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Module Recap and Quiz

Module Recap and Quiz

8.1 Recap of Forex Beginner Course 

Module 1: Introduction to Forex Trading 

  • The forex markets are the largest and most liquid financial markets, with total trading volume that dwarfs the global stock market.  
  • Forex trading is based on currency pairs, with the first currency known as the “base” and the second currency known as the “quote”. 
  • Leverage is commonly used in forex trading to facilitate larger trades without the need for a large capital.  
  • You can take long or short positions in forex trading, allowing trading in all directions.  
  • You can trade forex through Contracts-for-Difference (CFDs), which allow you to seize trading opportunities on the price movement of currency pairs without ownership of the underlying assets.  

Module 2: Preparing your arsenal 

  • Trading platforms offer both live and demo accounts. Both can be useful for traders of all levels, and even advanced traders can benefit by using a demo account to sharpen their trades.  
  • The most popular platforms for trading forex are MT4 and MT5. The former is focused on forex trading, while the latter offers a wider range of assets.  
  • Besides MT4 and MT5, Vantage also offers other trading platforms that may be useful for certain traders. WebTrader offers cloud-based trading via any web browser, ProTrader provides additional charting tools and technical indicators, while Vantage app facilitates seamless trading over mobile devices. 
  • Taking the time to expand your forex knowledge can lead to improved trading results.  

Module 3: Essentials of Chart Reading 

  • Forex charts – or more properly, price action charts – are an essential tool for traders to learn, as they provide basic but important information such as price trends and reversal points that may be potential trading opportunities.  
  • Three common forex charts are line charts, bar charts and candlestick charts. Of the three, candlesticks provide more information than line charts while being easier to read than bar charts.  
  • A candlestick chart is made up of individual candles, each representing a trading period (such as an hour, a day or a week, etc).  
  • Candles are made up of a rectangle (the real body) and wicks or shadows on the top and bottom.  
  • The length of the candle’s body tells us the difference in price between opening and closing. When the closing price is lower than the opening price, the candle is a bearish one and is traditionally coloured red. When the closing price is higher than the opening price, the candle is a bullish one, and is traditionally coloured green.  
  • The length of a candle’s wicks tells us the difference between the highest/lowest price and what the price ultimately closed at. This can be taken as a measurement of market sentiment.  
  • Long top wicks may be read as a bearish signal, while long bottom wicks may be read as a bullish signal. Short top wicks may be a bullish signal, while a short bottom wick may be a bearish signal. 
  • Candlesticks reflect the trading activity of the period and can thus appear differently from day to day. The appearance of certain candlestick shapes and patterns can indicate bullish or bearish trends.  
  • Bullish candlestick patterns include the Hammer, Inverse Hammer, Bullish Engulfing, Three White Soldiers and Bullish Rising Three 
  • Bearish candlestick patterns include the Hanging Man, Shooting Star, Bearish Engulfing, Evening Star, and Bearish Falling Three 
  • Candlestick patterns do not guarantee the onset of a bullish or bearish trend. Instead, they should be taken as descriptions of price tendencies. 

Module 4: Basics of Fundamental Analysis 

  • Fundamental analysis in forex involves reading and analysing key economic data and indicators to glean the economic health of a nation. 
  • The main purpose of forex fundamental analysis is to suss out events and developments that are likely to have direct impact on the valuation of a currency. 
  • If an economy is doing well, the value of its currency tends to appreciate; if an economy is slowing down or weakening, the value of its currency tends to depreciate. 
  • Forex fundamental analysis should cover economic reports, consumer spending, GDP, CPI, and industrial production levels, among others. 
  • An economic calendar is a commonly used tool that can help forex traders during fundamental analysis. Its main purpose is to organise and track events and happenings that are of relevance to the forex markets. 
  • Traders may make use of free online economic calendars, or create their own using cloud-based software, or paper journals. 
  • Module 5: Basics of Technical Analysis 
  • Technical analysis is a framework for traders to study the price action of a currency pair. Charting tools and technical indicators are commonly involved, and a trader who makes trading decisions mainly via technical analysis is known as a technical trader. 
  • Using historical price and trading volume data, technical analysis allows a trader to discern the possibility of future price trends and events. 
  • Technical analysis is often criticised for being too subjective; this is thought to arise from differences in how charting tools are employed, as well as differences in individual interpretations. 
  • Technical analysis is most commonly done on a candlestick chart, where traders can study individual candlestick characteristics and candlestick patterns to determine potential price reversals and incoming price trends.  
  • Trendlines can be plotted on a price chart to better visualise price trends – uptrends, downtrends and sideways trends. This can help minimise risk. 
  • Trendlines are also used to demarcate levels of support and resistance. Support levels represent a price floor, whereas resistance levels represent a price ceiling. 
  • Depending on the state of the market, support and resistance levels may be broken. When price rises above resistance levels during a bullish trend, the level turns into a new support level. When price falls below support levels during bearish trend, the level turns into a new resistance level. 

Module 5: Basics of Technical Analysis

  • The Relative Strength index is widely used to signal when the market is overbought or oversold. It is displayed as a number from 0 (oversold) to 100 (overbought). Typically, traders pay attention to levels 30 and 70 on the RSI. 
  • A moving average filters out noise on the price chart by creating a constantly updated average price. It is a lagging indicator that relies on past prices to identify the trend direction of a currency pair, or to find levels of support or resistance. 
  • A pair of moving averages can also be used to discern price trends. For instance, when a 50-day moving average (shorter lag) crosses above a 200-day moving average (longer lag), a bullish trend is indicated. When it crosses under instead, a bearish trend is indicated.  
  • A simple moving average is a simple arithmetic average of prices over a timespan. An exponential moving average accords more weight to recent prices over older ones in the time range.  
  • While fundamental analysis and technical analysis are two very distinct approaches to trading analysis, traders can benefit from both methods. Learning both will provide a trader with a richer foundation to draw upon. 

Module 6: Basics of Risk Management 

  • Risk management is an essential skill that forex traders must master. It involves scanning for factors that may negatively affect trades and taking steps to minimise their impact. 
  • The crux is to minimise risk while maximising the potential for returns. 
  • Proper risk management is what sets a professional trader apart from someone who simply gambles on the forex market.  
  • Liquidity risk arises when a currency pair has low trading volume. This can cause high spreads, or even prevent trades from being executed altogether. 
  • Broker risk depends on the technology, capabilities, policies, and safety measures of the brokerage you choose. It’s best to pick a reputable and highly regarded brokerage. 
  • Market risk refers to the volatility of the market and can be impacted by economic or political issues. 
  • Traders should also be aware of country, legal and social risks that may be at play in the countries whose currencies they are trading. 
  • To manage risk, proper use of leverage is crucial. Be aware that leverage multiples your potential loss, which may outstrip your account value. 
  • Properly allocating trade positions is also important. As a general rule, never risk more than 3% of your real trading capital in any one trade, although exceptions may apply. 
  • Learn how to set stop losses to reduce potential losses and improve your trading outcomes. 
  • Taking profit at appropriate levels can give you better results over the long run versus attempting to ride out every trade. 
  • Understanding risk-reward ratio is crucial to your success. Risk-reward ratio varies from trade to trade, and you can calculate your own ratio for each trade. 
  • A trading plan is an integral tool for risk management. It serves as a record of your trading outcomes, helps you to learn from past mistakes, and may help detect unconscious biases or negative beliefs that are hindering your success.  

Module 7: Trading Psychology 

  • The primary influence behind our trading decisions is our trading psychology. This influence can sometimes be very subtle, which can make it difficult to spot. 
  • Trading psychology may be thought of as our mental and emotional state while trading. Personality, beliefs, and past experience may also play a part. 
  • Traders who master their trading psychology are less prone to emotionally driven decisions, and thus have a higher potential to succeed. 
  • For most traders, the main driving forces between trading psychology is greed and fear, and the interplay between these two emotions. 
  • Feeling fearful or greedy is natural, but problems can arise when we give in to their influence and make irrational trading decisions. 
  • Fear can cause us to close positions too early, or even stop us from entering potentially profitable trades, reducing our overall returns. 
  • Greed can cause us to lose profits by keeping positions open for far too long, or risk losses on positions that are improperly sized.

Quiz

Take this short quiz and see if you have mastered this course!

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8.3 The Next Step 

Congratulations on completing our Forex Beginner Course. You’re now armed with the fundamentals of forex trading, along with some ideas for growing your knowledge.  

Feel free to revisit this course at any time if you need refresher.  

If you feel ready to move on, give our Forex Advanced Course a try, or choose another topic from our educational hub.

Module Recap and Quiz