Forex Trading

How to Get Started with Forex Trading

Getting started with forex trading requires educating yourself on the basics. Forex trading is serious business and there is much to learn before you can begin. Taking the time to educate yourself can help you avoid costly mistakes.

Forex Basics

Before you can get started, you need to know the basics. Here you can learn forex basics, the benefits of forex, and forex terminology.

• What is Forex Trading?
• The Benefits of Forex Trading
• Forex Order Types
• Forex Chart Basics
• Trading on Margin
• Best Times to Trade
• Forex Scams

What is Forex Trading?

An Introduction to Forex Trading

Forex Trading is trading currencies from different countries against each other. Forex is acronym of Foreign Exchange.

For example, in Europe the currency in circulation is called the Euro(ERU) and in the United States the currency in circulation is called the US Dollar (USD). An example of a forex trade is to buy the Euro while simultaneously selling US Dollar. This is called Going long on the EUR/USD.

 

How Does Forex Trading Work?

Forex trading is typically done through a broker or market maker. As a forex trader you can choose a currency pair that you expect to change in value and place a trade accordingly. For example, if you had purchased 1,000 Euros in January of 2013, it would have cost you around $1,300 USD. Throughout 2013 the Euro’s value vs. the U.S. Dollar’s value increased. At the end of the year 1,000 Euros was worth $1,500 U.S. Dollars. If you had chosen to end your trade at that point, you would have a $200 gain.

Forex trades can be placed through a broker or market maker. Orders can be placed with just a few clicks and the broker then passes the order along to a partner in the Interbank Market to fill your position. When you close your trade, the broker closes the position on the Interbank Market and credits your account with the loss or gain. This can all happen literally within a few seconds.

 

The Benefits of Forex Trading

 

1. 24 Hour Market

Since the forex market is worldwide, trading is continuous as long as there is a market open somewhere in the world. Trading starts when the markets open in Australia on Sunday evening, and ends after markets close in New York on Friday.

 

2. High Liquidity

Liquidity is the ability of an asset to be converted into cash quickly and without any price discount. In forex this means we can move large amounts of money into and out of foreign currency with minimal price movement.

3. Low Transaction Cost

In forex, typically the cost for a transaction is built into the price. It is called the spread. The spread is the difference between the buying and selling price.

4. Leverage

Forex Brokers allow traders to trade the market using leverage. Leverage is the ability to trade more money on the market than what is actually in the trader's account. If you were to trade at 50:1 leverage, you could trade $50 on the market for every $1 that was in your account. This means you could control a trade of $50,000 using only $1000 of capital.

5. Profit Potential from Rising and Falling Prices

The forex market has no restrictions for directional trading. This means, if you think a currency pair is going to increase in value; you can buy it, or go long. Similarly, if you think it could decrease in value you can sell it, or go short.

Currency Profiles

The world has many currencies. In order to trade them efficiently, you need to understand a little bit about them.

• AUD
• CAD
• CHF
• CZK
• DKK
• EUR
• GBP
• HUF
• INR
• JPY
• MXN
• NOK
• NZD
• PLN
• SAR
• SEK
• TRY
• TWD
• USD
• ZAR

Forex Orders 

An Introduction to Forex Orders

In forex trading, there are several different types of orders that you can use to make and control your trades. There are orders that control both how you enter and how you exit the market.

Market Orders

Market Orders are orders that are executed live on the market at the current price. A market order can be used to open or close a trade at the market price.

Limit Orders

Limit Orders are typically orders used to exit the market in profit. If you are going long, the limit order will be above the market price and if you are going short, the limit order will be below the market price. You can think of a limit order to be like a finish line. Once the market price crosses the limit order, your trade will be closed and your profit will be realized to your account balance.

Stop Orders or Stop Loss Orders

Stop Orders are also an exit order that will close your trade. Commonly referred to as a stop loss order, this type of order is intended to limit the amount of loss incurred by your trade. A stop loss order will close your trade at a designated level of loss. Stop losses can also be used to lock in gains as your trades progress into profit.

Entry Orders

Entry Orders are orders to enter the market at a specified price. It is almost impossible to monitor the market every second and this is why an entry order can be handy. If you feel the market may take a certain action, such as break through a price that it has been touching but it has not been able to break, you would want to use an Entry Limit Order. Once the price crosses your Entry Limit Order, you are in the market.
Entry Orders can be a double edged sword. The advantage is that you can enter the market when it moves while you are away or not paying attention. The disadvantage is the market can touch your Entry Order and take it negative before you have the chance to evaluate the move. This is where good risk management practices come into play.

Summary

Understanding different types of forex orders and their uses is an essential basic skill. Take the time to study them and try them out using a demo account.

 

 

 

Getting Started

Once you understand some of the basics of forex trading, it's time to get started. When getting started you will need to understand how to choose a broker, demo accounts, and how to make your first trade.

How to Choose a Forex Broker

 

Choosing a forex broker can be daunting task. They all seem to sound so good when you read their sales pages, but how do you know which ones are worth your money?

1. Initial Deposit

You should look for a forex brokerage that has a low initial deposit. It is not a matter of the amount you should start trading with, but if a broker wants many thousands just for you to open an account, it is questionable. The ideal initial deposit requirements should be $300 to $500 or less.

2. Regulation

The forex market is an unregulated market meaning there is no central exchange. However, forex brokers themselves are regulated. In the US they should be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission(CTFC) and a member of the National Futures Association(NFA). You can verify a broker’s status with the NFA on the NFA web site. If you do not find the broker you are interested in listed with the NFA, look for another broker that is listed and has a clean record.

3. Customer Service

Forex trading hours vary depending on what currencies you are most interested in trading. With that in mind, it is important to find a broker with 24 hour customer service. The forex markets can be wild at times. If you had a question about order execution or a closed order, you should be able to get your question answered no matter what time it is. A good test of a forex brokers customer service ability is to contact the support desk and ask some questions by phone. Keep notes on how responsive they are to your questions and what attitude they have about answering them. Remember, you are trusting these people with your money. You need to feel absolutely comfortable that all your needs will be addressed.

4. Currency Pairs

Find a broker that offers the currency pairs that you are most interested in trading, or at least a good variety to choose from. Currency pairs tend to have different breathing patterns and you want to have a good menu of selections.

5. Software

A professional and easy to use trading platform is a must. You would not want to be struggling with the features of the trading platform while trying to make a trade. Any reputable forex broker will offer the ability to trade on a demo account. The demo software operates the same way as the live trading platform. This will give you a chance to fully test out the trading platform without the pressure of using real money.

6. Reputation

Always check the reputation of a forex broker. One way is to do a google search with the name of the broker plus the word “complaints”. Check around and get opinions from traders on forex message boards. Spend a fair amount of time doing your research. This is an important relationship. You will want to be absolutely comfortable with the broker that you decide on.

The important thing to remember is that you will have to do some homework here. It is imperative that you are not lazy about it. Don’t be sucked in by a glossy sales page with extraordinary claims. Investigate! Use a demo account. Take some time to shop around. In the end, you will be happy that you did.

Demo Account

A demo account is a virtual account that comes with play money that you can make virtual trades with. Demo accounts are free of charge and they are supposed to represent actual market conditions. Some brokers limit the demo account to 30 days of use. A good broker allows unlimited use of a demo account.

What are the benefits of using a demo account?

1. A demo account is free Demo accounts do not cost anything. Most brokers want your name and phone number so they can contact you to try to convince you to open a live account and deposit money. That is the only real “cost”.

2. Develop and test a system without risk Developing a trading plan that works for you is one of the most difficult things to do. A demo account will allow you to try different trading ideas until you come up with a system that makes you comfortable. A demo account will allow you to explore the strengths and weaknesses of a trading system without risking a single penny. 

3. Learn how to use the trading platform effectively
Trading platforms can be difficult to grasp at first glance. The ability to use the demo version of a trading platform with play money allows you to learn the functions of your trading platform before committing your money. A broker may seem great to you, but if the trading platform is poorly put together, it is better to figure that out while testing rather than while risking your hard earned dollars.

What are the drawbacks of using a demo account?

1. No understanding of real risk
It is an advantage to be able to trade without risk, but it leaves an important element out of the act of trading. Trading psychology is important. It feels very different when your hard earned money is on the line. The demo account saves you from potentially massive losses while learning, but does not teach you anything about dealing with the emotions you will feel once that account balance is connected to your wallet.

2. No encouragement of sound money management
A demo account comes with a large amount of money deposited in it. Most of the time, a true beginner does not have a large amount of money to trade with. The amount of money that is usually deposited in demo accounts ranges from $50,000 to 100,000. These large amounts set up a psychological expectation to make large amounts of profit easily. This can encourage excessive risk taking once you switch to a live account with real money. The big difference is, when you have a live account and lose, it’s for real.

Opening a forex demo account can teach you a lot about trading. They allow you to learn to trade without putting your money on the line. This can be a big advantage if you are a true beginner. Make wise use of availability of demo accounts and practice trading before committing your money.