How to Trade in Foreign Exchange for Newbies

Currency is the most heavily traded commodity globally, which also makes it the most liquid. Which means you will usually find a market for major currency pairs, that are EUR/USD, GBP/USD, USD/JPY, USD/CHF, USD/AUD and USD/CAD. For those just beginning to trade in forex, the challenge is understanding the terminology and the way to track price movements over time.

Below are some suggestions you can follow:

1 – Review the meaning of a currency pair. Currencies are traded in pairs, that is, two different currencies. The first currency is the transaction currency and the second is the payment currency. The quotation tells us the number of units of the payment currency are required to be able to buy one unit of the transaction currency.

2 – Learn 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 getting stronger against the dollar. However, if the quote moves to 1.2390, this means the euro is getting weaker against the dollar.

3 – Select a broker with low spreads, a strong reputation and extensive tools. You can find as many forex brokers are there are different types of currency. Search for low spreads, which is the difference between the price the currency can be sold and bought at (also called bid or ask price). Fx brokers don’t charge commission and this difference is how they make money. Look for a quality institution. Your broker should 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 forex trading software from different brokers before funding your account. Experiment with the tools and request for a virtual trading account to test the trades.

4 – Sign up for a forex trading account. You can fund your account via a credit card, money order or wire. Signing up is the same as getting an equity account, and you will need to sign a margin agreement. The spreads are so small on forex that it takes a lot of capital to be able to trade profitably. It is not unusual for forex accounts to be leveraged 50 times (this is the similar to borrowing money). When you register, keep in mind how much your account is margined. In case your trade suffers a loss which takes your position into negative territory, it will likely be automatically closed. Start with no leverage and work your way up to 20 times. This will make it better to comprehend the effect it has on your trades.