- The Basics of FOREX Trading for Beginners
- Why Trade The FOREX Market
- How To Get Started With Forex Trading
The Basics of FOREX Trading for Beginners
What precisely is FOREX trading? Put simply, FOREX trading is the buying and selling of international currencies. Traditionally, participation in the FOREX market was confined to major banking and trading institutions. But in recent years, technological developments have opened up this once exclusive arena to smaller companies and even individuals by allowing them to trade currencies online.
The world’s currency rates are not fixed. They follow a floating exchange rate and are always traded in pairs – Euro/Dollar, Dollar/Yen, etc. Most international transactions are exchanges of the world’s major currencies.
When it comes to Forex trading, there are a number of major currency pairs. : Euro v. US dollar, US dollar v. Japanese yen, British pound v. US dollar, and US dollar v. Swiss franc. These currency pairs are considered major in comparison to the other currency pairs because of their trading volume.
In the FOREX market, these relationships are shortened: EUR/USD, USD/JPY, GBP/USD, and USD/CHF. They may also be listed as follows (without the slash): EURUSD, USDJPY, GBPUSD, and USDCHF
Below is a chart of 4 currency pairs clearly illustrating forex beginners their relationship to each other.
It is also important to remember that there are no dividends paid on currencies. If you are a trader in the FOREX market, you look to see whether one currency’s value will appreciate against another currency. When this is the case, you exchange the latter for the first.
FOREX transactions are typically conducted by professionals at major banks and brokerage firms. FOREX trading has long been an important feature of the international market. At all hours of the day, currencies are being traded by brokers around the world.
In fact, the FOREX market operates virtually twenty- four hours a day and five days a week with traders at international banking institutions working a number of separate shifts.
The FOREX market is different from the normal stock market in the fact that price shifts are much smoother and do not result in significant gaps. Each day the FOREX market turns over trillions of dollars, allowing traders to enter and exit certain position very easily.
As you can see, the FOREX market is a dynamic and continuous system that basically never sleeps. To be sure, even on September 11 in 2001 it was still possible to obtain currency quotes.
Also known as the foreign exchange market, or FX, it is the oldest and most expansive financial market in the world. In comparison, the currency futures market is a mere one percent the size of the FOREX market.
Trades are brokered between major banking groups and circulate around the globe, from America to Australia, to Asia, to Europe, and back to the U.S. For a long time, financial prerequisites and hefty minimum transaction amounts put the FOREX market out of reach of small traders.
Consequently, at one time major banks and financial institutions were the only parties that could benefit from participation in the FOREX market’s fluidness and strong exchange rates.
Today is a different story. FOREX market dealers can divide large units within the market, allowing smaller corporations and even individuals the ability to trade these smaller units. Even though it is the oldest financial market in the world, the FOREX market has evolved a great deal in a short amount of time.
High-speed internet connections and sophisticated online Forex trading platforms has definitely made it easier for individual traders to get involved in Forex trading and possibly be very successful at it. This basic guide is your first step towards a successful future in trading in the extremely lucrative FOREX market.
Why Trade The FOREX Market
If you asked Forex traders the number one reason they traded Forex most of them would say, “profit potential”
The chart above shows the daily GBPUSD (British Pound/US Dollar) currency pair. This chart shows the BUY entry where the blue arrow is (the bottom left of the chart). This represents where a particular Forex trading system went long (bought).
The profit so far in this trade is approximately $24,000 per Forex contract. This is from just one simple trade in the Forex market! So as you can see the profit potential is there and opportunities such as these exist in all Forex currency pairs.
There is a unique and potentially very profitable opportunity offered through cash/spot FOREX markets regardless of the condition of the market.
How To Get Started With Forex Trading
Learning to trade with Forex is not unnecessarily difficult; however, there are definitely a few items you must be aware of and instructions to follow.
Before beginning any trading, obviously you need to locate and learn how to use an online trading platform. This is not difficult and most of them have tutorial videos and practice features where you can learn the platform and how to trade using a free, dummy account. If nothing else, that’s fun.
Just as with doctors, lawyers and other professions, there are a multitude of Forex brokers from which you can select.
To help you choose, here are some factors to consider:
Minimal Spreads – Unlike standard stock trading brokers, Forex brokers do not charge any commissions on the trades. They earn their income from what is called a spread. The spread is simply the difference between the buy and sell price of currency at a particular point in time.
As you locate and investigate the brokers, you should inquire as to the spreads they charge. The lower the spread, the less it will cost you to trade in Forex. This is the same rule as with traditional brokers.
The higher their commission on the trades, the lower your profit at the conclusion of the buy and sell transaction. It is in your best interest to choose a Forex broker offering a low spread.
Compliance and Reputation – Traditional stock trading brokers generally operate through their own brokerage houses. Forex brokers, however, are most often affiliated with a large bank or other financial institution.
This is due to the substantial sums of capital required. In addition, you should confirm that the Forex broker you choose is properly licensed and registered.
You can locate and verify the registration as well as other facts and background information at the CFTC website at http://www.cftc.gov .Without a doubt, you want to retain and trade through a broker who is affiliated with a reputable bank or financial institution.
Available Research Tools and Information – Like traditional stock and commodity brokers, Forex brokers maintain various types of websites, trading platforms and underlying research and information portals.
The sites should provide you with real time information, current charts, technical information and comparison ability and other relevant data. A good Forex trader will also sustain the ability to trade on different systems.
Forex brokers should offer a wide array of information, schedules, tools and other support functions and records.
The bottom line is to locate platform who will provide you with all the tools and services you require to be successful. And then do some YouTube research to find out how others have got along with your new trading platform.
A Variety Of Leverage Options – To succeed in Forex trading you Leverage the price spreads on your trades. The price differentials are minute down to the small percentages of a penny. You are, however, using more than your actual capital borrowed from the broker to make the trades which is how you Leverage larger amounts for your trades than you actually have in cash.
This allows you to earn money on the small price deviations. As an example, if you are leveraging at a ration of 100 to 1, this means that for every one of your dollars with which you are trading, you are borrowing 100 from the broker. A wide majority of brokers will allow you to leverage up to a 250 to 1 ratio.
You need to be careful, however, because the leverage ratio is directly related to risk. The higher the ratio, the more you are effectively borrowing from the broker. While you can earn more profit from the trades, you can also lose more if the price fluctuation is not in your favor.
This risk reward evaluation is based on your own capital amounts and your tolerance level for profits and losses on the trades. If you are flush with capital, leveraging a higher amount is not as much of a concern. Nevertheless, brokers offer a large number of leveraging ratios and you will certainly find one or more to fit your desires and financial constraints.
Even if you have a good amount of capital and can accept a certain amount of risk, you may not want to leverage a high amount if the market becomes volatile such as with exotic currency pairs.
Types of Accounts – You will need to open an account with a broker to execute trades. There are a variety of types of accounts which you can maintain. The lowest account is referred to as a mini account. It has a low minimum opening balance requirement of approximately $50.00.
A mini account provides you with the highest ratio of leverage since you are using a small amount of capital with which to execute larger sums in your trades. Aside from the mini account is a standard account. That type of account provides a multitude of various leverage ratios.
It has a higher minimum balance to open of approximately $2000.00. Finally, another type of account which brokers offer is a premium account. These require substantially higher minimums to open. They also offer you multiple ratios of leverage as well as give you access to additional platforms, tools and services.
As you evaluate and pick a broker, find one that has the right mix of accounts, leverage, information and services for your requirements and financial circumstances.
Stay Away From Disreputable Brokers – Just like in any profession, there are good and bad representatives. Brokers are no different. Some are reputable and others are the ones you just need to avoid, especially as a forex trading beginner.
Limit of Liability / Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this Forex Trading For Beginners Guide, they make no representations or warranties with respect to the accuracy or completeness of the contents of this guide.
Risk Disclosure: The information in this Forex Trading For Beginners Guide is for educational purpose only. Past performances do not guarantee future results. FOREX Trading involves substantial risk and there is always the potential for loss.
Your trading results may vary. Trade only capital you can afford to lose. We assume no liability for losses incurred using the information on this site.