How to Trade in Foreign Exchange for Newbies
Currency is among the most heavily traded commodity worldwide, which also makes it the most liquid. Which means you will usually find a market for major currency pairs, which are EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/AUD and USD/CAD. For all those just starting to trade in forex, the challenge is knowing the terminology and approaches to track price movements over time.
Here are some tips you may follow:
1 – Review the meaning of a currency pair. Currencies are traded in pairs, which is, two different currencies. The first currency is the transaction currency and the second is the payment currency. The quotation tells us how many units of the payment currency are needed to be able to buy one unit of the transaction currency.
2 – Know how currency prices move. Suppose you want to trade EUR/USD. If the current quote for EUR/USD is 1.2400, this means that one EUR is exchanged for 1.24 US dollars. If the quote moves to 1.2410, this means the euro is becoming stronger against the dollar. However, if the quote moves to 1.2390, this means the euro is becoming weaker against the dollar.
3 – Pick a broker with low spreads, a strong reputation and extensive tools. You can find as much forex brokers are there are different kinds of currency. Search for low spreads, which is the difference between the price the currency could be sold and bought at (often known as bid or ask price). Foreign exchange brokers don’t charge commission and this difference is how they generate money. Choose a quality institution. Your broker must be registered with the Futures Commission Merchant (FCM) and regulated by the Commodity Futures Commission (CFTC). Finally, look for an extensive tool-set offering. Download a few versions of fx trading software from different brokers before funding your account. Experiment with the tools and ask for a virtual trading account to test the trades.
4 – Sign up for a forex trading account. You can fund your account using a credit card, money order or wire. Signing up is equivalent to getting an equity account, however you will need to sign a margin agreement. The spreads are so small on forex that it requires a great deal of capital to be able to trade profitably. It isn’t unusual for forex accounts to be leveraged 50 times (this is actually the similar to borrowing money). When you register, be mindful of how much your account is margined. If your trade suffers a loss that takes your position into negative territory, it will be automatically closed. Start off with no leverage and work your way up to 20 times. This makes it easier to understand the effect it has on your trades.
