Foreign Exchange or Forex trading can be an exciting hobby. If you become skilled enough at it, you may even be able to make a living from the markets. It can be a little intimidating when you first begin. Any speculative market is bound to be complex and the Forex market is no exception.
Indeed it is so large and so unregulated, it can be absolutely daunting. But then again, the rewards can be equally staggering. This article aims to help you make sense of the trading Forex marketplace and start your journey towards profitability.
Step 1: The Basics
Trading in Forex is the act of buying and selling different global currencies. It is considered an Over-the-Counter market, which means that is unregulated. The Forex market is huge and allows many different people to participate-from Wall Street executives to American tourists in China. The average daily turnover of the trading on Forex and exchanges runs into the billions.
In its essence, trading in Forex is quite simple. If you believe the value of a currency, say the Euro, is going to rise you buy that currency. If you believe it is going to fall, you sell. As in any market, you want to buy low, sell high.
Much like stocks, three letters represent every currency. So the US Dollar is USD, the Euro is EUR, the British Pound is GBP, etc. All trading in Forex is done in pairs, for instance, EUR for USD or USD for GBP, etc.
If you believed that the Euro was going to rise and you wanted to buy €1000 it would cost you about $1200. If you were correct and the Euro did rise, you could sell your €1000 back for $1300, making a $100 profit.
Important Forex Terms
PIP stands for Percentage in Point and is the minimum price increase of a trading Forex rate. So if the exchange rate of Euros for Dollars changes from 1.31428 to 1.31429, you say it increased by 1PIP. The more Pips, the more profit. The most common Pip is 0.00001.
Ask Price: is the price you can buy a currency at
Bid Price: is the price you can sell a currency at
Spreads: are the differences between ask prices and bid prices
Trading on the Forex Market is international and open 24 hours on weekdays, but is closed on weekends.
Step 2: Find A Broker
Trading in the Forex market, you will need to go through a Forex broker who can facilitate your trades and provide you with market analysis. After an order to buy or sell is placed with the broker, they will then passes it along to the Interbank Market. When you close your trade, the broker will credit your account with any gains or losses. In the digital era, this all happens in seconds.
There are many trading Forex brokers online and deciding who to work with is a personal decision. However, you should bear in mind several important points when making your decision:
Is the broker regulated?
Does the broker offer a minimum deposit amount?
What is the minimum size of trade they allow?
What are the Terms and Conditions?
Step 3: Practice
Before you start pouring money into the Forex market, you should practice reading the charts. Charts display different time frames and come in several different styles. Short time period charts can show you market changes minute by minute. Long time period charts will show you trends that cover weeks, months, fiscal quarters, or even whole years. The three most commonly used chart styles are line graphs, bar graphs, and candlesticks.
Becoming familiar with how the different charts look and convey information will not only help you become more confident and comfortable with the art of trading in Forex, it will also help get you up to speed on how well the currencies you will soon be trading are fairing on the market.
You should also learn and practice reading spreads. Take for example a EUR/USD trade. The bid price is 1.31428, meaning you can sell €1 for $1.31428. The ask price is 1.31420, meaning you can buy €1 for $1.31420. A Forex quote will display this information like so: EURUSD 1.31428/1.31420. In this example, the spread would be 8 Pips because the rate changed by 0.00008 cents.
Step 4: Open A Demo Account
Once you have selected your broker and learned the ropes, you should open a demo account. This is a platform to buy and sell currencies with play money, giving you a chance to get a feel for trading with Forex as well as for the broker. Most brokers offer you a 30-day trial of their platform using a demo account.
A demo allows you to become comfortable and adept at the broker’s trading Forex tools and platform. You will also be able to experience market trading in real time, which is far more instructive than reading examples. You should not start using real money until you are confident you know what you are doing.
Step 5: Go Live
After fine-tuning your strategy for trading in the Forex market using the demo account, it is time to put real money on the line. This can be an exhilarating or terrifying experience. Trading in Forex with actual money is a lot more emotional than trading with play money. Do your best to stay calm and stick to the tactics you worked out in the demo.
Be prepared to lose some money on your first few trades-it happens to every beginner. But as you grow more experienced and learn to keep your emotions at bay, you will start to see the rewards of your efforts.
Remember that Forex trading is a constant learning experience, even for expert. Currencies rise and decline in value over time due to a great number of external forces – global economies, trade, politics, warfare, even the weather can affect foreign currency exchange rates. The very unpredictability of the market is one of the reasons trading with Forex is so thrilling.