subject: Beginner's Guide To Forex Trading [print this page] 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.
The way it works is that you go long (buy) or short (sell) into a currency pair and if you're right, you pocket the gains as the currencies rise or fall relative to each other. It's not rocket science but you do need to remember that this is real money you're putting on the line. If you're wrong, you'll end up with a hole in your pocket.
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.
Before you start for real, you should be very clear about concepts like leveraging. Leveraging is where you're buying into an FX contract that allows you to play with huge sums while actually putting up a tiny amount.
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.
The sums are big, so it's best to get started with reliable and popular currency pairs. The most popular pairs are EUR/USD, GBP/USD, USD/JPY, USD/CHF, EUR/JPY and EUR/GBP. You also need to get yourself a broker who doesn't hog too big 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.
These popular pairs have a spread of between 1.5 to 3 pips. A pip is short for percentage in point, defined as the smallest price increment for a currency on the forex market. For pairs which aren't as popular as the ones mentioned above, brokers take up a large spread, which makes your path to a profit that much more difficult.
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 are day traders who study real-time forex market data, and can spot or ride hourly trends on the FX market. This is more of a stock market game and needs all sorts of tools for studying and analyzing data that your broker will provide. You can make a killing in forex trading if you can spot a currency fluctuation quickly enough.
