Forex is the most widely traded market in the world, with more than $4 trillion being bought and sold every single day. You can speculate on the future direction of currencies, taking either a long or short position depending on whether you think the currency’s value will go up or down...
|How to Trade Forex|
1. Learning Forex Trading Basics
1. Understand basic forex terminology.
- The type of currency you are spending, or getting rid of, is the base currency. The currency that you are purchasing is called quote currency. In forex trading, you sell one currency to purchase another.
- The exchange rate tells you how much you have to spend in quote currency to purchase base currency. For example, if you want to purchase some U.S. dollars using British pounds, you may see an exchange rate that looks like this: GBP/USD=1.589. This rate means that you'll spend 1.589 dollars for one British pound.
- A long position means that you want to buy the base currency and sell the quote currency. In our example above, you would want to sell U.S. dollars to purchase British pounds.
- A short position means that you want to buy quote currency and sell base currency. In other words, you would sell British pounds and purchase U.S. dollars.
- The bid price is the price at which your broker is willing to buy base currency in exchange for quote currency. The bid is the best price at which you are willing to sell your quote currency on the market.
- The ask price, or the offer price, is the price at which your broker will sell base currency in exchange for quote currency. The ask price is the best available price at which you are willing to buy from the market.
- A spread is the difference between the bid price and the ask price.
3. Decide what currency you want to buy and sell.
- Make predictions about the economy. If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, then you probably want to sell dollars in exchange for a currency from a country where the economy is strong.
- Look at a country's trading position. If a country has many goods that are in demand, then the country will likely export many goods to make money. This trading advantage will boost the country's economy, thus boosting the value of its currency.
- Consider politics. If a country is having an election, then the country's currency will appreciate if the winner of the election has a fiscally responsible agenda. Also, if the government of a country loosens regulations for economic growth, the currency is likely to increase in value.
- Read economic reports. Reports on a country's GDP, for instance, or reports about other economic factors like employment and inflation, will have an effect on the value of the country's currency.
- A pip measures the change in value between two currencies. Usually, one pip equals 0.0001 of a change in value. For example, if your EUR/USD trade moves from 1.546 to 1.547, your currency value has increased by ten pips.
- Multiply the number of pips that your account has changed by the exchange rate. This calculation will tell you how much your account has increased or decreased in value.
1. Research different brokerages. Take these factors into consideration when choosing your brokerage:
- Look for someone who has been in the industry for ten years or more. Experience indicates that the company knows what it's doing and knows how to take care of clients.
- Check to see that the brokerage is regulated by a major oversight body. If your broker voluntarily submits to government oversight, then you can feel reassured about your broker's honesty and transparency. Some oversight bodies include:
- United States: National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC)
- United Kingdom: Financial Conduct Authority (FCA)
- Australia: Australian Securities and Investment Commission (ASIC)
- Switzerland: Swiss Federal Banking Commission (SFBC)
- Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)
- France: Autorité des Marchés Financiers (AMF)
- See how many products the broker offers. If the broker also trades securities and commodities, for instance, then you know that the broker has a bigger client base and a wider business reach.
- Read reviews but be careful. Sometimes unscrupulous brokers will go into review sites and write reviews to boost their own reputations. Reviews can give you a flavor for a broker, but you should always take them with a grain of salt.
- Visit the broker's website. It should look professional, and links should be active. If the website says something like "Coming Soon!" or otherwise looks unprofessional, then steer clear of that broker.
- Check on transaction costs for each trade. You should also check to see how much your bank will charge to wire money into your forex account.
- Focus on the essentials. You need good customer support, easy transactions and transparency. You should also gravitate toward brokers who have a good reputation.
3. Fill out the appropriate paperwork. You can ask for the paperwork by mail or download it, usually in the form of a PDF file. Make sure to check the costs of transferring cash from your bank account into your brokerage account. The fees will cut into your profits.
4. Activate your account. Usually the broker will send you an email containing a link to activate your account. Click the link and follow the instructions to get started with trading.
3. Starting Trading
1. Analyze the market. You can try several different methods:
- Technical analysis: Technical analysis involves reviewing charts or historical data to predict how the currency will move based on past events. You can usually obtain charts from your broker or use a popular platform like Metatrader 4.
- Fundamental analysis: This type of analysis involves looking at a country's economic fundamentals and using this information to influence your trading decisions.
- Sentiment analysis: This kind of analysis is largely subjective. Essentially you try to analyze the mood of the market to figure out if it's "bearish" or "bullish." While you can't always put your finger on market sentiment, you can often make a good guess that can influence your trades.
- For example, if you want to trade 100,000 units at a margin of one percent, your broker will require you to put $1,000 cash in an account as security.
- Your gains and losses will either add to the account or deduct from its value. For this reason, a good general rule is to invest only two percent of your cash in a particular currency pair.
- Market orders: With a market order, you instruct your broker to execute your buy/sell at the current market rate.
- Limit orders: These orders instruct your broker to execute a trade at a specific price. For instance, you can buy currency when it reaches a certain price or sell currency if it lowers to a particular price.
- Stop orders: A stop order is a choice to buy currency above the current market price (in anticipation that its value will increase) or to sell currency below the current market price to cut your losses.