Starting Trading

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.

Determine your margin. 

Depending on your broker's policies, you can invest a little bit of money but still make big 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.

Place your order. 

You can place different kinds of orders:

• 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.

Watch your profit and loss. 

Above all, don't get emotional. The forex market is volatile, and you will see a lot of ups and downs. What matters is to continue doing your research and sticking with your strategy. Eventually you will see profits.

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Opening an Online Forex Brokerage Account

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.

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Currency Pairs

AVAILABLE CURRENCY PAIRS

As you may have noticed, the symbols (abbreviations) for all currencies have three letters. The first two letters denote the name of the country and third letter stands for the name of that country’s currency.

As an example, let’s look at the USD. The US stands for United States and the D stands Dollar.

The "majors" and the "commodity pairs" are the most liquid and most widely traded currency pairs in the forex market. These pairs and their combinations (EUR/JPY, GBP/JPY, and EUR/GBP) make up the vast majority of all trading in the forex market. Because these pairs typically have the largest volume of buyers and sellers, they also typically will have the tightest spreads.

• Majors: EUR/USD, USD/JPY, GBP/USD, USD/CHF
• Commodity Pairs: AUD/USD, USD/CAD, NZD/USD

There are however other currency pairs that allow you to take advantage of macroeconomic events in specific international markets, such as the USD/MXN (US Dollar/Mexican Peso).

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Basic Concepts

HOW DO YOU READ A QUOTE?

Because you are always comparing one currency to another, forex is quoted in pairs. This may seem confusing at first, but it is actually pretty straightforward. For example, the EUR/USD at 1.4022 shows how much one euro (EUR) is worth in us dollars (USD).

WHAT IS A LOT?

A lot is the smallest trade size available. Most accounts have a standard lot size of 1,000 units of currency. Account holders can however place trades of different sizes, so long as they are in increments of 1,000 units like, 2,000, 3,000, 15,000, 112,000 etc.

WHAT IS A PIP?

A pip is the unit you count profit or loss in. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what one watches to count "pips". Every point that place in the quote moves is 1 pip of movement. For example, if the EUR/USD rises from 1.4022 to 1.4027, the EUR/USD has risen 5 pips.

WHAT IS LEVERAGE/MARGIN?

As mentioned before, all trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 100:1 allows you to trade with $1,000 in the market by setting aside only $10 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account. On the other hand, leverage can significantly increase your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors.

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Why trade Forex?

FOREX NEVER SLEEPS

Trading goes on all around the world during different countries' business hours. You can, therefore, trade major currencies at any time, 24 hours per day, 5 days per week. Since there are no set exchange hours, it means that there is also something happening at almost any time of the day or night.

GO LONG OR SHORT

Unlike many other financial markets, where it can be difficult to sell short, there are no limitations on shorting currencies. If you think a currency will go up, buy it. If you think it will fall, sell it. This means there is no such thing as a "bear market" in forex - you can make (or lose) money any time.

LOW TRADING COSTS

Most forex accounts are made up of low, competitive commissions and super-tight spreads. You trade the direct quotes from our liquidity providers with no hidden markups.2

UNMATCHED LIQUIDITY

Because forex is a $4 trillion a day market, with most trading concentrated in only a few currencies, there are always a lot of people trading. This makes it typically very easy to get into and out of trades at any time, even in large sizes.

AVAILABLE LEVERAGE

Because of the deep liquidity available in the forex market, you can trade forex with considerable leverage (up to 50:1). This can allow you to take advantage of even the smallest moves in the market. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.

INTERNATIONAL EXPOSURE

As the world becomes more and more global, investors hunt for opportunities anywhere they can. If you want to take a broad opinion and invest in another country (or sell it short!), forex is an easy way to gain exposure while avoiding vagaries such as foreign securities laws and financial statements in other languages.

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What Is Forex?

The foreign exchange market is the "place" where currencies are traded. Currencies are important to most people around the world, whether they realize it or not, because currencies need to be exchanged in order to conduct foreign trade and business. If you are living in the U.S. and want to buy cheese from German, either you or the company that you buy the cheese from has to pay the German for the cheese in euros (EUR). This means that the U.S. importer would have to exchange the equivalent value of U.S. dollars (USD) into euros. The same goes for traveling. A German tourist in Egypt can't pay in euros to see the pyramids because it's not the locally accepted currency. As such, the tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate.

One unique aspect of this international market is that there is no central marketplace for foreign exchange. Rather, currency trading is conducted electronically over-the-counter(OTC), which means that all transactions occur via computer networks between traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney - across almost every time zone. This means that when the trading day in the U.S. ends, the forex market begins anew in Tokyo and Hong Kong. As such, the forex market can be extremely active any time of the day, with price quotes changing constantly.

WHAT AM I DOING WHEN I TRADE FOREX?

Forex is a commonly used abbreviation for "foreign exchange," and it is typically used to describe trading in the foreign exchange market by investors and speculators.

For example, imagine a situation where the U.S. dollar is expected to weaken in value relative to the euro. A forex trader in this situation will sell dollars and buy euros. If the euro strengthens, the purchasing power to buy dollars has now increased. The trader can now buy back more dollars than they had to begin with, making a profit.

This is similar to stock trading. A stock trader will buy a stock if they think its price will rise in the future and sell a stock if they think its price will fall in the future. Similarly, a forex trader will buy a currency pair if they expect its exchange rate will rise in the future and sell a currency pair if they expect its exchange rate will fall in the future.

WHAT IS AN EXCHANGE RATE?

The foreign exchange market is a global decentralized marketplace that determines the relative values of different currencies. Unlike other markets, there is no centralized depository or exchange where transactions are conducted. Instead, these transactions are conducted by several market participants in several locations. It is rare that any two currencies will be identical to one another in value, and it's also rare that any two currencies will maintain the same relative value for more than a short period of time.  In forex, the exchange rate between two currencies constantly changes.

For example, on January 3, 2011, one euro was worth about $1.33.  By May 3, 2011, one euro was worth about $1.48.  The euro increased in value by about 10% relative to the U.S. dollar during this time.

WHY DO EXCHANGE RATES CHANGE?

Currencies trade on an open market, just like stocks, bonds, computers, cars, and many other goods and services. A currency's value fluctuates as its supply and demand fluctuates, just like anything else.

• An increase in supply or a decrease in demand for a currency can cause the value of that currency to fall.
• A decrease in the supply or an increase in demand for a currency can cause the value of that currency to rise.

A big benefit to forex trading is that you can buy or sell any currency pair, at any time subject to available liquidity. So if you think the Eurozone is going to break apart, you can sell the euro and buy the dollar (sell EUR/USD). If you think the price of gold is going to go up, based on historical correlation patterns you can buy the Australian dollar and sell the U.S. dollar (buy AUD/USD).

This also means that there really is no such thing as a "bear market," in the traditional sense. You can make (or lose) money when the market is trending up or down.

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