Understand the Forex Market

By Thovhedzo Thomani

This book is the first of a series of forex text books to be published by the author, Thovhedzo Thomani. It covers the basic principles of forex trading in general, answering the “what, how, where, when, and who” questions associated with the foreign exchange market. However, the main focus of the book is to provide a simplified version of events that happen in the forex market, most of which are very difficult for beginner traders to understand. But with the simplified diagrams and illustrations, combined with a few funny analogies, the reader is guaranteed a funny learning adventure. Learning does not have to be a frowning contest. A little smile wont wipe out what you have learnt. Smile a little yet enjoying the flow of simple to grasp explanations of the forex world events.

• Language: English
• Publisher: Thovhedzo Thomani
• Release date: Jun 24, 2020
• ISBN: 9780463708286

Thovhedzo Thomani

Thovhedzo Thomani is a professional trader who started his journey of currency trading about five years ago. My step into the Forex world came about after I lost my job which by then was my only source of income. It was quite a bumpy road to get to where I am right now.The most huddle I had to go through was the education needed to start trading profitably. I did not have any money to pay for the expensive courses, hence I had to take the long route and teach myself. I could say being broke by then is the best thing that ever happened to me. If I had the money to enroll to a trading course, I wouldn't have the knowledge I have now. I would have simply taken the knowledge of whoever was teaching me and end there. Nothing beats self education.Today i am trading a funded account from one of the top trading institutes in the world.

Book preview

Uunderstand The Forex Market

By

Thovhedzo Thomani

Copyright 2020 Thovhedzo Thomani

Smashword Edition

INTRODUCTION

This book is the first of a series of forex text books to be published by the author, Thovhedzo Thomani. It covers the basic principles of forex trading in general, answering the what, how, where, when, and who questions associated with the foreign exchange market. However, the main focus of the book is to provide a simplified version of events that happen in the forex market, most of which are very difficult for beginner traders to understand. But with the simplified diagrams and illustrations, combined with a few funny analogies, the reader is guaranteed a funny learning adventure. Learning does not have to be a frowning contest. A little smile wont wipe out what you have learnt. Smile a little yet enjoying the flow of simple to grasp explanations of the forex world events.

Statistics has it that ninety percent of retail forex traders lose their accounts in just a few trading days. The reason for this is that they probably do not have a clue whatsoever when it comes to margin trading. Their main focus is the prospects of making gigantic profits from as little capital as possible. With that in mind, they tend to overleverage their accounts, which usually result in huge losses if not blown accounts.

I have dedicated a whole chapter to explain Margin trading in detail so that you can be aware of what you are dealing with the next time you open a margin account with a broker. I am pretty sure that at least one, if not many of you have had a horrible experience of blown accounts at a certain point in you trading journey, especially when you just started out. It’s nothing to be ashamed of. If anything, it is the most important lesson a trader can ever learn in this industry. A friend of mine blew his entire savings a few years ago and that was the most horrible but eye opening experience of my life. I felt guilt for that because I was the one who introduced him to trading in the first place. I was still new to it myself, but was so cautious. Not because I knew what I was doing but because I was scared. That led me to take small trading position sizes with the fear of losing all my money.

On the other hand, my friend was so confident, betting the farm on every trade. Honestly he did pretty good for a few days and managed to double his account in just a week. His aim was to reach a certain threshold until one trade went south without him noticing. His account was on the red within a few seconds, and eventually wiped out. With that experience hovering around my heard, I took a decision to study as much as I could to understand the concept of margin and leverage trading. To date, I have never had a drawdown of more than twenty percent, even after a series of losing trades.

There is a chapter about the sexiest language in the world. A language that would score you a lot of points during dinner dates,as well as in the bedroom and boardroom. It is called the forex lingo. Be warned though, if you use it in public, you will sound like an idiot. For example, in the forex world, you can be Long which is impossible in reality. Let’s not spoil the fun

CHAPTER 1

WHAT IS FOREX?

The word Forex is just an abbreviation for Foreign Exchange. At least that’s how we referred to it back in high school economics, which I passionately hated.

It is a global market that allows one to trade two currencies against each other.

Pretty much everyone has participated in the forex market once or often in their lives. For example: If you’ve ever traveled to another country, you usually had to find a currency exchange booth at the airport, and then exchange the money you have in your wallet into the currency of the country you are visiting.

You go up to the counter and notice a screen displaying different exchange rates for different currencies.You exchange your South African Rand to Euros and be like oh man, my R2 000 is only worth €100?

Despite your disappointment (which no one cares about), you’ve essentially participated in the forex market!You’ve exchanged one currency for another.

In forex trading terms, you simultaneously sold the rand and bought the euro.

Before you fly back home, you stop by the currency exchange booth to exchange the euro that you miraculously have left over (champagne is so damn expensive in Paris), and notice that the exchange rates have changed.

It’s these changes in the exchange rates that allow you to make profit in the foreign exchange market.

Not so fast tiger. Ever heard of an African proverb that goes "the sun that bakes clay is the same sun that melts butter)?

Yep.

The changes that makes you profit are the same changes that make you lose in the forex market

Fair enough?

The Foreign Exchange market, also referred to as the FOREX or Retail forex or FX or Spot FX is the largest financial market in the world, with a volume of about $5.3 trillion a day.

If you compare that to the lousy $28 billion a day volume that the New York Stock Exchange trades, you can easily see how enormous the Foreign Exchange really is.

It actually equates to more than three times the total amount of the stocks and futures markets combined! You will just fall in love with it. Even after combining all other financial markets of the world, the forex market will still stand tall.

What is traded in forex?

The simple answer is MONEY. MOOLAH. You can call it anyhow you feel comfortable with, but that’s what is traded. Buying money with money and selling money for money.

Forex trading is the simultaneous buying of one currency and the selling of another. Currencies are traded through a broker or dealer, and are traded in pairs; for example the Euro dollar (EUR/USD) or the Dollar British pound (USD/GBP), the British pound Japanese Yen (GB

P/JPY), the Dollar South African Rand (USD/ZAR) etc.

You buy one and the other tags along, but in the opposite direction. Isn’t that awesome? Because you're not buying anything physical, this kind of trading can be confusing. Think of buying a currency as buying a share in a particular country’s economy.

When you buy, say, South African Rand , you are in effect buying a share in the South African economy, as the price of the currency is a direct reflection of what the market thinks about the current and future health of the South African economy.

You are betting that the South African economy is doing well, and will even get better as time goes.When you sell those shares back to the market, hopefully, you will end up with a profit.

In general terms, the exchange rate of a currency versus other currencies is a reflection of the condition of that country's economy, compared to the other countries' economies.

Which Currencies Are Traded

You can trade any currency of your choice as long as it is listed on your broker platform However, the most popular currencies along with their symbols are shown below.

I know some of you are technophobic, and would like to do things physical. That’s why I added a map, so you can go and physically trade your favorite currencies. I have already sorted your visas out.

These are called major currencies.

They’re called major currencies because they’re the most heavily traded currencies and represent some of the world’s largest economies.

Forex traders differ on what they consider as major currencies though.The smart pants who probably got straight A’s in high school only consider USD, EUR. JPY, GBP, and CHF as major currencies.

Then they label AUD, NZD, and CAD as commodity currencies.

For us C students (probably D), to keep things simple, we just consider all eight currencies as the majors.

I mean, what’s the difference? Except for the fact that the USD is ashamed of its family and doesn’t want to fall in the same group as its brothers. (Did you notice that they share the same surname? Dollar).

Below, we list them by their symbol, country where they’re used, currency name, and cool nicknames.

Currency symbols always have three letters

The first two letters identify the name of the country. The third letter identifies the name of that country’s currency, usually the first letter of the currency’s name.

An exception is the EUR, which is used by a group of countries under the European Union, hence cannot be quoted with one country code.

These three letters are known as ISO 4217 Currency Codes.They were established by the International Organization for Standardization (ISO) in 1973

Enough about history. I never liked the subject anyway.