What is the Forex Market?

The Forex Market (Foreign Exchange Market) is the largest financial market in the world where
currencies are bought and sold

History of the Forex Market

1. Long ago – Gold Standard (1800s)

• Each country’s money was backed by gold.

• Example: If you had $1, you could exchange it for a fixed amount of gold.

• Exchange rates were very stable.

2. After World War II – Bretton Woods System (1944–1971)

• All major currencies were linked to the US Dollar.

• The US Dollar was linked to gold ($35 per ounce).

• This made the USD the world’s main currency.

3. In 1971 – Floating Exchange Rates

• US ended the gold link.

• Currencies started changing value freely based on demand and supply.

4. Today – Modern Forex

• Technology and the internet made Forex trading possible for everyone.

• Now, banks, companies, and individuals trade online 24 hours a day, 5 days a week.

Product of Forex market

1. Currencies: Trading currency pairs

2. Metal: Trading precious metals like gold, silver
3. CFDs: Trading price differences of various assets like crude oil.

Major Currency Pairs

• EUR/USD
• USD/JPY
• GBP/USD
• USD/CHF
• AUD/USD
• USD/CAD
• NZD/USD
 Pip
Definition: A pip (Percentage in Point) is usually the fourth decimal place in most
currency pairs.

Example:
If EUR/USD moves from 1.1000 → 1.1001, that is a 0.0001 change, or 1 pip.
Units of Base Pip Value For 10 Pip
Lot Type Move
Currency (EUR/USD)

Standard 100,000 $10 $100

Mini 10,000 $1 $10

Micro 1,000 $0.10 $1

Nano 100 $0.01 $0.10

Step 1: Understand the Pip Value

For EUR/USD, 1 pip = 0.0001 in price movement.

Formula for pip value:

0.0001∗𝐿𝑜𝑡 𝑠𝑖𝑧𝑒
Pip Value= Exchange rate

If EUR/USD ≈ 1.1000:
0.0001×100,000
Pip Value= 1.1000

10
Pip Value= 1.1000

=9.09 USD
Step 2: Profit/Loss Formula

P/L=Pip Movement×Pip Value

Step 3: Detailed Examples

Let’s calculate for a Standard Lot.

Step 3: Detailed Examples

Let’s calculate for a Standard Lot.

Example 1 — Win

• Trade: Buy EUR/USD at 1.1000, close at 1.1050

• Pip Movement: 1.1050 − 1.1000 = 0.0050 = 50 pips
• Pip Value: $9.09 per pip (exact)

P/L=50×9.09=454.50 USD

Example 2 — Loss

• Trade: Sell EUR/USD at 1.1000, close at 1.1030

• Pip Movement: 1.1030 − 1.1000 = 0.0030 = 30 pips
• Pip Value: $9.09 per pip

P/L=30×9.09=272.70 USD loss

calculate free margin for EUR/USD when leverage is 1:500.

Key Terms
• Account Balance = Total money in your account before open trades.
• Margin = Amount of money locked by your broker to keep your trade open.
• Free Margin = Free Margin=Equity−Used Margin
• Equity = Balance ± current floating P/L from open trades.
• Leverage = Ratio showing how much bigger a trade you can open compared to your
capital.

Step 1 — Find the Margin Required

Formula: Margin=Contract Size /Leverage

For EUR/USD:

• Standard Lot = 100,000 EUR.

• If EUR/USD = 1.1000,
• contract size in USD =100,000×1.1000=110,000 USD
 With 1:500 leverage:

Margin=1,10,000/500=220usd

So you need $220 to open 1 standard lot.

Step 2 — Calculate Free Margin

Example:

• Account Balance: $1,000

• Trade Open: 1 standard lot EUR/USD
• Margin Required: $220 (calculated above)
• Equity:
o If trade is at break-even = $1,000
o If trade is +$50 floating profit = $1,050
o If trade is −$30 floating loss = $970

Case A — Break-even

Free Margin=1,000−220=780 USD

Case B — +$50 Profit

Free Margin=1,050−220=830 USD

Case C — −$30 Loss

Free Margin=970−220=750 USD

Quick Formula for Free Margin

Quick Formula for Free Margin

Free Margin=Balance+Floating P/L−Margin Required

• Balance: 2,999.38 USD

• Equity: 2,990.88 USD

• Margin: 46.83 USD

• Free Margin: 2,944.05 USD

Step 1: Understand the formulas

1. Equity = Balance + Floating Profit/Loss

2. Free Margin = Equity − Margin
3. Margin Level % = (Equity ÷ Margin) × 100

Step 2: Check floating P/L

Your open trades have losses:

• −1.00
• −4.10
• −3.40

Total floating loss = −8.50 USD

Equity = Balance + Floating P/L = 2,999.38 − 8.50 = 2,990.88 USD

Step 3: Calculate Free Margin

Free Margin = Equity − Margin

= 2,990.88 − 46.83 = 2,944.05 USD

Indicators
Simple Moving Average (SMA)

Definition:
The Simple Moving Average (SMA) is a popular technical indicator in trading and investing. It
shows the average price of a financial instrument (like a currency pair, stock, or commodity)
over a specific number of periods.

Formula:
 𝑃1+𝑃2+𝑃3+...+𝑃𝑛
SMA= n

Where:

• P = Price (usually closing price)

• n = Number of periods

Key Features:

1. Smooths Price Data – Reduces market “noise” and shows the overall trend.
2. Trend Identification –
o If price is above SMA → Uptrend
o If price is below SMA → Downtrend
3. Lagging Indicator – It reacts slowly because it’s based on past data.
4. Timeframe Choice – Common SMAs: 10, 20, 50, 100, 200 periods.

Uses in Trading:

• Support & Resistance: Price often reacts around SMA levels.

• Crossover Strategy:
o Short SMA crossing above long SMA → Buy signal
o Short SMA crossing below long SMA → Sell signal
• Trend Confirmation: Helps confirm direction of market moves.

Example:
If you calculate a 10-day SMA of EUR/USD, you add the last 10 days’ closing prices and
divide by 10. This gives the average line traders use to see short-term trend direction.

Relative Strength Index (RSI)

Definition:
RSI is a momentum oscillator developed by J. Welles Wilder. It measures the speed and
strength of price movements and helps identify overbought or oversold conditions in the
market.

100
RSI=100-1+RS

Where,

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐺𝑎𝑖𝑛 𝑜𝑣𝑒𝑟 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

RS=100-
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑙𝑜𝑠𝑠 𝑜𝑣𝑒𝑟 𝑛 𝑝𝑒𝑟𝑖𝑜𝑑𝑠

(Default period = 14)

 Key Levels:

• Above 70 → Overbought (possible sell signal)

• Below 30 → Oversold (possible buy signal)
• 50 → Neutral / Trend strength zone

Uses in Trading:

1. Identify overbought & oversold market conditions.

2. Detect bullish/bearish divergence between price and RSI.
3. Confirm strength of trend continuation or reversal.

Example:
If RSI of EUR/USD is 78 → Market is overbought → Possible correction or reversal.
If RSI is 25 → Market is oversold → Possible upward move.

Types of Forex Trading

Forex trading styles are generally divided based on timeframe and trading approach.

1. Scalping

• Timeframe: Seconds to minutes

• Holding Period: Very short (few seconds/minutes)
• Goal: Capture small price movements (5–10 pips).
• Features:
o Many trades per day
o Requires speed, low spreads, and fast execution
• Best For: Traders who can monitor charts constantly

2. Day Trading

• Timeframe: Minutes to hours (within a single day)

• Holding Period: No overnight positions
• Goal: Profit from daily price swings
• Features:
o Close all trades before market closes
o Avoids overnight risk
• Best For: Traders who want daily activity but less stress than scalping

3. Swing Trading

• Timeframe: Hours to days/weeks

• Holding Period: Several days
 • Goal: Catch medium-term market moves
• Features:
o Uses technical and fundamental analysis
o Fewer trades, larger targets than day trading
• Best For: Traders with limited screen time

4. Position Trading

• Timeframe: Weeks to months (sometimes years)

• Holding Period: Long-term
• Goal: Ride big trends based on fundamentals and major market shifts
• Features:
o Large stop-losses, higher patience needed
o More like investing
• Best For: Long-term focused traders

5. Definition:
News trading is a strategy where traders enter and exit positions based on the release of
economic news, reports, and events that can cause high volatility in the forex market.

Key Economic News That Affects Forex

1. Interest Rate Decisions – (Federal Reserve, ECB)

2. Employment Data – (Non-Farm Payrolls – NFP, Unemployment Rate)
3. Inflation Reports – (CPI, PPI)
4. GDP Growth Reports
5. Central Bank Speeches – (e.g., FOMC statements)
6. Geopolitical Events – Elections, wars, trade deals, etc.