There are lots of resources online such as the Elliott Wave theory that’ll explain how to start out with using their particular Forex brokerage or tools – but not as many impartial guides that’ll give you an overview of the steps you need to take.
If Forex trading looks like something worth exploring, follow these steps to get up and running…
- Get clued up on the terminology
Before you make any trades you need to know the language of the marketplace. Take some time to read some guides on Forex and you’ll see terms used in context. Here are a few of the most important ones to get you moving:
- Base: The base currency is the one you’re holding or selling.
- Quote: The quote currency is the currency you’re purchasing.
- Pair: A pair represents the two currencies you’re dealing with in a trade.
- Exchange rate: This is the rate at which the base can be exchanged for the quote.
- Long: This is a trading position, in which you intend to buy the base and sell the quote.
- Short: This is a trading position, in which you’re buying the quote in exchange for the base.
- Spread: The rate at which a broker buys and sells currency is referred to as a ‘bid’ and ‘ask’ price respectively – between those two prices is the ‘spread’.
- Point/Pip: This is 0.0001 of the change in value between two currencies.
It’s worth becoming familiar with the different currency acronyms too – as well as the terms that relate to different buying strategies.
- Check out some quotes
Having a look at some Forex quotes will give you a good idea of how the previously mentioned terms fall into place.
Generally, you’ll see bid and ask price that relates to the broker you’re using, the opening price for that currency – as well as the highest and lowest values the pair has achieved that day. Things get really interesting when you see the red or green columns – indicating whether the base currency in the pair is up or down in value against the quote.
- Think about currency pairs
Most Forex brokerages deal with the main 4 main currencies pairs, they are:
- EUR/USD – The Euro and the US Dollar
- USD/JPY – The US Dollar and the Japanese Yen
- GBP/USD – The British Pound and the US Dollar
- USD/CHF – The US Dollar and the Swiss franc
That said, there are combinations possible that extend to more broadly than these 8 currencies – so there are a few things to think about before you decide which to choose. You might want to consider:
- The countries current financial situation, including employment and inflation
- The countries political position – stability in politics normally means currency stability, but elections can stir things up
- The country’s current trading position
- Find a suitable Brokerage account
Searching for brokerage accounts is generally going to return reputable companies on the first few pages of Google – and assuming you do a little homework into them before you sign up (to make sure you’re happy with the way they operate) then you won’t go far wrong.
That said, not all brokerages are regulated or even legitimate – be careful to do some reading up before you commit to giving your detail and money to anyone who’s been recommended as part of a chat, forum or social media conversation. Chances are you’ll be fine – but it’s better to check.
It’s also important to check that the company you’re going to be using complies with your local financial regulation – for example, the Financial Conduct Authority (FCA) regulates companies offering financial services in the UK. Check your local laws and regulations if you’re not sure.
- Decide which type of account you want
Generally, brokers will offer two types of account. A personal account lets you execute trades yourself – whereas a managed account will see trades made on your behalf by a broker working for the company.
If you’re here, the chances are you’re looking to do the trading yourself, but watching what a broker does with your money can give you a good indication of how someone more experienced approaches the market.
- Fill out an application
Signing up for a broker account normally involves submitting some paperwork to confirm who you are – such as a driving license, utility bill, passport – and so forth.
Don’t panic, this is normal and just the broker’s way of staying compliant with their local money laundering due diligence laws.
- Think about how you plan to approach the market
There is no one perfect way to trade in a Forex marketplace – people have made fortunes and lost fortunes following virtually every strategy conceivable. There are however 3 overarching approaches that more niche trends tend to fall under, they are:
- Technical analysis: The studying of historic data relating to the currency and the conditions that surrounded the fluctuations in price at that time.
- Fundamental analysis: This is the study of fundamental data relating to the country’s economical position and using this data to inform your trades.
- Sentimental analysis: The ‘sentiment’ of the market relates to how traders are reacting to the current currency fluctuations. Analysis of this information can give an indication of the currency’s immediate future performance.
- Think about margin
Now, understanding margin could take up books as a subject by itself, however, it’s important that you think about it now as it can have a huge impact on your trading.
Often, a broker will allow you to trade greater amounts of currency than your capital allows. For example, at 1:50 rate, with £1,000 of capital you’d be able to trade £50,000 worth of currency. This means your capital can go a lot further, but you’re multiplying your risk – as well as potential rewards.
- Make some orders
When you feel ready, you’ll be able to make some orders through your broker account. Generally, someone who’s stepped into Forex to ‘trade’ will look to place a ‘market order’ – which is a direct purchase of a currency through your broker.
It’s not the only option though, you could place a limit order that your broker will make on your behalf – which sees an order placed when a currency hits a certain high or low – or a stop order, which is an instruction for a broker to buy or sell your currency above or below the current market price in the anticipation that the price will move in this direction.
- Monitor the red and green
When you’re the proud owner of some currency, it’s time to watch the market! You’ll now be looking at a screen that like the quote sheet in step 2 – but now those green and red numbers actually impact your position. Hold tight, this is where big money is made and lost in the blink of an eye…