Forex is one of the most volatile types of investment markets and one of the most exhilarating experiences in the world. Forex is simply trading currencies-buying and selling, betting for and against the various currencies of nations. With excellent liquidity and large margins, it is one of the very effective ways to make money in a market, and the quickest way to throw the money away.
Step 1: Understand How Currencies are Trades
There are three critical terms to learn:
- Exchange rate or quote
For starters let’s look at a Forex quote: EUR/USD 1.3330 BUY / 1.3320 SELL
1. Exchange Rate or Quote or Pairs
EUR/USD means “Dollars for Euro;” EUR/GBP, besides, equals “Pounds for Euro.” The rate is what you can buy or sell the pair for 1.3330 BUY means you can buy 1.3330 dollars for each euro, and 1.3320 SELL means you can sell 1.3320 dollars for each euro.
The second major term is “pip.“ This word describes the basic unit of profit in forex, so it’s crucial to understand it. Pip is the smallest increment of a pair. For the EUR/USD or any another pair, it is 1/10,000th. The yen is an exception, where the pip is 1/100th.
You might have noticed that the BUY/SELL rate are not same. That is called the “spread.“ All forex markets of any liquidity have a spread of some sort, and often a broker will open them slightly to make a profit. It is equivalent to a stockbroker charging per-trade. So to be profitable, you will need to recover the spread.
Step 2: Practice
The second key to Forex trading is practice. Most of the forex brokers offer a $50,000 practice account. Set one up, and mess around watch your money evaporate. After you have played around for a couple of days, open another practice account, but this time develops or uses a particular trading strategy. Pick a method and stick to it. You may or may not make money that time, but you will start to have a fuller understanding the inner workings of the market. After the few weeks, try another strategy and get good at two or maybe three.
Step 3: Start Small
The third key is to start small. It is where most beginning traders lose the most money. After you have practiced for several months, take the strategy you know best and some money you can afford to lose. It is certainly best to choose a broker based on a corresponding list or based on positive reviews. Open a micro account, start small, use a disciplined method, and begin trading. Know your psychology and resist the temptation to be driven by greed or fear.