Executive Summary

This module introduces what forex is, why it exists, who participates, and how currencies are quoted and traded. You will learn essential terms (bid/ask, spread, pips), mechanics (lot sizes, leverage, margin), market structure and sessions, brokers, order types, and basics of price movement and charts. We emphasize risk management, realistic expectations, and disciplined practice on a demo account.

1) Introduction to Forex

Learning Objectives

  • Define the forex (FX) market and its global role.
  • Understand 24/5 session flow (Sydney → Tokyo → London → New York).
  • Adopt a safety-first mindset before live trading.

Core Explanation

Foreign exchange is the decentralized global market for exchanging currencies, enabling international trade, investing, travel, and payments. Trading occurs OTC across time zones, making FX the world’s most liquid market (source note: BIS 2022 survey). Retail traders commonly access spot FX via brokers.

Pro TipStart on a demo account and keep a simple practice journal.
Risk WarningHigh leverage amplifies both gains and losses. Keep risk per trade small (e.g., 0.5%–1%).
Common PitfallTrading live before understanding pips, lot sizes, and margin.

2) What Is Forex Trading?

Learning Objectives

  • Explain base/quote structure and how to read a price.
  • Differentiate long (buy) vs. short (sell).
  • Recognize trading costs: spread, commission, slippage.

Core Explanation

Currencies trade in pairs. In EUR/USD, EUR is base and USD is quote. A quote of 1.1050 means €1 costs $1.1050. You go long if you expect the base to rise vs. the quote; you go short if you expect it to fall. Outcomes are measured in pips and affected by spread/commission/slippage.

Key Terms

  • Base/Quote: First/second currency in a pair.
  • Long/Short: Buy/Sell the pair to profit from rise/fall of base vs. quote.
  • Spread: Ask − Bid; immediate cost when entering.

Quick Examples

  • Quote: EUR/USD 1.1050 → rise to 1.1100 ≈ +50 pips for longs (pre-cost).
  • Short: GBP/USD 1.2500 → drop to 1.2450 ≈ +50 pips for shorts (pre-cost).
  • Spread: If spread is 0.8 pips, very tight stops may be hit by normal spread noise.
Pro TipWrite a brief trade plan (thesis, entry trigger, stop, targets, risk%).
Risk WarningNever trade without a stop-loss; size positions to a small fixed % of equity.
Common PitfallChasing news candles; spreads widen and fills can slip.

Practice (Short)

  1. Identify base/quote in USD/JPY.
  2. What does short EUR/USD mean?
  3. Name two trading costs besides the price move.
Answers

1) USD base; JPY quote.

2) You expect EUR to weaken vs. USD (price to fall).

3) Spread, commission, and slippage.

3) Why Forex Trading Exists

Learning Objectives

  • Explain real-economy currency conversion needs.
  • Differentiate spot conversion, hedging, and speculation.
  • Understand liquidity and price discovery.

Core Explanation

FX exists because people and organizations must exchange currencies to transact across borders. Importers, exporters, travelers, investors, and governments convert currencies. Banks and market makers provide two-way prices, creating liquidity and enabling price discovery. Derivatives (forwards/futures) allow hedgers to lock in rates and reduce uncertainty.

  • Spot: Immediate exchange for payments/settlement.
  • Hedging: Using forwards/futures/options to offset currency risk.
  • Speculation: Taking risk for potential profit, adding liquidity but facing the possibility of loss.
Pro TipIf you earn/spend in different currencies, basic hedging knowledge can reduce uncertainty.
Risk WarningDerivatives reduce risk only when sized and matched correctly. Misuse can magnify losses.
Common PitfallConfusing speculation with hedging—mismatched size/direction turns a hedge into a speculative bet.

Worked Examples

  1. Importer Hedge: USD/KES 155.00. Paying $50,000 in 60 days → buy USD forward to lock rate; if spot rises to 160, hedge saves KES; if spot falls to 152, you lose upside but gain certainty.
  2. Exporter Hedge: EUR-based firm receives $200,000 in 90 days → sells USD forward to protect against EUR appreciation.
  3. Traveler Spot: Convert €2,000 at EUR/USD 1.1000 → $2,200 (ignoring fees).

Practice (Short)

  1. Give one example each of spot, hedging, and speculation.
  2. Why is liquidity important for execution quality?
  3. What does price discovery mean in FX?
Answers

1) Spot: traveler conversion; Hedge: forward for future payment; Speculation: retail/institutional trade seeking profit.

2) Better fills, tighter spreads, less slippage.

3) Market process of finding fair prices via supply/demand.

Mini-Assignment

  • Identify any income/expense you have in a foreign currency and outline a simple hedging approach in theory.

Quick Recap: FX exists for conversion, hedging, and price discovery. Hedging reduces uncertainty; speculation adds liquidity but carries risk.

4) Participants in the Forex Market

Learning Objectives

  • Identify key participants and their motivations.
  • Understand how participation affects liquidity and spreads.
  • Recognize session-dependent differences in execution.

Core Explanation

FX is an OTC network. Banks and non-bank liquidity providers quote two-way prices. Prime brokers/aggregators connect institutions to multiple LPs. Funds/asset managers trade for return/hedging. Corporations convert and hedge operational flows. Central banks set policy and may intervene. Retail brokers give platform access to retail traders. News/data providers release information that the market rapidly prices in.

Pro TipTrade during high-liquidity windows (e.g., London–NY overlap) for tighter spreads.
Risk WarningThin liquidity (holidays/rollover/news) widens spreads and increases slippage.
Common PitfallAssuming conditions are uniform across sessions and pairs.

Quick Examples

  • Spreads in EUR/USD tighter in London–NY overlap than late Asia.
  • Corporate hedging flows can move price when liquidity is thin.
  • Central bank surprises trigger rapid repricing; LPs widen quotes.

Practice (Short)

  1. Name three participant categories and their roles.
  2. Why do two brokers sometimes show different spreads at the same moment?
Answers

1) Banks/LPs (liquidity/pricing), corporates (conversion/hedging), funds (return/hedging), retail (speculation/learning), central banks (policy/intervention).

2) Different liquidity pools, aggregation, and risk settings.

Quick Recap: The FX ecosystem’s participants shape liquidity, spreads, and execution. Align trading windows with liquid sessions.

5) Currency Pairs (Major, Minor, Exotic)

Learning Objectives

  • Classify pairs into majors, minors (crosses), and exotics.
  • Understand liquidity, spread, and volatility differences.
  • Select appropriate pairs for beginners based on costs/behavior.

Core Explanation

Majors include USD vs. a major economy (e.g., EUR/USD, USD/JPY) with tight spreads and deep liquidity. Minors (crosses) exclude USD (e.g., EUR/GBP, EUR/JPY) and often have wider spreads than majors but remain liquid. Exotics pair a major with an emerging/smaller economy (e.g., USD/ZAR, USD/KES) and typically have wider spreads and uneven liquidity.

Pro TipStart with 1–2 liquid majors (e.g., EUR/USD, USD/JPY) to minimize costs while learning.
Risk WarningExotics can move sharply with larger spreads; reduce position size and expect slippage.
Common PitfallChoosing pairs for big moves without considering spread costs and session liquidity.

Quick Examples

  • EUR/USD spread often ~0.6–1.0 pips in London–NY overlap.
  • EUR/JPY movement reflects both EUR/USD and USD/JPY dynamics.
  • USD/KES spreads can be many pips; intraday scalping becomes costly.

Practice (Short)

  1. Classify: EUR/USD, EUR/GBP, USD/MXN.
  2. Why are majors typically cheaper to trade?
Answers

1) Major, minor (cross), exotic.

2) Higher liquidity and competition among liquidity providers compress spreads.

Quick Recap: Majors are cheapest and most liquid; crosses are active but USD legs matter; exotics are costlier and require smaller sizing.

6) Bid, Ask & Spread

Learning Objectives

  • Define bid, ask, and spread; read a live quote.
  • Understand spread as an immediate trading cost.
  • Adjust plans for session/news-driven spread changes.

Core Explanation

Bid is where you can sell, Ask is where you can buy, and Spread = Ask − Bid. Example: EUR/USD 1.10500/1.10508 → spread = 0.00008 = 0.8 pips on a 5-decimal quote (pip at 4th decimal; 5th is a pipette).

Pro TipRecord typical spreads for your pairs by session; design stops/targets with spread in mind.
Risk WarningSpreads can widen suddenly around news/rollover; tight stops may be hit by spread expansion.
Common PitfallIgnoring spread when scalping with very tight stops.

Quick Examples

  • Buy at the ask → immediate unrealized loss roughly equal to spread.
  • News widening: 0.8 pips normal → 3.5 pips during NFP; reassess entries.
  • Effective R:R: 30 target, 15 stop, 1.0 spread → effective ≈ 29/16 instead of 30/15.

Practice (Short)

  1. Define bid, ask, spread.
  2. Quote 1.25000/1.25018 → spread in pips?
Answers

1) Bid = sell price; Ask = buy price; Spread = Ask − Bid.

2) 1.8 pips (0.00018).

Quick Recap: Bid/ask define execution; spread is a built-in cost that widens in low liquidity—account for it.

7) Pips Explained

Learning Objectives

  • Locate pip/pipette for 4/5-decimal and JPY quotes.
  • Calculate pip value for non-JPY and JPY pairs.
  • Convert pip value to account currency when needed.

Core Explanation

A pip is the standard unit of price movement. Non-JPY pairs: pip at 4th decimal (0.0001), 5th is a pipette. JPY pairs: pip at 2nd decimal (0.01), 3rd is a pipette.

Pip Value (high level)

  • EUR/USD (USD account): standard lot ≈ $10/pip; mini ≈ $1; micro ≈ $0.10.
  • USD/JPY (USD account): pip value ≈ (100,000 × 0.01)/price per standard lot (e.g., ≈ $6.7 at 150.00).
  • Cross/account conversions: compute in quote currency then convert to account currency.

Quick Examples

  • EUR/USD mini lot → ≈ $1 per pip.
  • USD/JPY at 150.00 → standard lot pip ≈ $6.67; mini ≈ $0.667.
  • EUR/JPY standard → JPY 1,000/pip; convert via USD/JPY or EUR/JPY as needed.

Practice (Short)

  1. Where is the pip for a 5-decimal EUR/USD quote?
  2. Approximate USD/JPY pip value per standard lot at 150.00?
Answers

1) At the 4th decimal; 5th is pipette.

2) ≈ (100,000 × 0.01)/150 ≈ $6.67 per pip.

Quick Recap: Know pip positions and pip value across pairs—this underpins risk sizing and trade evaluation.

8) Lot Sizes (Standard, Mini, Micro, Nano)

Learning Objectives

  • Define standard, mini, micro, and nano lot sizes.
  • Relate lot size to exposure and pip value.
  • Compute position size from risk %, stop distance, and pip value.

Core Explanation

Standard = 100,000 units; Mini = 10,000; Micro = 1,000; Nano = 100 (if offered). Lot size drives exposure and pip value. In a USD account for EUR/USD: standard ≈ $10/pip; mini ≈ $1; micro ≈ $0.10.

Quick Examples

  • Risk model: Equity $2,000; risk 1% = $20; stop 25 pips; EUR/USD mini pip ≈ $1 → size ≈ 20/(25×1) = 0.8 mini (0.08 standard).
  • USD/JPY at 150: standard pip ≈ $6.67 → mini ≈ $0.667; with $15 risk and 30 pips → size ≈ 15/(30×0.667) ≈ 0.75 mini.
  • Exposure: 0.10 standard (10,000 units) of EUR/USD at 1.1050 → ≈ $11,050 notional.
Pro TipUse fractional lots (e.g., 0.03) to match your exact risk plan.
Risk WarningOversizing relative to stop distance and equity causes outsized losses.
Common PitfallPicking a lot size first, then forcing a tight stop. Size from risk → not vice versa.

Practice (Short)

  1. List the units for standard, mini, micro, nano.
  2. With $25 risk, 50-pip stop on EUR/USD (mini ≈ $1/pip) → size?
Answers

1) 100,000; 10,000; 1,000; 100.

2) ≈ 25/(50×1) = 0.5 mini.

Quick Recap: Lot size sets exposure and pip value. Compute size from risk %, stop distance, and pip value.

9) Leverage

Learning Objectives

  • Define leverage and effective leverage.
  • Compute exposure and monitor portfolio leverage.
  • Use R-multiples to evaluate outcomes independent of leverage.

Core Explanation

Leverage lets small capital control large exposure (e.g., 1:100). It magnifies both gains and losses. Effective leverage = Exposure ÷ Equity. Manage risk by sizing positions to a fixed risk %, not by maxing leverage.

Quick Examples

  • Equity $2,000; 20,000 units EUR/USD at 1.1000 → Exposure ≈ $22,000 → Effective leverage ≈ 11:1.
  • 1:50 broker leverage and $1,000 equity → max theoretical notional $50,000 (not a recommendation).
  • R-multiple: Risk $20 with 20-pip stop; +40 pips = +2R regardless of leverage setting.
Pro TipSet a personal cap (e.g., ≤1:5 effective) even if broker allows higher.
Risk WarningHigh leverage + tight stops = frequent noise-induced losses.
Common PitfallTreating available margin as a target to fully utilize.

Practice (Short)

  1. Define effective leverage.
  2. Equity $3,000; broker 1:100 → max theoretical notional?
Answers

1) Exposure ÷ Equity.

2) $300,000.

Quick Recap: Leverage is a tool—size by risk and stops, track effective leverage, and keep buffers.

10) Margin & Margin Call

Learning Objectives

  • Define used margin, free margin, equity, and margin level.
  • Calculate required margin from notional and leverage.
  • Understand margin call vs. stop-out.

Core Explanation

Required margin is collateral set aside to open/hold a position. Free margin = Equity − Used Margin. Margin level = (Equity / Used Margin) × 100%. Brokers warn at margin call (e.g., 100%) and may close at stop-out (e.g., 50%).

Quick Examples

  • Notional $33,000 at 1:50 → margin ≈ $660; equity $2,000 → margin level ≈ 303%.
  • Drawdown reduces equity → margin level falls toward call/stop-out.
Pro TipKeep margin level ≥ 300% for a safety buffer.
Risk WarningCorrelated trades can deplete free margin quickly during shocks.
Common PitfallLow required margin ≠ low risk; true risk is size vs. stop and volatility.

Practice (Short)

  1. Required margin to control $25,000 at 1:50?
  2. Equity $1,500; used $500 → margin level?
Answers

1) $25,000/50 = $500.

2) (1,500/500) × 100 = 300%.

Quick Recap: Margin is collateral, not a fee. Monitor used/free margin and margin level to avoid forced closures.

11) Forex Market Structure (Spot, Forward, Futures)

Learning Objectives

  • Differentiate spot, forward, and futures.
  • Understand rollover vs. standardized contracts and central clearing.
  • Explain why futures can differ from spot (basis/carry).

Core Explanation

Spot is OTC with daily rollover if held overnight. Forwards are customized OTC hedges for future dates. Futures are standardized exchange-traded contracts with clearing, fixed sizes/expiries, and transparent fees.

Quick Examples

  • Rollover at 5 p.m. New York adds/subtracts swap on spot.
  • Exporter sells USD forward to lock a revenue rate.
  • Futures > spot by ~carry → not a free directional edge.

Quick Recap: Spot dominates retail; forwards hedge; futures standardize and clear centrally.

12) Forex Trading Sessions (Sydney, Tokyo, London, New York)

Learning Objectives

  • Identify major sessions and overlaps.
  • Map sessions to your timezone and plan a routine.
  • Align pair selection to session behavior.

Core Explanation

FX runs 24/5. Sydney opens the week; Tokyo is active for JPY/AUD; London is most liquid; New York is highly active—especially the London–NY overlap.

Quick Examples

  • Spreads are tighter in London–NY overlap than late Asia.
  • Choose pairs by session (AUD/USD in Asia; EUR/USD in London–NY).
  • Daylight saving changes shift session relationships—reconfirm seasonally.

Quick Recap: Sessions shape liquidity and volatility. Align your schedule and pairs accordingly.

13) Types of Forex Brokers (ECN, STP, Market Maker)

Learning Objectives

  • Differentiate ECN, STP, and Market Maker models.
  • Identify broker due diligence items.
  • Compare pricing (spread/commission) and execution.

Core Explanation

ECN: Aggregates quotes from multiple LPs; typically tight raw spreads + commission; variable depth. STP: Routes orders to LP(s) without dealing desk; spread +/− commission. Market Maker: Internalizes flow and quotes prices; may offer fixed or variable spreads. Quality varies—focus on regulation, transparency, and execution stats.

Due Diligence

  • Regulatory license and client fund segregation.
  • Spread/commission schedule and historical averages.
  • Slippage, rejects, latency, and negative balance protection.

Practice (Short)

  1. Name one pro and one con of ECN vs. Market Maker.
  2. List two broker due diligence checks.
Answers

1) ECN pro: tight raw spreads; con: commission and variable depth. MM pro: simple pricing; con: potential conflicts if poorly managed.

2) Regulation and fund segregation; execution/slippage stats.

Quick Recap: Broker model affects pricing and execution—verify regulation and real execution quality.

14) Order Types (Market, Limit, Stop, SL, TP, Pending Orders)

Learning Objectives

  • Use market, limit, and stop orders appropriately.
  • Set protective stop-loss (SL) and take-profit (TP).
  • Understand pending orders and execution nuance.

Core Explanation

  • Market: Execute now at best available price (subject to spread/slippage).
  • Limit: Buy below or sell above current price—seek price improvement.
  • Stop: Buy above or sell below current price—momentum/confirmation.
  • SL/TP: Exit risk/target automatically once triggered.

Quick Examples

  • Breakout: place buy stop above resistance with SL below structure; TP at next level.
  • Pullback: place buy limit at support with SL below swing low; TP at prior high.
  • News: market orders risk slippage; consider standing limits or wait for spreads to normalize.

Practice (Short)

  1. Which order to buy on a breakout above 1.1100?
  2. Which order to buy a pullback to 1.1000 support?
Answers

1) Buy stop.

2) Buy limit.

Quick Recap: Choose order type to match strategy: confirmation (stop), value (limit), immediacy (market)—always define SL/TP.

15) How Forex Prices Move (Supply/Demand, News, Sentiment)

Learning Objectives

  • Explain supply/demand, news, and sentiment forces.
  • Recognize liquidity pockets and volatility clusters.
  • Plan risk around event risk and thin liquidity.

Core Explanation

Prices move as orders interact. Supply/Demand zones form where large orders previously turned price. News alters expectations (rates, jobs, inflation), rapidly repricing. Sentiment (risk-on/off) drives flows across currencies (e.g., JPY strength in risk-off).

Quick Examples

  • Breakouts occur when resting orders at highs/lows are consumed.
  • CPI surprise → USD repricing across majors; spreads widen initially.
  • Liquidity pockets around prior swing highs/lows and session opens.

Practice (Short)

  1. Name two factors that can abruptly change price.
  2. Why can breakouts accelerate once triggered?
Answers

1) News releases, large institutional flows.

2) Resting stop orders fuel momentum as liquidity is consumed.

Quick Recap: Price reflects evolving expectations and order flow—prepare for volatility around news and liquidity pockets.

16) Introduction to Chart Reading (Line, Bar, Candlesticks)

Learning Objectives

  • Identify line, bar, and candlestick charts.
  • Read basic candle anatomy and wicks.
  • Use multi-timeframe context.

Core Explanation

A line chart plots closing prices; bar and candlestick charts show open/high/low/close (OHLC). Candles with long wicks signal rejection; bodies show net direction. Always align entries with higher-timeframe trend/structure.

Quick Examples

  • Daily uptrend + H1 pullback to support → bullish setup area.
  • Long upper wick at resistance suggests selling pressure.
  • Ranging markets: fade extremes; trending markets: trade pullbacks/breaks.

Practice (Short)

  1. Which chart type displays OHLC most clearly?
  2. What can long lower wicks at support imply?
Answers

1) Candlestick (or bar) charts.

2) Buying interest or rejection of lower prices.

Quick Recap: Use candles to infer behavior; combine with structure and multi-timeframe alignment.

17) Advantages & Disadvantages of Forex Trading

Learning Objectives

  • Evaluate realistic pros and cons of retail FX.
  • Set expectations aligned with risk and discipline.

Core Explanation

  • Advantages: 24/5 access, high liquidity, small position sizes, flexible strategies, low barriers to entry.
  • Disadvantages: Leverage risk, psychology challenges, event-driven gaps, overtrading temptation.

Quick Recap: FX is accessible but unforgiving—discipline and risk control matter more than predictions.

18) Why People Lose Money in Forex

Core Causes

  • Oversized positions and misuse of leverage.
  • No tested plan; inconsistency and emotional decisions.
  • Ignoring costs (spread/slippage/swap) and news risk.
  • Overtrading and revenge trading.

Quick Recap: Define risk first, trade a written plan, and review your journal—process beats impulse.

19) Qualities of a Successful Forex Trader

  • Risk discipline (fixed % risk, protective stops).
  • Process focus (checklists, routines, backtesting).
  • Journaling and continuous learning.
  • Patience and selectivity—quality over quantity.

Quick Recap: Systems thinking, risk control, and reflection create durable edge.

20) Summary of Module 1

You learned FX foundations: how pairs work, costs (spread/pips), sizing (lots), leverage, margin, market structure, sessions, brokers, order types, price mechanics, and charts—anchored by risk management and execution discipline.

Next, apply this knowledge on a demo account with a written plan and consistent journaling before scaling complexity.

Glossary (Selected)

Ask
Price to buy the base currency.
Bid
Price to sell the base currency.
ECN/STP
Broker routing models to liquidity providers.
Leverage
Exposure controlled per unit of equity (e.g., 1:50).
Margin Level
Equity/Used Margin × 100%.
Pip/Pipette
Standard price unit; fractional pip is 1/10 pip.
Rollover (Swap)
Financing applied when holding spot overnight.
Spread
Ask − Bid; immediate trading cost.

FAQ (Beginners)

Do I need a lot of money to start?
No. Use a demo first. Live trading can begin with small accounts, but focus on learning and risk control.
What is a safe risk per trade?
Common guidance is 0.5%–1% of equity per trade; stay conservative.
How do I choose a broker?
Check regulation, fund segregation, costs, and execution stats; test a demo.
Should I trade the news?
Only with full understanding; spreads widen and slippage increases. Many beginners avoid news trading.
Why did my stop get hit even though mid-price didn’t reach it?
Stops execute on bid or ask; spread expansion can tag stops. Allow for spread.

Tools & Resources Checklist

  • Regulated broker demo account (MT4/MT5/cTrader/Web).
  • Economic calendar (major releases, central bank dates).
  • Position size calculator (risk %, stop, pip value).
  • Trading journal (template or app).
  • Session time converter and news alerts.

End-of-Module Assessment (Outline)

  • 30 Multiple-Choice Questions covering all topics.
  • 10 Calculation Questions (pips, sizing, leverage, margin).
  • 5 Scenario Analyses (execution and risk decisions).

Note: For production, populate each item with full questions and solutions. The structure here ensures the required assessment is ready to expand.

Study Roadmap to Module 2

  1. Trade a demo plan for 2 weeks: 15–30 trades with fixed risk (0.5%–1%).
  2. Journal each trade (thesis, entry, stop/TP, size, outcome, lessons).
  3. Achieve process goals (e.g., follow plan ≥ 90%).
  4. Proceed to Module 2: market structure, trend, support/resistance, and setup criteria.

References & Further Reading

  • BIS Triennial Central Bank Survey (e.g., 2022) for FX daily turnover and structure.
  • Major central bank websites (Fed, ECB, BoE, BoJ) for policy and education.
  • Exchange specifications (e.g., CME) for FX futures contract details.
  • Reputable broker education portals for platform-specific guides.