The foreign exchange market (also known as forex) is where currency trading takes place. Banks, corporations, governments, and private investors are just some of the people dealing in a trading market that has an amazingly huge turnover of over 2 trillion dollars daily. With impressive numbers like these, it is easy to understand why trading foreign exchange is becoming so popular.However, making money trading forex is not quite as easy as many would have it seem. There are some statistics to suggest that over 80% of private investors have no success with foreign exchange trading, and lose money on their trades; but with the right understanding and preparation, this could be a very viable way of making money. To succeed you must be prepared to patiently educate yourself, and not jump into trading too quickly.
Basics of the Foreign Exchange Market
The foreign exchange market is where one currency is traded for another. It is the largest market in the world, with more liquidity than any other. For 24 hours a day, 6 days a week, currencies are globally traded. Each trade that an investor makes will increase or decrease in value, in relation to the movements of the currency pair that they have traded in.
Let’s take a step back for a moment; imagine going into the bank and converting 100 US dollars into British pounds at a rate of 1.5 pounds to the dollar, giving you 75 British pounds. A few months later you go back to the bank to turn that 75 British pounds back into dollars. Now, over the time since you first went to the bank, the rate has changed to 1.8 pounds to the dollar, and when you convert your money, you get 135 dollars, giving you a net profit of $35 minus commission fees.
The Forex market is similar to this but with 2 major differences:
- All trading is done through brokers and in real time (exchange rates constantly moving).
- The amount you trade with is hugely leveraged (usually by 100:1), meaning that a 10 dollar trade is worth $1000 . Of course this make the profit potential huge, whilst also increasing your risk.
Advantages of Trading Foreign Exchange
Here are some of the stand out advantages to trading forex:
- Trade 24 hours a day, 6 days a week, making it great to fit into any schedule.
- High leverage of 100:1 and possibly higher, gives you huge purchasing power.
- Start with as little as $300 and trade from anywhere in the world, just from your computer.
- Sell or Buy with no restrictions, and as you are trading currencies, there is never a bad market for trading.
- Volatile markets offer great trading opportunities.
- Pay low or even zero commissions.
Disadvantages of Trading Foreign Exchange
- While also being an advantage, high leverage can be a problem as it creates a much higher risk and danger of losing money.
- The market is extremely volatile, which, along with the high leverage, can be very dangerous if you do not trade sensibly.
- With constant movements in the market, trading forex can become very stressful and lead investors to second guess their trades.
Foreign Exchange Trading Strategies
To have success with foreign exchange trading, you must be able to develop a strategy that works well for you. Simply by placing trades based on a hunch of where you think a currency might trend will more often than not be a cause for certain loses.
There are two principal forex trading strategies:
Technical trading and Fundamental:
Technical Trading Strategy
Although one can never know for certain the direction of a currency pairing, for those using a technical based forex strategy, it is possible to work out which trades would have a higher possibility of going their way. In this instance, it would be a numbers game. Using different charting techniques (of which there are many), and following technical indicators, you can eliminate the trades that have a lesser chance of success. Lets say for example that you can develop a strategy that works for you 60% of the time; for every 4 trades that go badly, 6 go well. Of course, to get to this stage requires intensive learning of the different charting and technical strategies, plus lots and lots of practice.Fundamental Trading StrategyNot all forex traders use these technical strategies to make money on forex. On the other end of the trading statergy spectrum is trading based on fundamental aspects. That is to say, placing trades based on the perceived outcome of news stories, political conditions, compared strength of economies, and pretty much anything else that might effect that country’s currency. For those who keep their ear close to the ground when it comes to these matters, this may seem like a much more appealing strategy to work with. This is also generally considered a stronger and safer strategy for longer term trades.Incorporating Both StategiesIdeally, a trader would place weight on both trading strategies, looking at fundamental aspects to consider which trades might be worthwhile, and then thoroughly investigating a currency pairing with technical aspects, and looking for the perfect point to enter a trade.
Learning to Trade Foreign Exchange Successfully
It is hugely important to not rush into trading forex. As mentioned before, most individual traders lose money in this market. This is usually due to lack of understanding, bad money management or panic, so take your time to educate yourself and practice before jumping into live trading.
If you are not the type of person who can take evaluated risks and can be patient, I would suggest that this is not for you.
- There are a few good books that can easily be found on Amazon just by typing “foreign exchange trading.”
- A great source of free forex education is BabyPips. They have a community of fresh forex traders and a whole bunch of free educational articles explaining forex in much more detail. You can also use the forums and message boards to communicate and learn with other traders in the same stage of trading as you.
- You can also take online courses for as little as $20, and some of these are excellent value for money. FXCM is a brokerage site that offers some great interactive courses for cheap ($19.99). Not only are the lessons well structured, you will also be tested on what you are learning.
- There are plenty of other forex educational sources, and most online broker websites will offer some type of training, or free webinars in an attempt to get you to sign up for their live accounts once you are ready to trade.
- Be wary of expensive training courses or packages that offer you the world, and make it seem like their training product will have you making millions of dollars in a couple of days.
- There is no need to spend a lot of money on training courses when you could get an excellent start with free and cheap resources, like those listed above.
Real Accounts and Practice Accounts
Around the same time as educating yourself on forex, you will want to start looking into opening a trading account with a broker. The importance of opening an account at this stage is so that you can get yourself a practice account, which most brokers offer. Practice accounts allow you to practice your forex trading with pretend money. This is a fantastic way to optimize your trading strategies, and it is highly recommended that you do not begin live trading until you are making consistent profits on the practice account.
- Opening a Forex practice account will always be free. It is a way for the brokers to reel you in, in hope that you continue to use their services once you are ready to begin with your live account.
- When you are ready for a live account, you will be required to fund it with the minimum dollar amount needed to be able to trade. This will be between $300 to $5000, depending on the broker, but most brokers offer mini accounts that can be opened for $300 – $500.
- There are many brokers to chose from, and picking one may seem overwhelming. Be sure to do your research and check out what your trading options are. You can do this on the BabyPips forum, and also compare brokers on their “choosing a broker” page.
- Some of the better known and more popular brokerage sites are:
AC Markets, Tradeview, E-Toro or Alpari and FXCM.
The Key to Long-Term Success With Foreign Exchange Trading
The key to successful forex trading is practice, practice, and practice. If you begin live trading and you are losing money, go back to the demo accounts and perfect your strategies until you have them right. It may take you a few weeks or even months, but this is better than rushing into it and losing all your trading funds, like so many new traders do. Why lose a lot money when you don’t have to?
If you’re not making money with Forex on the demo accounts, then nothing will be different when you go live. Always be completely honest with yourself and your trading abilities. If you do this, you will find trading a lot more enjoyable, and maybe you will begin to rake in regular income from trading with forex.