Forex or foreign exchange has created new aspects of financial independence for various people. It is a global decentralized platform for the trade of currencies. Buying, selling, and/or exchange, all aspects of currency trading at current or fixed prices take place. Online brokers have led to a significant rise in retail forex trading. Forex trading has revolutionized over the decade, making itself accessible to every common man. You can venture into this world with an internet-enabled device and a small deposit as a margin.
Forex trading isn’t complicated like day trading or traditional trading. It doesn’t require a huge investment in the form of equity. One can quickly learn the basics if they are familiar with computer operations. While the prospect of losing money persists in every trading, it is relatively lower in forex trading. However, one would want to turn their efforts and time into profits. If you are wondering how to get into forex trading, here is your guide.
How To Get Started With Forex?
Recently we wrote the article How to Become a Forex Trader and we pointed to very important step – self-education, reading college books related to technical and fundamental analysis.
The first question that crosses the mind of every inexperienced trader is how to get started with forex? Here is the break-up of everything that you need to begin your forex trading journey:
- Get an Internet-Enabled Device
One of the reasons why forex trading gained popularity in the last decade is its easy accessibility. If you have a device that could be connected with the internet, you are all set to start via an online broker. You can select any device. You can do it with your phone, tablet, laptop, or desktop. While most of the trading applications are readily available on Android and Windows, some can be found on Mac and iOS as well.
- Find a Reliable Online Forex Broker
You will find plenty of good forex brokers. Most of the online brokers have the same commission and margin system, it is always advisable to compare before you finalize.
If a trader wants to learn how to find a broker, he will need to analyze 17 practical steps.
- Create an Account
The next thing that you need to do is to open an account. This isn’t a complicated task and you should be able to do it independently. Once you have decided on your broker, you can simply visit the forex.com website and open an account. You will be asked to confirm that you have a legal identity and will not be getting involved in money laundering.
- Deposit Funds
Like on other trading platforms, you need to deposit some into your account as well for safety reasons. Your broker will use these funds as a margin and for creating leverage. The ratio of leverage will depend on your and your broker’s location. Your broker will most likely offer several funding methods to you. You can select the one that is the most convenient for you. If in the future, you need to withdraw your money, you will have to do so via the same method. Therefore, select the method that you are sure about.
- Select a Forex Trading Platform
There is a plethora of forex trading platforms that can be downloaded with a click. These platforms make forex trading convenient. Some of the popular platforms are Meta Trader 4, and a few platforms from MetaQuotes. You can download these for free at a developer’s website and install these in your device. Your broker might also suggest a particular platform to you. Whatever you chose, rest assured that selecting and downloading a forex trading platform is not rocket science. You can easily do it.
- Make Your First Trade
Now that you have set-up everything, the next question is, how to get started in the forex market? You need to give yourself some time to learn how to use the trading application. Familiarize yourself with it. Learn how to enter and exit the platform without leaving loose ends. Make a demo account if you are not sure to avoid making costly mistakes. When you feel confident, you can get started and make your first trade in the forex market.
Deciding between Long and Short Positions
By entering into the forex trading market, you enter into a position that is like a non-binding contract. The position can be long term or short term. Based on the number of transactions, you can add to the position. You also have the option of reducing the position by closing your existing trades.
Since your position is based on the exchange rate of the currencies, you need to understand them. Every currency pair is made with a base currency and a counter currency. Traditionally, these pairs are noted by their three-letter ISO 4217 codes with a slash in-between. For example, if we are considering Britain’s pound (GBP) as the base currency against the U.S. dollar (USD), it will be written as GBP/USD. Now that you have understood how base currency and counter currency work, you can decide between the following options:
Long Position: your position will be long term if you buy the base currency and sell the counter currency. For example, if your currency pair is GBP/USD and you are buying GBP and selling USD, you have taken a long GBP position.
Short Position: it is exactly the opposite of a long position. If you are selling the counter currency while selling the base currency, yours will be a short position.
The Risks and the Rewards
It is a fact that anyone who enters any sort of trading market is looking to make profits. It is the same with trading forex. You make profits once you take a position. When your position losses value, you make a loss. However, these gains and losses are only realized when you decide to close the position. As long as the position remains open, everything is unrealized.
All the inevitable risks and rewards involved in forex trading by taking a position are based on the concept of leverage. Here, leverage is noted in the base currency that you have chosen. It is expressed as a ratio of the position size that you can control against 1 unit on your deposit. For example, in a 500:1 leverage ratio in the currency pair USD/JPY, you can control $500 position using just $1 placed on deposit margin.
Before you enter the forex trading market, you must think about your minimum risk/reward ratio. For example, if you are willing to risk 10 pips on a trade where you are expecting to gain 20 pips, your risk/reward ratio would be 10/20 or 1:2. Risking anything for less than this ratio is not preferable.
One doesn’t need to be an expert in stock and trading to become a part of the forex market. But one thing that differentiates a successful trader from a beginner is the process of learning. While anyone can set up a forex trading account, not everyone can develop the right strategy, discipline, and the mindset to be a part of this world for a long time. You need to be quick and accurate. There is a lot of unavoidable clerical work.
All these qualities are requisites of becoming a successful trader. You need to be transparent to yourself about your mistakes. Start slow and work upwards. This market is for resilient traders. Any rash decision can put you in deep waters. Analyze your mistakes, if and when you make them. Your learning curve will decide whether or not you are suitable for forex trading.