If you’re curious about forex trading and want to learn how to trade forex, you’ve come to the right place. Here, we’ll provide the basics about forex trading, including what the foreign exchange market actually is, how to open a brokerage account and, of course, how to trade forex. Please note that this is merely a brief introduction to the subject. To be a successful forex trader, you must devote plenty of time and effort to the pursuit.
First, the basics. The foreign exchange market, which is alternatively known as the forex market or just the FX market, allows everyday investors to buy and sell currencies through online brokerage accounts. Daily currency fluctuations tend to be quite small, but massive leverage is used to make trading more profitable. Of course, this means that losses are also magnified, so be sure to keep that in mind.
Forex trading is unique in that there is not central marketplace. Rather, trades are conducted on an electronic, over-the-counter basis via computer networks. The market is open 24 hours a day, 5.5 days per week. According to an August 2012 report by BIS, $4.9 trillion in trades are executed on the market per day. It is the largest, most liquid market around.
One of the first steps in learning how to trade forex is understanding the various terms. Here’s a quick rundown of the most common terms you’ll run across:
Currency pair – A currency pair is made up of a base currency and a quote, or counter, currency.
Bid price – The price at which you are willing to buy a base currency in exchange for a quote currency.
Ask price – Also known as the offer price, it is the price at which a broker will sell a base currency in exchange for a quote currency.
Going long – Buying a base currency and selling a quoted currency.
Going short – Buying a quote currency and selling a base currency.
Spread – The difference between the bid price and the ask price. It is typically expressed in “pips,” or points.
Now, let’s get down to the finer details of how to trade forex. While it pays to learn the basics before opening an account and actually engaging in forex trading, much of the learning that you will do will happen when you actually execute trades. In other words, you primarily learn by doing.
The first step in forex trading is opening a brokerage account. You can take your pick from many options, but they are not all created equal. A few considerations should be made to ensure that you select the best possible brokerage. First, what are the margins like? Some are as low as 50:1 while others are as high as 250:1. Next, what kinds of spreads are offered? Spreads are how a market maker makes money.
With every trade, the market maker snags the spread. Different firms offer different spreads, and spreads vary from one currency pair to the next. There are also fixed spreads and variable spreads.
The next thing to do when learning how to trade forex is to choose a currency and analyze the market. Most trades involve currency pairs that include the U.S. dollar, but you certainly don’t have to trade such pairs if you’d prefer something else. As for analyzing the market, you can go about this in a variety of ways. Technical analysis, sentimental analysis and fundamental analysis are the most popular options.
You should now be ready to place an order. A market order gives you the ability to buy currencies at the current exchange rate. With a limit order, you specify a certain entry price. With a stop-loss order, you specify how much the rate can drop before your position closes, and it automatically closes upon reaching that point. You can also execute a take profit order, which allows you to lock in the profit by automatically closing your position once the rate reaches a certain amount.
Once your order is placed, keep an eye on your profits and losses. Unless you’ve placed a stop-loss or take-profit order, you will need to watch and wait to determine when to close your position. Remember that the market fluctuates rapidly and that a loss isn’t really a loss until your position has closed.
That is how to trade forex in a nutshell. Before engaging in actual forex trading, however, set up and use a demo account to get the hang of things. Once you understand the gist of it, set up a real account and start trading.