others.
Cryptocurrency trading can bring both breathtaking profits and no less breathtaking losses, so you should start only after you have been trained and psychologically prepared for the possible risks. To do this, you need to use only those funds, the loss of which does not change the trader’s way of life, otherwise the stress of a possible loss can be difficult to overcome.
Cryptocurrencies are not regulated, so they are good for speculation and money laundering. Their value depends on supply and demand, and supply and demand depends on inflation in particular, that’s why the cryptocurrency market is very unstable. But the excitement around it is not subsiding, and more and more people believe in the future of digital currencies, especially because of their anonymity and the possibility of lightning speed profit. However, the risks are also high. At the moment, cryptocurrencies are in a state of massive collapse, and it is likely that only the largest ones will survive.
If you want to trade cryptocurrencies, you can either do it directly through a cryptocurrency exchange or through a regulated online broker, which will offer to trade through CFDs on value fluctuations.
Commodity trading – what is it?
Commodity trading is the trading of physical commodities that people have been trading for centuries.
Today, the trade is carried out with the help of futures contracts, which means that investors agree to buy / sell at a certain price and time in the future.
There are two types of traders: those who have the goal to buy the goods and use futures contracts to reduce their sensitivity to price movements (volatility); those who have the goal to speculate on the price of the goods without owning them.
The smallest possible price change is also called tick, the value of a tick depends on the commodity, in oil and gold trading a tick is worth $0.01 and in soy trading $0.25.
It must be remembered that each commodity has its own unit, for example, oil has a barrel, while gold and precious metals have ounces. The goods are valued in dollars.
If you want to trade in futures contracts, you have to get acquainted with commodity trading platforms.
You can also invest indirectly in the commodities market through stocks of companies related to the commodity of interest or ETFs.
Oil is considered unstable, and gold and other precious metals are relatively stable assets.
A trader who trades commodity futures contracts needs to keep a close eye on seasonality, geopolitics, climate, inflation, and supply chains.
You can use the leverage of your online broker to open a big position and pay 0.1% of its value if the broker will offer you 100:1 leverage on gold.