How to Trade Forex
Last Update: June 15th, 2020
More than 5 trillion dollars are traded on the foreign exchange market every day! This makes foreign exchange trading, also known as Forex trading, one of the best places to invest and a great place to make money. Large initial investments are not always necessary in order to succeed in Forex trading and nothing compares to the excitement of making a right call and earning a bulk of money on the market. This article will discuss how to trade Forex online. There are three main components that you must go over in order to learn how to trade Forex:
1. Learn the Basics of Forex Trading
The basis of Forex online trading is selling one type of currency in exchange for another currency. The currency that you are selling is called the ‘Base Currency’ and the currency you are buying is called the ‘Quote Currency’. The amount of quote currency that you will get for the sell depends on the constantly changing exchange rate, and learning to understand the movement of this exchange rate is the key to learning how to trade Forex. Another important term is a ‘Long Position’. A ‘Long Position’ simply means that you are buying the base currency and selling the quote currency. On the contrary, a ‘Short Position’ means that you are selling the base currency and buying the quote currency. So how do we decide which currency pair to trade? An endless amount of factors influence the movement of the price of every currency pair. In order to learn how to trade Forex we must understand a least a few of these factors and how they might affect the price. One of these factors is the state of the country’s economy. When an economy weakens, the value of its currency also weakens in respect to other currencies on the market. Political events may also influence the price change. An upcoming election may increase or decrease the faith of people in the economic future of a certain country therefore influencing the strength of that currency. Follow recent economic reports to get a glimpse into a certain currency pair and make a smart decision based on facts.
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The final part of the basics is learning how to calculate our earnings and losses. Changes in price are measures using pips. One pip is one ten-thousands of a unit. For example, if the original price was 5.6930 and the price dropped by 10 pips then the new price will be 5.6920. In order to convert the pip change to an actual profit or loss, multiply the pip change by the current exchange rate and you get the increase or decrease in your account’s value. Read more about Forex trading basics
2. Open an Online Account
To trade Forex online you must have an active online account. Many brokerages offer online accounts and joining the right one is very important. Look into several alternatives before making a decision while taking into consideration these key factors:
- Experience – In trading Forex online, experience is very important and choosing a company without the proper experience is a big risk. Consider companies with an operating experience of 5 years or more to be safe.
- Regulation – Most countries provide government supervision and the best brokerages abide to this supervision willingly. Check who oversees the company’s work and make sure that it is an honest and serious body. Some well known supervision bodies are:
France: Autorité des Marchés Financiers (AMF)Switzerland: Swiss Federal Banking Commission (SFBC)Germany: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFIN)United Kingdom: Financial Services Authority (FSA)Australia: Australian Securities and Investment Commission (ASIC)United States: National Futures Association (NFA)
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- Reviews – A great way to learn what others think about a certain brokerage is to read its reviews. Some companies publish fake reviews for themselves so keep that in mind and try to distinguish between genuine and fake reviews.
- Website – Compare the websites between different brokerages. A professional brokerage will have an active website with no dead end links and will provide a professional look and feel.
Once you have chosen a brokerage which meets your needs, start filling in the paperwork. You can choose between a personal account and a managed account which is an account that is managed by your Forex broker automatically. Check the fees before closing a deal as the fees of transferring money from your bank can be quite high and other fees can cut into your profits. The final step is to activate your account via a link that your broker will send you by e-mail. Upon completing this step you are ready to start trading Forex online.
3. Trade Forex Online
It’s time to start analyzing the market in preparation for making a first trade. There are three types of analysis that help us make a decision:
- Fundamental analysis is an analysis of the current events and economic developments that may affects the price of a certain currency pair. Learning about current events and about a certain country’s economical status is the key to this type of analysis.
- Technical analysis is an analysis type which requires a good understanding of charts and graphs. The proper charts can usually be received from your broker or via certain Forex trading platforms. Using these charts, we analyze the previous price movements and use them to predict the future price movements.
- Sentimental analysis is a more intuitive type of analysis. It involves guessing, based on intuition what the price will do. Over time, experienced traders acquire the intuition to know which trades are likely to be profitable and which are not.
The amount of money that you can invest in each trade depends on your broker’s protocols but remember, if you invest smart you can invest a small amount of money and still earn big. The general practice is not to invest more than 2 percent of your account on a single trade. Your Forex broker will also allow you to limit a certain trade to a certain price. Market orders are orders that are to be carried out immediately, at the current price. Limit orders are orders that instruct your broker to enter a trade only if the price reaches a certain level which you have chosen. Stop orders instruct your broker when to close a position. When the price reaches your stop order price the trade will automatically close. Remember, trading Forex online is not an exact science and a few ups and downs are to be expected. Make sure to complete a professional analysis of the market, make up a strategy in advanced and stick to it no matter what. If you follow these key instructions you will eventually start to see that your profits outweigh your losses more and more as time goes by. Further Reading:
- Why trade Forex
- Forex trading strategies
- Learn how to trade Forex like a professional using our Forex trading course
About the author
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.
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