Entering the foreign exchange, or forex, markets is to some people a very exciting pastime. But to others, it is an opportunity for making money (even with the inherent risks attached) and some of them even embrace it as a full time job. The huge size of these markets is one of the reasons that forex trading is so exciting. To compare with actual numbers, the stock market’s daily trading volume is about $24 billion each day, while forex markets move a staggering $5 trillion each day. Forecasting the market’s next move can be really exciting. Forex trading can be made online, even from the comfort of your favorite coffee shop.
1.Know the forex market basics
First things first. Learning the basics such as terminology, reading a quote, and profit calculation before trading is as important as learning to walk before running. Forex trading involves the selling of one currency (base currency) to buy another (quote currency). The exchange rate specifies how much of the base currency is sold to buy the quote currency.
So in the example above, you would spend $1.37677 to purchase €1. This is also called a long position, meaning that you buy the currency pair with the hope that the exchange rate will increase and then sell it back to make a profit. A short position means that you are selling the currency pair with a view to purchase it back when the exchange rate becomes lower.
The bid price is the exchange rate of the currency pair which a forex broker is offering for you to buy. Inversely, the ask price is the exchange rate of the currency pair that the forex broker is offering for you to sell. The difference between the bid and ask prices (spread) that forex brokers offer is the method they use to charge the traders for their services.
2.Open a forex account
With so many options of forex brokers, it is worth making your research before you chose with which forex broker you go with. Experience counts, so forex brokers who are in the market for more than 10 years is safer as it shows they are doing good business. Make sure that the broker is regulated by a reputable governmental regulatory body such as the Cyprus Securities and Exchange Commission (CySEC) or the U.K. Financial Services Authority (FSA).
It is also a good idea to check on the products that the forex broker is offering. For instance, if they also trade securities, commodities, and options, it probably means that they have a respectable database and hence more security. A good forex broker is also the one who has good customer service, especially for those taking their first steps into the forex markets.
3.Kick-start your trading
To get an idea of when to enter the market, and also for which instrument, there are two different methods. Technical analysis deals with the research of historical data and charts to get hints on future price movements. Fundamental analysis studies current economic developments and indicators such as a nation’s growth, inflation, and unemployment to get insights on the country’s economic health and hence upcoming price movements.
There are a few options on how to enter a market. A market order simply instructs the forex broker to execute the trading position at the current market rate, whereas a limit order instructs the broker to execute the order based on a pre-specified exchange rate set by you. A stop order works while you are already in a trading position, and it automatically closes your position to cut further losses.
Irrespective of the markets you are trading, or the timing, make sure that you have a trading plan in action and stick with it. Do not let your emotions rule your trading actions because that is just a bad idea. Only consider adjusting your strategy in case of regular inconsistencies, otherwise be patient and wait for the good times to come.
By David Parker,
Short bio: Marketing Consultant & Content Manager.