Trading foreign exchange on the currency market, also called trading forex, can be a thrilling hobby and a great source of income. To put it into perspective, the securities market trades about $22.4 billion per day; the forex market trades about $5 trillion per day. You can trade forex online in multiple ways.
Learning Forex Trading Basics
Understand basic forex terminology
- The type of currency you are spending or getting rid of, is the base currency. The currency that you are purchasing is called quote currency. In forex trading, you sell one currency to purchase another.
- The exchange rate tells you how much you have to spend in quote currency to purchase base currency.
- A long position means that you want to buy the base currency and sell the quote currency. In our example above, you would want to sell U.S. dollars to purchase British pounds.
- A short position means that you want to buy quote currency and sell the base currency. In other words, you would sell British pounds and purchase U.S. dollars.
- The bid price is the price at which your broker is willing to buy base currency in exchange for quote currency. The bid is the best price at which you are willing to sell your quote currency on the market.
- The ask price, or the offer price is the price at which your broker will sell base currency in exchange for quote currency. The ask price is the best available price at which you are willing to buy from the market.
- A spread is the difference between the bid price and the asking price.
Read a forex quote
You'll see two numbers on a forex quote: the bid price on the left and the asking price on the right.
Decide what currency you want to buy and sell.
- Make predictions about the economy. If you believe that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, then you probably want to sell dollars in exchange for a currency from a country where the economy is strong.
- Look at a country's trading position. If a country has many goods that are in demand, then the country will likely export many goods to make money. This trading advantage will boost the country's economy, thus boosting the value of its currency.
- Consider politics. If a country is having an election, then the country's currency will appreciate if the winner of the election has a fiscally responsible agenda. Also, if the government of a country loosens regulations for economic growth, the currency is likely to increase in value.
- Read economic reports. Reports on a country's GDP, for instance, or reports about other economic factors like employment and inflation will have an effect on the value of the country's currency.
Learn how to calculate profits.
- A pip measures the change in value between two currencies. Usually, one pip equals 0.0001 of a change in value. For example, if your EUR/USD trade moves from 1.546 to 1.547, your currency value has increased by ten pips.
- Multiply the number of pips that your account has changed by the exchange rate. This calculation will tell you how much your account has increased or decreased in value.
Open an Online Forex Brokerage Account
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Request information about opening an account
You can open a personal account or you can choose a managed account. With a personal account, you can execute your own trades. With a managed account, your broker will execute trades for you.
Fill out the appropriate paperwork
You can ask for the paperwork by mail or download it, usually in the form of a PDF file. Make sure to check the costs of transferring cash from your bank account into your brokerage account. The fees will cut into your profits.
Activate your account
Usually, the broker will send you an email containing a link to activate your account. Click the link and follow the instructions to get started with trading.
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 sells 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.
