Forex trading (Foreign Exchange Market) is the playground of the massive international foreign exchange traders. Plenty of money is shuffled back and forth virtually here with daily sales of over five trillion dollars. The (pecuniary) largest marketplace in the world!
If you would like to play here, you should start carefully. You should take these 6 steps to get started using a proven method so the risk doesn’t get too great at the beginning.
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1. Be aware of the risk
Forex & CFDs are investments with leverage and, in addition to the resulting opportunities, involve a substantial risk of loss. The losses can even exceed the initial investment. If you hold the trades too long, you’ll be required to form additional payments.
2. Get to know and understand technical terms and the marketplace
Forex trading is characterized by cryptic terms, the meaning of which you must to know for Forex trading.
- Major – these currency pairs are the most heavily traded currency pairs in the world. This might be euro / US dollar, for instance
- Minor – in contrast to major, denotes little traded currency pairs. The increase would be “Exotic Currency Pairs”.
- Lots – the currency pairs are traded in so-called lots. One lot corresponds to 100,000 units of the respective currency. However, many brokers also offer fractions of this standard size for trading.
- Margin – the so-called margin refers to the security that an investor must provide at the start of the trade order to trade a lot (or smaller denominations). a common size is 1 percent of the capital invested in the trade.
- Brokers have a leeway here and may change this rate by means of a margin call (e.g. in the case of restless markets). this could also cause a forced sale.
- Pips – this funny name describes the change in the rate of exchange of a currency pair. Written out it says “Percentage in Point” and refers to the last digit in which the rate of exchange is given. This is usually the fourth digit after the comma.
- Spread – this indicates the difference between the buying price and the asking price.
- Trading hours – not really a technical term, but the times of trading must be kept in mind by every forex trader. Sometimes when both national markets of a currency pair are open at a similar time, there’s increased volatility. This may be positive or negative.
In Europe, the markets are open between 8 a.m. and 6 p.m. CET, in the USA from 2 p.m. to 9 p.m. CET and in Tokyo, Singapore and Hong Kong from 1 a.m. to 9 a.m. CET.
3. Open a demo account
So, equipped you go searching for a broker and in the first step you open a trading demo account. The subsequent criteria help to find a reputable and fair broker:
- The company is well-known and has been in the market for a long time
- The user experiences about the broker on the net are positive
- The broker only requires low margin (minimum deposit)
- The trading software is clear and stable
4. Familiarize yourself with the trading tool
Each broker has its own interface for Forex trading. Once you have opened the free demo account, the test phase begins. Implement all the functions, put your own strategy to the test.
5. Try the trade
The easiest way to start is once you first try out proven trading strategies and tips for beginners and study the results.
Well-known tips for beginners are for example:
Start with small sums and “large” currencies
The dollar, euro and pound are the popular “entry currencies”. The fluctuations are much smaller than those of exotic currencies. Many market participants guarantee continuous trading, which is vital when you need to get out quickly. Your starting capital should be low.
Spread: Spread the risk
As with all financial investments, currency trades should also be spread. With the demo account, you’ll still put everything on one card. Later, no over 15 to 20 percent should be placed on a position.
Make sure you’ve got sufficient margin
In order to not be stopped out with every price twitch, the margin should allow a certain amount of leeway. Here the demo account helps to determine the correct amount for your own trading currencies.
6. Develop and test your own trading strategy
When starting live trading, you should have developed your own trading strategy, which you’ve got checked for suitability in the demo account.
Well-known trading strategies are often found on the trading strategy page, see here.
How do I come up with my own strategy?
One approach is to think in scenarios: If this happens in the world, that’s likely to happen to the currency pair XY. Write down and test each. This is often called fundamental analysis.
If you would like to use technical signals for your strategy, you’ll find a range of technical investment strategies on the page (e.g. at www.forexcanada.ca/forex-trading-strategies/).
These technical signals can be checked for effectiveness using backtesting in the demo account. Plenty of work, but the reward may be a feeling for the price development. In the end, this may differentiate the good trader from the losing private investor.