Have you ever thought of opening an account to start trading Forex but don’t know how? We have all heard of Forex businesses and the vast amounts of money available but how can the average person start trading?
In this article you’ll find all the basic information you will need to know to start trading Forex; for example the dangers you should be aware of and terminologies you must get familiar with and then lots of information on how to get a trading account, and finally how to trade Forex and the different types of orders that can be placed.
First of all, you need to know that the process is similar to opening a bank account. You will have to do your research on different brokers very carefully to find the one that suits you and how you want to trade.
Some brokers offer free demo accounts so you can get used to how their trading platform operates. You’ll find that many brokers are very careful about when opening an account for a client – don’t be intimidated by the certifications they will need – it’s simply because they must be able to prove they have met the regulations by which they are governed. For the same reason be wary of those that don’t ask. If you like the sound of the broker but want to be sure of their credibility you can always check its status on its respectable regulatory bodies.
When you take all things into consideration, beginners should be reminded of the dangers involved in trading currencies. Actually no matter how long you have been trading Forex, you should always be prepared for some losses, as much as you anticipate gains.
Forex trading is an exciting business. There is so much hype surrounding it online, but how exactly can the average person get started with trading Forex?
Opening an Account
The first thing that you’ll need to do when you start trading Forex is to decide on a broker. This can be accomplished by trading different Forex demo accounts offered by the various brokers and reading different Forex brokers reviews. Once you’ve decided on a broker, the process becomes a standard bureaucratic process that is similar to opening a bank account.
Second is filling up the account opening application. Most companies have the application ready online. Once you’ve provided all your basic information for them to process, the majority of brokers requires two documents in order to open the trading account, they are a passport copy and a utility bill. It’s unlikely that you will find any broker prepared to open an account for you without requiring these two documents. If you do happen to find one that isn’t asking for them, then you should be suspicious.
After opening a Forex trading account you will have to decide on what kind of account you want; each Forex account and the services it provides differ between brokers so it is important that you find the right one for yourself.
Once the account you desire is opened you can fund your account and begin trading. One piece of advice worth mentioning here is not to put any money into a trading account that you cannot afford to lose. It seems like an obvious advice, but some people start off feeling like they know more than they do and they take unnecessary risks. Start with a reasonable sum of money and trade small. Although much professional traders talk about it, you’ll find that nothing can truly prepare you for the emotions that you’ll feel when your money is truly at risk, so it’s wise to start off slowly.
Leverage, Margin Requirement and Stop Out
When you start trading Forex, you will need to clarify the leverage, margin requirement and stop out percentages with your broker. Leverage is something you’ll be offered by your broker but you must remain constantly aware of its pitfalls to avoid potentially high losses. Essentially, leverage allows you to use a little of your money to trade larger amounts of capital. Leverage factor can start at 50:1 but can reach as high as 500:1 depending on your broker, your account type and how much is your capital. A leverage ratio of 200:1 means for every dollar in your account you trade with, the trader trades with two hundred dollars. This is actually what makes the profit and loss amplified when currency rates fluctuate. Leverage on equities is typically only 2:1 and in the USA it’s the maximum of 50:1.
Leverage is seen as a major benefit when you start trading Forex as it allows you to make large gains with a small capital. However, leverage can also be an extreme negative if a trade moves against you because your losses are amplified by the leverage, for this reason, a stop loss is an important feature, because once the trade losses reached to the stop out level, the trade will close automatically. The stop out level is set differently among brokers but its always a percentage of the required margin. The required margin is the amount the broker holds from your capital when you execute a trade. The required margin can be calculated by dividing one to leverage, 1/leverage. This is one example of how you need to be completely aware of the risks before you begin.
Commissions and Fees
Another major benefit of Forex trading is that it is on a commission-free basis. This is unlike equity accounts in which you pay the broker a fee for each trade. The reason for this is that you are dealing directly with market makers and do not have to go through other parties like brokers.
This may sound too good to be true, but rest assured that market makers are still making money each time you trade. Each time a trade is made, it is the market makers that capture the spread between the bid and ask. Therefore, if the bid/ask for a foreign currency is 1.5200/1.5202, the market maker captures the difference of 2 basis points, or 2 pips.
If you are planning on opening a Forex account, it is important to know that each firm has different spreads on foreign currency pairs traded through them. While they will often differ by only a few pips (0.0001+), this can be meaningful around news releases or illiquid trading periods as spreads widen sometimes significantly. So when opening an account make sure to ascertain the pip spread and how much it can widen on currency pairs you are looking to trade.
There are a lot of differences between the Forex companies and each will offer different levels of services and programs which might be associated with fees above and beyond actual trading costs, therefore, it is important to go with a reputable company, and during the final steps of opening your account you must seek risk disclosures to confirm what the broker claims. Forex is working with money, it’s a serious business, so this should be taken seriously. Finally, the broker will always remind you that Forex is a risky business as they are required to do this by law.
Start Trading Forex
Now that you know the important factors to be aware of when you start trading Forex, we will take a look at what exactly you can trade with this account. Trading is using part of the capital to buying and selling of currency pairs in the market, where you go long on one currency and short on another, where you will be hoping the value of the pair itself changes in a manner favorable to you. If you go long on a currency pair, you are hoping that the value of the pair increases. For example, let’s say that you took a long position in the USD/CAD pair – you will make money if the value of this pair goes up, and lose money if it falls. This pair rises when the U.S. dollar increases in value against the Canadian dollar.
Types of Orders
When a trader start trading Forex, he will be looking to open a new position by using either a market order or a limit order. The manner of these order types remains the same as when they are used in the equity markets. A market order gives a Forex trader the ability to execute a trade at whatever the exchange rate is currently trading at in the market, while a limit order allows the trader to specify a certain entry price in the future. Having a good understanding of these orders is critical before placing your first trade.
Forex traders who already hold an open position can close the position with a take-profit order to book in a profit or a stop loss to limit their losses. Say, for example, a trader is confident that the USD/JPY rate will reach 120.00, but is not as sure that the rate could climb any higher. Then a trader will use a take-profit order, which would automatically close his or her position when the rate reaches 120.00, locking in his profits.
The other order that can be used when traders hold open positions is the stop-loss order. This order allows traders to determine how much the rate can go the other way of your trade before the position is closed and further losses are accumulated. Therefore, if the USD/JPY rate begins to drop, an investor can place a stop-loss that will close the position (for example at 117.00), in order to prevent any further losses.