You may not have realised, but you probably already have some experience with forex trading. How so, you ask? Well, when you purchased some Euros for a trip to Paris, did you shop around for the best prices, to ensure you maximised your spending money? That’s forex trading at a very basic level.
Forex trading for profit is a lot more complicated, of course, but nevertheless, anyone can do it. In the old days, forex traders all worked for investment banks. Today, the accessibility of online trading platforms means that anyone can trade on the foreign exchange markets. All you need is a trading account and some money.
In this guide, we are going to go through the basic steps to help you get started with forex trading.
The first thing you need to be aware of is that forex trading is not a guaranteed way to make huge sums of money overnight. If life was that simple, we’d all be driving Lamborghinis and drinking Kristal for breakfast. Successful traders make mistakes. Most only get it right some of the time, but as long as you make more profitable trades than bad ones, you can make a profit from forex trading.
Open a Demo Account
The first thing any would-be trader must do is find a broker and open a demo account. There are lots of forex brokers to choose from, including IG, EasyMarkets, and CMC Markets. Read reviews, see what other people think, check how easy it is to open an account, and then make a decision.
Remember, there are extra costs associated with making forex trades. Brokers charge fees for transactions, which all eat into your profit margins. Each time you make a trade, you will be charged a commission fee, and when you deposit and withdraw trading capital, there are more fees associated with the transaction. Then there are broker spreads, which are the difference between the bid and ask prices. To find out more about which brokers offer the lowest spreads, read this low spread brokers list from InvestinGoal. It should help you narrow your options further when looking for a suitable forex broker.
A demo account lets you learn the ropes without risking your trading capital. It is a great way to work on a trading strategy. You can test out theories, get used to the many forex trading tools at your disposal, and practice your analytical skills.
Choose a Currency Pair
Forex traders work with currency pairs. In any pair, one currency is paired against another. So, if you elect to work with EUR/USD, you speculate on how much the USD is worth against the Euro. When you purchase a currency (going long), you are betting that the currency will rise in value and you can sell it for a profit. When you sell a currency (going short), you are betting it will fall in value, so you can buy it back at a cheaper price.
Understand Leverage in Forex Trading
Leverage is an important concept when trading forex. Leverage helps traders make big profits for relatively low investments. Most brokers offer leverage of between 50:1 and 200:1, depending on the value of the trade. So, if you want to go long on £100,000 of USD and the broker is offering a 100:1 leverage, you only need to deposit $1,000 in your trading account.
Leverage is good, but it can also backfire. If you make a bad trade, leverage greatly amplifies your losses. This is where forex trading tools such as stop losses come in handy, as they minimise your exposure to risk. Use a profit/loss calculator to work out how much you stand to gain or lose on a trade.
Common Forex Terms
There are a number of terms that forex traders need to know. We have already mentioned spread and leverage, but two other key terms include:
- Pip – a unit of price in currency pairs; and
- Margin – the money you have in your trading account.
Is Forex Trading Profitable?
Forex trading can be profitable, but only if you learn how it works and don’t rush into making trades without careful analysis. Many forex traders use automated trading signals, which are useful. Copy trading is another strategy you may wish to try. Copy trading means following experienced traders and utilizing their trading strategies to make a profit.
It is always best to start small when forex trading. Once you understand how forex trading works and you are confident that you have a workable forex trading strategy, make one of two trades when the conditions are right and keep a trading journal. Only open trading positions when your analysis shows it is the right decision.
You will make mistakes and get things wrong, but as long as you don’t risk more than 5% of trading capital at any given time, it’s OK.
Forex trading is a low-cost money-making activity you can do 24/7. The markets never sleep, so what are you waiting for?
Nicole Hicks a graduate of UFT. She’s based in Toronto but travels much of the year. Nicole has written for NPR, Motherboard, MSN Money, and the Huffington Post. Nicole is a financial reporter, focusing on technology, national security, and policing.