MFX Academy – Forex Trading education portal!

Level 1
Basics of Forex

Lecture 1
• The concept of financial market

What is the financial market? Financial market is system of relations originating in the course of economic goods exchange with money being used as the intermediary asset. Redistribution of capital takes place on these markets. Let’s assume there is a large shipping company. It needs to enlarge its fleet, to by an oil tanker. Just because an oil tanker costs too much, not every company can afford such investments anytime. With this purpose the company can float securities on the financial market – in an exchange house. It will allow to raise a significant amount of funds and to purchase a tanker.

Candlestick patterns: It is a «hammer»! And a «hanging man»
Vera Six, expert MFX Trading Academy

One of the most important things in Forex trading is to filter out a possible trend reversal, so you can place your buy or sell order at the beginning of a trend for large profits. If you are using candlestick charts, there are some useful patterns that can be an alert for the trader that there might be one of such trend reversal ahead. Let us speak about two of them: the hammer and the hanging man.

The candlestick has a small body as you can see in the picture below, and one long shadow, and a very short or even no second shadow. The body’s colour is not of much importance. But please be wise enough to wait for the candle coming after the hammer, and if it confirms it, you might jump in with your trade, especially if the second or third bar confirms it, too. Please make use of other indicators additionally.

A hammer which appears in a bearish market might introduce a bullish trend as can be seen in the picture on the left. A hammer which appears in a bullish market is also known as “hanging man” and is often followed by a bearish engulfing as in the right picture.

Preparing yourself for trading

In the present post I’ll try to point out the moments I consider very important in a trader’s every day life. What I am going to talk about now is of great importance not only in the context of preparation for work day on the market, but for the trading in general. In other words these are rules for all times. Needless to say, it’s impossible to cover all aspects in few articles, so I am going to return to undisputable truths many times in the future. Today I’ll tell about the basics, without knowing which it’s impossible to become successful trader, in my opinion. These recommendations must be adhered to everyday without any exclusion.

Vera Six, MFX Academy expert

In the following example of the 1-hour chart of the EURUSD I am using the exponential moving averages of 20 (yellow) and 5 (red) for the crossovers, and one of 200 (green) that shows me the major trend direction. This is what they look like in the chart:

I prefer to use exponential (also called progressive) moving averages (EMAs) to the simple moving averages (MAs), because they evaluate the latest movements more than the older ones, which is more precise for what is going on at the moment. Moving averages have the disadvantage that they respond rather slowly to market changes, because they calculate old prices from long ago, too, and the exponential moving averages compensate this up to a certain extent.

Basics of Forex

Forex is based on futures contracts trading as illustrated below.

Margin System

Margin is a determined as an amount of money that acts as a good faith deposit. A trader has to have enough margin to be able to trade.

Standardised Contracts

Each exchange will determined the size and value of futures contracts and its information are always available for the public. Each futures contract has a value equivalent to an underlying commodity.

High Liquidity

Its easy to get on and off positions in futures markets, because of the huge volume. Also, a trading account works like a current account but, without an ATM card. Withdrawals can be made easily by submitting a withdrawal form, and the money shall be in your bank account the next day . Provided there’s no open positions.

The Bollinger Bands in action
Vera Six, MFX Academy expert

The following chart shows a 1-hour chart of the GBPUSD and the Bollinger Bands (yellow). I will explain how they can be analysed here. It would be wise not to base your decision to enter or exit the market on the Bollinger Bands alone. Please keep in mind that they need confirmation, maybe by using an economic calendar or other tools. It is very good for spotting trend reversals together with other tools that give you more information

Please have a look at the image below.

A: You can see the two outer Bollinger Bands (yellow) as if squeezed. This gives us a signal that there might be a stronger movement coming soon, but the direction is not clear yet.

As any other market, the FX has its sellers and buyers. On the Forex market these concepts are leveled. Everyone can be seller and buyer. As a rule, this role is passed from one market participant to another depending on aims and motives.
Nevertheless, there is strict ranking of the participants according to extent of their influence on the market. There are leading players, the largest investors – banks, insurance companies, pension funds, other funds, the largest exporters and importers such as Gazprom. And there are secondary players traders. Although about 80% of the market is speculative, its extremely hard for traders to affect the market.