A Beginner's Guide To The World Of Forex Trading
By David Shephard
You will undoubtedly have heard of the foreign exchange, or Forex, market and will also probably be well aware of the buzz that currently surrounds it. You may also have heard of the many advantages that it offers over other forms of trading, such as trading on the stock market, and have thought about trying it out for yourself. But just where do you start?
Well, in this short introduction, we'll cover the basics of trading and give you an idea of just what you need to join this exciting and fast growing world.
Until about twenty years ago the foreign exchange was the preserve of large players such as national banks and multi-national corporations. However, during the 1980s, new rules were introduced to permit smaller investors into the market and their entry was facilitated with the introduction of margin accounts. Without going into too much detail here, a margin account means that it is possible to trade with more money than you have in your trading account. For example, a 200:1 margin account would allow you to participate in trading a block of $200,000 with an investment of just $1,000. In other words, it is no longer necessary to have the huge sums of capital available to the major financial institutions in order to trade in the market.
Now, although the entry level has been lowered, this does not mean that trading is easy. The world of trading is complex and, like any other market, it is not without its risks. The first tool in your armory therefore is education. Before you embark on any form of trading you will need to sit down and study the foreign exchange markets carefully. Arming yourself with knowledge about the market and how it works is the only way to ensure that you are making wise investment decisions right from the outset.
Forex traders normally require a broker to handle transactions for them and, as a beginner, you would be well advised to start by finding yourself a good broker. The majority of brokers are reputable and work alongside large financial institutions, such as banks. A reputable broker will be registered with the Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant (FCM) which is important as this provides you with protection against abusive trade practices and fraud.
Opening an account with a broker is normally a simple process of filling out a form and
producing a suitable form of identification and, once this has been done and you have added funds to your account, you can begin trading. Your agreement with the broker will specify the margin on which you are allowed to trade through him and will also normally give the broker the authority to prevent a trade on your account where the broker feels that the trade carries too high a risk. This is simply to protect the broker as, on a margin trading account, you are essentially trading with his money and not your own.
Brokers will usually offer a variety of different accounts to suit individual investors and many will have "mini" accounts which allow you to start trading with as little as $250. Standard accounts will require an initial deposit of between $1,000 and $2,500 depending on the broker. The margin, or leverage, allowed will also vary between accounts.
Most brokers will also have facilities for those people coming into the market for the first time to learn the ropes by carrying out simulated, or paper, trades for a period of time. In this case trading is conducted in the normal manner but no money is involved and each trade simply takes place on paper. This gives the newcomer an excellent opportunity to see trading in action without the associated risks while gaining an understanding of the market.
Many of the online brokers, though whom an increasing amount of trading is being done, have simulated accounts which allow you to make free paper trades for up to 30 days and every newcomer would be well advised to take full advantage of this facility.
Brokers will also have their own set of software tools to assist in making transactions and you should take your time to familiarize yourself with these before launching headlong into trading. In addition, there are several tools that are common to all brokers such as real time quotes, news feeds, technical analyses and charts, and profit and loss analyses and you will also need to acquire a good basic understanding of how each of these can be used.
One final point to remember is that trading in the market is free of commission and so, unlike many other markets, you can make several trades in the course of a single day without worrying about running up huge brokerage fees. The brokers will make his money from the difference between the buying and selling price on each transaction.
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