Currency Trading Basics
Everything you need to start profitable trading today
Published by Dean Watt at Smashwords
Copyright 2013 Dean Watt
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Table of contents
Learn forex trading
What is a currency pair?
Forex pips explained - What is a pip?
Forex Lots Explained - What is a lot?
Leverage
Forex margin explained - What is forex margin?
What is the risk of ruin?
Forex Money Management is the traders friend
Want to learn how to become an auto forex trader ?
About The Author
Learn forex trading
Trading the foreign exchange market is a great way to make extra
income. However to be able to earn consistent profits takes time,
dedication and effort. The only way we can become profitable is
through learning.
When we take the time to learn we begin to understand how we can
make money from the forex market. As we learn we are developing
essential skills that will make us money for life.
Why learning and experience matters

• What profits can be expected per pip
• The basis of risk control and over-trading
• Teaches you how to maximize your profits with broker leverage
while minimizing risk
• How our brokers lend us money to trade and how this effects our
trading
Learning about advanced forex concepts
Now that we understand the building blocks we can move on to more
advanced skills and concepts. This is where we can start to learn the
how to make money and develop the skills to keep it.
The core advanced concepts are
• Money management
• Risk of ruin
Be a better trader with money management
On our road to successful trading we eventually discover the
importance of money management. Every trader must learn this skill to
be successful. However money management is normally learned the
hard way. After we have lost thousands of dollars and years of struggle
trying to be profitable
Once we understand the power of these two concepts our trading will
never be the same again. Money management turns us into a
professional trader and using money management means we have
taken a giant step towards profitability.
My 15 minute forex investing system is available to you for free on my
website. It has all the tools you need to start making money in forex. It
is a complete money management system and can be used by all
traders to help control our risk and boost our profits.
This gives us a professional way of managing our money.
Follow a professional for accelerated results
One way we can accelerate our profits and short cut our learning is by

countries currencies are being traded. The pair is defined as the Base/
Quote. We read the the currency pairs as follows.
EUR/GBP (Euro / British Pound)
USD/CAD (US Dollar / Canadian Dollar)
EUR/CHF (Euro / Swiss Franc)
GBP/USD (British Pound / US Dollar)
ETC.
When we buy a currency pair we are buying the first part of the
currency pair which is called the base. We are also simultaneously
selling the other currency called the quote. When we sell a currency
we sell the base and buy the quote.
The base is always a fixed amount.
The base is always 1.
Forex pips explained - What is a pip?
A pip is the 4th decimal place when looking at a currency pairs price. A
pip is 0.0001 move in the currency. So if we are trading EUR/USD at
1.2984 and the currency moves to 1.2985 it has moved 1 pip. This is
important as profit and loss are calculated using pips.
Let’s say we have a pip worth $10 and we have a profitable trade of 10
pips. $10 X 10 pips would give a profit of $100 on the trade.
The exception to the rule
When trading the Japanese Yen (JPY). In this case the 2nd decimal
point is the pip. A Yen pip is a 0.01 move in the currency. Let’s say we
are trading USD/JPY at 78.15 and the currency moves to 78.14 it has
moved one pip.
4 or 5 digit broker?
Depending on which forex broker you choose we may have either a 4
decimal place price feed or a 5 decimal place feed.
We know that pips are the 4th decimal place on most currencies. The
5th decimal place offered by some brokers is called a pipette and is

Choose the lot size that is right for us. I have provided free calculators
on my site that have all 3 scales available.
Leverage
Most forex brokers will offer you leverage, this can be as low as 1:1 or
as high as 1:500. There are 2 types of leverage, margin leverage and
real leverage.
Margin leverage
When you open any trade you have to give you broker a deposit from
your trading account. If you wish to open 1 standard lot you are buying
100,000 units of currency. Let’s say we want to open 1 standard lot
USD/CAD and we trade with a dollar account.
Without leverage we would have to deposit $100,000 with our broker
to open a single trade. To trade safely we would need account size in
excess of $4,000,000. Without margin leverage it is almost impossible
for private traders to trade the forex market.
The leverage offered by brokers allows private traders to open trades
that would normally be too large for their accounts. Say we open 1
standard lot of USD/CAD but this time we have a leverage of 1:100.
Now instead of needing $100,000 we only need 1% to open our trade,
which is $1,000.
Margin leverage allows private traders access the forex markets.
Real Leverage
Margin Leverage can be a double edged sword. This happens because
margin leverage allows you to open lot sizes far in excess of what your
account can manage. Therefore we have to be careful to not over
trade and blow up our accounts.
Real leverage is the amount of risk you are taking per trade.
Example 1
$10,000 account
$10 per pip per standard lot. USD/CAD

management, risk of ruin and forex margin explained to see how you
can reduce your real leverage whilst making the most of margin
leverage.
By controlling our trading risk we are allowing our trading systems the
time to make money.
Forex margin explained - What is forex margin?
When we trade currencies we are effectively trading very small
amounts of a currency. So small that if we were to trade a single unit
of currency we would find it extremely difficult to make any money.
We need to trade large volumes of a currency to make any meaningful
gains.
For instance a 1 standard lot is 100,000 units of currency. To trade this
we would have to buy 100,000 of the base currency. e.g. $100,000 if
trading 1 standard lot of USD/CAD. As most private traders could not
afford to buy $100,000 worth of currency our forex broker offers us a
margin trade.
Let’s say we wish to open 1 standard lot of USD/CAD. Your broker
offers us 1:100 leverage. Instead of needing $100,000 dollars to open
the trade we only need 1% which is $1,000. This makes it possible for
private traders to trade in the forex market.
Our broker is lending us the rest of the money required to open the
trade. However to do this our broker requires an initial deposit. No
deposit no trade. Our broker will also look to protect themselves from
any loss by monitoring our trading account. If our trading account
reaches zero they can close all of our open trades therefore protecting
themselves from loss. This is called a margin call.
When a trade opens we will have the initial margin deducted from our
trading account.
Margin is a representation of our account size and margin is essentially
how much money we have in our account. Margin divides our account

returned.
If 2 USD/CAD trades were opened $2,000 would be deducted from our
account. We would have $8,000 left in our trading account. Once again
the money is returned once the trades are closed.
What if your account currency is different to the base currency?
If our account currency is different from the base currency. We would
have to convert the base initial margin into our account currency.
Example
We have a 10,000 dollar account.
Leverage of 1:100
We wish to open (buy) a EUR/CHF trade with 1 standard lot. We know
with a leverage of 1:100 we would need 1,000 Euro's (Base) to open the
trade.
We now convert this to our account currency in this case USD. First we
find out what the EUR/USD exchange rate is. (Current exchange rates
can be found on the side bar of the companion website.)
It is 1.29315 (at time of writing)
We enter the exchange rate (1.29315) into the margin calculator. The
calculator will tell us how much initial margin is required for 1
standard lot.
You would need £1,293.15 of initial margin (deposit) to buy 1 standard
lot of EUR/CHF.
Why do we need to know about margin?
Opening trades requires a deposit which reduces our trading capital.
This in turn increases our trading risk therefore we need to control it.
The risk we are avoiding is the premature closure of our trades before
they hit the stop losses. This will cause catastrophic loss to our trading
capital.
As we have to give our broker an initial margin (deposit) to open a
trade. Let examine what happens during the trade.

Either way we are in trouble as we have to choose either to spend
more money with no guarantee of success, or lose our account margin.
So what can we do to reduce our risk?
To do this we need to make sure that our trades are not cut short by
the margin call.
How to protect ourselves from a margin call
As with money management and risk of ruin we have to work out and
then minimize the risk. The first part is knowing how much our initial
margin will be. Then we need to know what the maximum amount of
open trades we are trading.
As each time a trade is opened an initial margin is removed from our
account. We need to work out how much this will be. I have included a
FREE calculator on my companion website to help with the
calculations.
First work out the initial margin for each currency pair we are trading.
To do this we will need to know our leverage and the exchange rates
for the base currencies to our trading account currency.
Example
Account currency USD
Leverage 1:100
EUR/GBP
GBP/AUD
Etc
In the example we would need to know the exchange rate for EUR/USD
and GBP/USD.
Enter our leverage and the exchange rates into the margin calculator.
The calculator will tell us how much initial margin we would require to
open 1 standard lot.
Next we need to know how much initial margin we are using for our
chosen lot size. We will know our lot sizes from the money

the FREE video tutorials.
What is the risk of ruin?
Risk is an ever present part of trading. It is something we have to live
with but it is also one area of trading that we are able to control. We
cannot know if a trade will be successful or not when we open our
trade but we can control our risk to the trade.
It is conventional wisdom to think “the higher the risk, the higher the
reward” and in some areas of finance this may be true. In areas such
as bank lending and insurance. However in trading the higher the risk
the more chance you have of blowing your trading account (losing all
your money).
To be successful in trading you need a trading system that has a
positive return (expectancy) and the time needed to make multiple
trades. If either the positive expectancy system or the time are missing
then we will not make any money.
This is why knowing and controlling our risk is the most important part
of trading. Controlling our risk gives us the time we need to increase
our account. When combined with correct money management our
profits will soar.
Let’s take a look at risk and how to calculate it.
Take for example 2 traders both trading the same system with the
same lot size and leverage. One (trader A) has a $10000 account and
the other (trader B) a $1000 account. The system incurs a loss of $500.
Trader A has lost 5% of his account but Trader B has lost a massive 50%.
Trader A has to grow their account by 5.27% to recoup the loss.
However trader B's account has to grow by 100% just to break even.
To reduce their risk trader B could either increase the size of the
trading account, reduce the lot size traded, reduce the real leverage
used or a combination of all 3. However the question still remains how
do we know when we have reduced our risk to a safe level and what is

trading)
Trader B
$1000 in account
$500 risked on each trade
50% risked per trade
Risk of ruin 44.44% (per trade)
Trader B has a risk of ruin of 44%
The acceptable level of risk for your trading account is 0%. Anything
other than 0% will result in a blown account and a serious loss of
money. You may be thinking that this will not happen to me.
Remember unless you have a risk of ruin of 0% it is just a matter of
time.
How to find the win loss % and how to work out number of units of
money?
The website shows you where to find the information you need to be
able to use all of the 3 calculators provided.
On the risk of ruin calculator you will be asked to input our trading
account size. You will also be asked for the percentage we are willing
to risk on each trade. Enter these figures into the calculator along with
the win loss % and the calculator will do the rest.
Now that we understand the risk of ruin and how we can use it to
protect our account. Read the money management section to learn
how to increase our profits.
Forex Money Management is the traders friend.
Correct money management is a fantastic tool in trading. In essence it
reduces risk when we are losing money and magnifies profits when we
are winning. There are 2 types of money management.
Martingale
Anti martingale
The perils of a martingale system

fixed percentage of our trading account that is risked per trade. This
can be any percentage the trader wishes. It all depends on how much
risk per trade we are willing to accept.
The percentage risked per trade gives us a maximum number of trades
we can make out of our trading account. If we wish to risk 5% of our
account per trade we would have 20 trades. (100 x 5% = 20). If we
wanted to risk 2% per trade then we would have 50 trades. (100% x 2%
= 50).
This gives us great control of our risk per trade and when combined
with the risk of ruin we can easily monitor our overall risk and reward.
Use my money management Calculators
On the calculator just enter our account balance and the percentage
you wish risk per trade. The calculator will tell us how much money we
are risking per trade and this helps us calculate our lot size.
How to work out our fixed percentage money management.
First we need to decide what percentage we wish to risk. Most traders
would have a minimum of 20 trades or 5%. Once this has been decided
we can work out how much this is in trading capital.
Note: the money management calculator works this out for us. All we
need to know is how much trading capital we have and what % risk we
are willing to take. Enter this into the boxes provided and the
calculator will know tell us how much trading capital we are risking per
trade.
Example
Account size $10,000
$10,000 x 5% = $500
$500 is the maximum amount of money to be risked on a single trade.
This is 5% of our account and will give us 20 trades.
Example 2
Account size $10,000

$11,000 x 5% = $550
$550 is now our maximum dollar risk per trade. By following the fixed
percentage money management we would now have a lot size which
represents 5% risk per trade.
How to work out the correct lot size
The following can be a little complicated so if you do not know what
pips or a lots are. Please read our pip, lot, leverage and margin pages
for more information.
We have a calculator to help you with the calculations.
Money Management Calculator
All currencies are traded in pairs
Base/Quote
EUR/GBP Euro / British Pound
USD/CAD US Dollar / Canadian Dollar
EUR/CHF Euro / Swiss Franc
GBP/USD British Pound / US Dollar
ETC.
When we buy a currency pair we are buying the first part of the
currency pair which is called the base. We are also simultaneously
selling the other currency called the quote. When we sell a currency
we sell the base and buy the quote.
The base is always a fixed amount.
The base is always 1.
Example
$10,000 trading account
5% risked per trade.
Account Currency: Dollar