You’ve probably already heard about the foreign exchange market and the advantages it can offer to smart investors.
Perhaps you’d like to try it out, but you don’t know where to begin? Well rest assured – getting started in forex is easier than you think!
This 5 step guide will give you the basics of Forex and tell you what you’ll need to start participating in this fast growing market.
STEP #1 Educate Yourself
In the past, foreign exchange trading was limited to large players such as national banks and multi-national corporations. In the 1980’s the rules were changed to allow smaller investors to participate using margin accounts. Margin accounts are the reason why forex trading has become so popular. With a 100:1 margin account, you can control $100,000 with a $1,000 investment.
Forex is not simple, though, so you’ll need some education to make wise investment decisions. Although it is relatively easy to start trading currencies, there are risks involved, and these need to be understood in order to profit.
Your first move as a beginner should be to find out as much as possible about the market before risking a dime.
STEP #2 Find A Broker
Forex traders usually require a broker to handle transactions. Most brokers are reputable and are associated with large financial institutions such as banks. A reputable broker will be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against fraud and abusive trade practices.
STEP #3 Open an Account
Opening a forex account is as simple as filling out a form and providing the necessary identification. The form will include a margin agreement which states that the broker may interfere with any trade deemed to be too risky. This is to protect the interests of the broker, since most trades are done using the broker’s money. Once your account has been established, you can fund it and begin trading.
Many brokers offer a variety of accounts to suit the needs of individual investors. Mini accounts allow you to get involved in forex trading for as little as $250. Standard accounts may have a minimum deposit of $1000 to $2500, depending on the broker. The amount of leverage (how much borrowed money you can use) varies with account type. High leverage accounts give you more money to trade for a given investment.
Trades are commission-free, meaning that you can make many trades in one day without worrying about incurring high brokerage fees. Brokers make their money on the ‘spread’: the difference between bid and ask prices.
STEP #4 Paper Trading
Beginning traders are strongly advised get accustomed to forex by doing “paper trades” for a period of time. Paper trades are practice transactions that don’t involve real capital. They allow you to see how the system works while learning how to use the various software tools provided by most forex brokers.
Most online brokers have demo accounts that allow you to make free paper trades for up to 30 days. Every new forex investor should use these demo accounts at least until they are consistently showing profits.
STEP #5 Start Trading in the Real Markets
Each firm has its own set of software tools for making transactions, but there are a few tools that are common to all forex brokers. Real-time quotes, news feeds, technical analyses and charts, and profit-and-loss analyses are some of the features you can expect to see on most online brokers’ web sites.
Almost every broker operates on the Internet. To access a broker’s online services you’ll need a reasonably modern computer, a fast Internet connection, and an up-to-date operating system. Once your account is set up, you can access it from any computer just by entering your account name and password. If for some reason you are unable get to a computer, most brokers will allow you to make trades over the phone.
Now that you’re primed on all the steps to getting started in forex, take a look at some of the articles in the sidebar to learn more about how Forex4U can help you to kick-start your trading.