Forex trading is the buying and selling of currency pairs on the foreign exchange (FX) market. The main aim is to allow international businesses to convert currency to pay for goods and accept payments. But speculating on whether a currency will fall or rise is a business all by itself.
How you can start off with forex trading and pocket the difference when a currency rises or falls is discussed below. You shouldn’t forget, however, that this is cold hard cash you’ll be putting on the line. If your trades go south, you end up getting burned.
Its best if you start with a demo account and make all the rookie mistakes you want before you start trading for real. Get acquainted with brokers and their spreads, and understand how FX futures and derivatives work. You’ll also need to learn to work with the 24 hour nature of forex trading, since it spans across time zones.
While you’re still demo’ing, try to figure out concepts like leveraging, where you don’t actually buy currencies. Instead, you get an FX contract which allows you to manipulate huge sums with a small investment.
For example, if $1000 gets you a $100,000 contract, you have a leverage of 1:100. With such vast sums in play, tiny fluctuations in currency can add up very fast. You’ll either win big or lose your entire $1000.
Get your feet wet with popular currency pairs. The most popular ones are EUR/USD, GBP/USD, USD/JPY, USD/CHF, EUR/JPY and EUR/GBP. It’s also important to find brokers who you can rely on and will not take too big of a spread.
The difference between the actual currency value and what you pay the broker is his spread. Brokers have low spreads for popular currency pairs, such as those mentioned above. This is one more good reason for you to start with the popular pairs.
The popular pairs usually have spreads of 1.5 to 3 pips (pip being the smallest price increment, or percentage in point). For not-so-popular currency pairs, brokers will take a high number of pips which makes it more difficult for you to cross the threshold into profitability.
To maintain a sense of balance and sanity, allocate amounts beforehand and keep track of all your trades in a spreadsheet or use forex trading software. As a new trader, you shouldn’t play with more than 2 or 3% of your budget for each trade. This ensures that even a wipeout on a trade won’t hurt you too bad.
There are two types of forex traders. Some are experts in international geo-politics who understand how, why and when a specific currency fluctuates. Policy and institutional banking experts will typically restrict their forex trading to a few currency pairs they know intricately well.
The second kind is where you pore over real-time forex trading data and try to spot a trend that you can get in on. As with stock markets, brokers have all kinds of tools to help you analyze the data and find something useful. You can make a small fortune with day trades, if you don’t lose your head and base your decisions on hard facts.
Learn more about Forex Trading. Stop by Sharon Taylor’s site where you can find out all about Forex Trading and what it can do for you.