But first, before anything else, you need to understand that the making money in the Forex market is NOT as easy as many sites/brokerages want you to think. Foreign Exchange trading involves many considerable risks that other types of trading do not. I'm going to list a few key things to keep in mind when beginning to trade Forex.
- Forex Scam
- Although Forex Scams have all but completely cleared up in recent years, it is still important to do some research before choosing a broker. Check that they are registered with the appropriate government agencies. If you are trading through a US broker, they should be registered with the Commodities Futures Trading Commission (CFTC) or be a member of the National Futures Association (NFA).
- Basic Exchange Rate Risk
- When trading Forex, it is important to remember that you are literally trading one currency for another. Think of it this way: if you traded your entire USA $ life savings for an equivalent amount in the Yen and the next day, the Chinese stock market crumbles having a drastic depreciating effect on the Yen. You're beat. Now obviously this example was exaggerated but you get the idea. Mid trade a country may cut/raise a key interest rate and have a horrifying effect on your account. Also, this effect is multiplied as you will read next.
- When trading Forex, it is important to remember that you are literally trading one currency for another. Think of it this way: if you traded your entire USA $ life savings for an equivalent amount in the Yen and the next day, the Chinese stock market crumbles having a drastic depreciating effect on the Yen. You're beat. Now obviously this example was exaggerated but you get the idea. Mid trade a country may cut/raise a key interest rate and have a horrifying effect on your account. Also, this effect is multiplied as you will read next.
- Leverage
- Leverage is the double edged sword that lures people into the Forex market. Leverage is the ability to manipulate a whole lot of money, with just a little money. Mini and Micro accounts will sometimes offer up to 400:1 leverage. This means that with $100 you can trade $40,000 worth of currency. A little scary right? Brokerages use leverage because, unless you are trading very large amounts of currency, the fluctuations in the Forex market are negligible. Remember, in Forex, currency pairs fluctuate by Pips (usually 1/100 of a cent). Leverage multiplies both your Profits and your Losses, so be cautious!
- Leverage is the double edged sword that lures people into the Forex market. Leverage is the ability to manipulate a whole lot of money, with just a little money. Mini and Micro accounts will sometimes offer up to 400:1 leverage. This means that with $100 you can trade $40,000 worth of currency. A little scary right? Brokerages use leverage because, unless you are trading very large amounts of currency, the fluctuations in the Forex market are negligible. Remember, in Forex, currency pairs fluctuate by Pips (usually 1/100 of a cent). Leverage multiplies both your Profits and your Losses, so be cautious!
- Foreign Interest Rates
- Another thing to keep in mind is foreign interest rates. Sometimes, when a trade is not closed during normal market hours, the currency you sold may increase in value slightly due to that country's interest rate. This will have a negative effect on your profits. This risk, however, is easy to avoid by closing all trades during the respective markets open hours. Note: Interest Rates can also have positive effects on your trade as well.
- Another thing to keep in mind is foreign interest rates. Sometimes, when a trade is not closed during normal market hours, the currency you sold may increase in value slightly due to that country's interest rate. This will have a negative effect on your profits. This risk, however, is easy to avoid by closing all trades during the respective markets open hours. Note: Interest Rates can also have positive effects on your trade as well.
- Stop-Loss Orders
- Stop-Loss orders are a very important way to limit your losses when trading Forex. A Stop-Loss order is one that will close an open trade on a currency pair at a specified magnitude of loss. These types of orders are used in conjunction with Limit orders that will close a trade at a specified level of profit. Both are used very frequently in trading systems. Stop Losses are important in avoiding the dreaded Margin Call.
- Margin Call
- A Margin call occurs when an open trade moves so far against you that a broker must close the position out because you have exceeded the balance of your account in the loss. In other words, your trade sucked so bad that it wiped out your entire account balance. This is every traders worst nightmare, but easy to avoid by monitoring personally or by using a stop loss.
- A Margin call occurs when an open trade moves so far against you that a broker must close the position out because you have exceeded the balance of your account in the loss. In other words, your trade sucked so bad that it wiped out your entire account balance. This is every traders worst nightmare, but easy to avoid by monitoring personally or by using a stop loss.
- Spread
- During a normal day of trading, a currency pairs Spread may vary from 1-2 pips all the way to 10 pips, depending on the pair. Just keep in mind that it is much harder to profit from a trade when spreads are excessively high.
Now that we've gotten that out of the way, let me just give you a few reasons TO trade Forex.
- The Forex Market is the most liquid in the world.
- Execution rates are very high because of this liquidity
- No Middle Men.
- Leverage is extremely powerful when used correctly.
- No Commissions, just the Spread. Overcome the spread, and the rest is all your own profit.
- 24 hour market. Trade 6 days a week, all day.
- Mini and Micro trading accounts are great for beginners.
- Charts, analysis, and software are abundantly plentiful, making analysis easy and fun.
BabyPips
ForexTips
Forex Robot
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