Introduction to Forex Trading with ZuluTrade

This tutorial will introduce you to Forex trading and explain how you can trade forex with ZuluTrade. 

To understand how forex trading works, we will introduce the most important terms that you will need to know to learn. So listen carefully and try to understand those basics as you will be using this knowledge daily when trading forex. 

First, let’s explain what forex stands for… The Forex market is the largest globally, with trillions of dollars or equivalent in other currencies changing hands every day. So forex means foreign exchange trading, which is the activity where traders like you can bet on one currency to get stronger or weaker relative to another currency.

For example, today, with one euro, you can buy 1.39 US dollars. This is the exchange rate. Thanks to financial institutions and banks, it is changing every second, which continuously adjust to this exchange rate fluctuation’s supply and demand response. 

So let’s make a bet, which is in financial markets called a trade. Let’s bet that the Euro will become stronger than the US dollar. For that, you need to buy a EUR/USD pair. Remember, when you think that one currency will rise against another, you buy the strong currency and sell the weak one. 

The sale of the currency, or in most cases the derivative contract, also called CFD or Contract for Difference, is handled by a third-part brokerage firm (see the full list of brokers that ZuluTrade works with), so all you have to do is buy the EUR/USD pair to make a trade. When traders talk about such trade, they usually say that you go long on the EUR/USD pair. 

So let’s look at the real-life example. 

Suppose that with one euro, you can buy 1.3940 US dollars. If you go long on the EUR/USD pair, you bet that the Euro will go up against the US dollar. Now let’s watch what happens when the price is going up… 

1.3940 -> 1.3941 -> 1.394 -> to 1.3943 -> 1.3944 up and stays at 1.3947. So now, with one euro, you can buy 1.3947 US dollars. Now you can exit your trade and take your profit. 

To figure out how much money you just made, we need to consider the initial investment. So let’s say in this trade you put 10,000 euros. To start with, 10,000 euros would have bought you 13,940 US dollars. But when you closed your trade, 10,000 euros would have bought you 13,947 US dollars. 

As the Euro gained seven pips against the dollar, in just five minutes, you made a profit of $7. 

What’s a PIP? Good question!

One PIP represents 1/100th of a per cent or point 0001, the smallest currency fluctuation used in forex trading. PIP is the unit that is used to express the price change of an exchange rate. 

Usually, brokerage firms want to help traders make larger bets without depositing the full amount of the bet. This is why they offer leverage. 

So now, let’s look at how the leverage works. First, let’s assume that you think that the Euro will become stronger against the US dollar. 

You can be so convinced about this that you don’t want to bet 100,000 euros on one trade, or you can’t afford it. That is not a problem. The best CFD brokers will allow you to take this risk and will lend you 100,000 euros. All they will need from you is only 1,000 euros as a collateral deposit. 

You can borrow 100, 200, or even 400 times the amount of your initial collateral deposit with many brokers. If you put 1,000 euros from your own money, you can place a bet between 1,000 and 400,000 euros in one trade. It’s up to you, but, of course, you need to remember the risks involved.  

If you have only 1,000 euros in your pocket and your bet is 1,000 euros, you don’t use the leverage. Or you can say that you exercised a leverage ratio of one to one. For example, if you want to bet 50,000 euros with only 1000 euros, you exercise 50 to one. 

You might be thinking, do the brokers lend the money for free? No, they don’t. Instead, they charge an interest rate on the money lent to provide the traders with leverage, called the overnight rate. 

A lot is an industry term used to describe the size of a bet. For example, a 1,000 euro bet is a Micro lot. A 10,000 euro bet is what professional traders call a Mini lot. A 100,000 euro is a Standard lot. 

For example, if you go long on a mini lot of EUR/USD, that means you are betting an amount of 10,000 euros. Remember, the actual deposit you need to make such a Mini lot could be 400 times smaller, depending on what leverage ratio you decide to use. 

Why do the exchange rates move so fast? 

As you probably know, if you have euros deposited with your local bank account for one year, your bank will pay on your account a certain percentage of interest which is today is usually close to zero.  

However, what you may not know is that interest rates vary among different currencies. For example, the interest rate on your bank deposit in euros in a bank in Paris might be 3.5%. Where’s in the United Kingdom, you might be earning 5.5% interest on your deposit in British pounds. 

To take advantage of the higher interest rates of the British pound, you would probably like to sell your euros and buy British pounds. And it is not surprising that you won’t be the only one interested in such a transaction. Many individual investors and banks would like to do the same. 

If more euros are traded for the pounds, the Euro will become weaker, and the pound becomes stronger as decreasing demand for the Euro drives its price down. 

Another reason why exchange rates move so fast may result from international multi-billion dollar companies that need to convert the currency of large amounts of money. For example, Toyota, the car manufacturer, sold 1 million cars to the United States. 

Toyota has been paid by the US importers 20 billion USD, which gets deposited in a US dollar-denominated account in Japan. It’s April, and it’s tax season for the Japanese residents. Toyota has to pay 1 trillion Japanese yen in taxes this year. That’s close to 10 billion US dollars. This is a large amount even for Toyota. To pay its taxes, Toyota will have to sell 10 billion US dollars to buy Japanese yen. 

So Toyota goes into the Forex market and sells US dollars and buys Japanese yen. The demand for US dollars at this moment will naturally go down since 10 billion US dollars are being sold all at once. Similarly, the demand for the Japanese yen goes up because somebody wants to buy 1 trillion Japanese yen. In this case, the exchange rate between the euro and the Japanese yen could easily be affected and move the price. And, as you can imagine, in our global economy, that happens a lot! 

Another example could relate to the timing and circulation of market information. For example, a financial report is published and shows an economic decline in Europe. The unemployment rate is going up, and companies are beginning to report negative growth. This news will scare many investors to sell the euro, and the Euro will decline against other currencies. 

For more information on the world largest social trading platform, please read our comprehensive ZuluTrade review.

An important point to remember is this. 

Typically the stronger the image of a country or a group of countries representing a currency, the stronger that currency becomes against others in the long run.

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Risk Warning

Trading spot currencies involves substantial risk and there is always the potential for loss. Your trading results may vary. Because the risk factor is high in foreign exchange market trading, only genuine "risk" funds should be used in such trading. If you do not have the extra capital that you can afford to lose, you should not trade in the foreign exchange market. Forex Brokers and ZuluTrade are compensated for their services through the spread between the bid/ask prices or there may be a cost to initiate a trade through the bid/ask spread. Profit-sharing accounts are subject to a monthly performance fee per selected trading system.

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