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What is the biggest financial market in the world, where more than $4 trillion worth of transactions take place every single day, and yet gets very little press? If you guessed: the foreign exchange market, or forex, then you’re right!
What is the Forex Market?
Forex trading involves significant risk of loss and is not suitable for all investors.
Contrary to what you might think, the forex is not a centralized currency exchange. The forex is the sprawling global network of banks, investment firms, financial organizations, brokers, and investors who buy, sell, and trade currency. It includes money exchanges that enable the purchase of goods across international borders, hedge funds that holds billions worth of foreign currencies, and individual speculators with the nerves and knowledge to play in the global currency marketplace.
Due to the global nature of international currency trading, the forex market is open 24 hours a day during the business week. While forex trading used to be limited to large corporations and governments, the rise of internet-based trading platforms means anyone with a computer, an internet connection, and funds to invest, can participate in the forex market today.
Getting Started with Forex
If you want to join the financial speculators who make money online trading in forex, you should plan your entry carefully. While it sounds exciting, and like an easy way to earn income, the truth is that it’s much easier to lose money than to make it if you don’t know what you’re doing.
More than $4 trillion worth of forex transactions take place every single day.
The first step to making money with forex, and the surest way to avoid losing more than you earn, is to educate yourself. Before you think about moving on to the next step you should understand why low spreads save you money, what a pip is, which regulating agencies monitor the forex market, why sniping and hunting are to be avoided, and whether or not it’s best to pick a broker with strict margin rules.
There are a number of different places you could go to learn about forex, and we recommend you consider the following websites where you’ll find high-quality free information about forex trading.
- Investopedia: Getting Started In Forex and Forex Walkthrough
- Forex.com: Introduction to the Forex Market
- DailyFX: Learn Forex Trading
Find the Right Broker
In order to trade in the forex market, you’ll have to go through a broker. However, picking a broker is easier said than done. In order to pick an honest broker, who will give you the best chance at succeeding, follow these steps recommended by Investopedia:
- Look for brokers who offer a low spread. Brokers offer to buy currency at a lower rate than the one at which they sell the same currency. The difference between the buy and sell rate, called the spread, and calculated in pips, is how brokers make money. Spreads vary widely from one broker to the next.
- Brokers are tied to large banks and other financial institutions. Look for brokers who are backed by trustworthy financial institutions. Research the backing institution to make sure they’re registered with the Futures Commission Merchant, and regulated by the Commodity Futures Trading Commission.
- Not all platforms are created equal. Every broker provides a trading platform that includes a variety of charts, news feeds, and other tools to help you make investment decisions. Research and test drive the platform offered by any broker you’re considering before opening an account.
- Research the broker’s reputation. When you invest in forex, your broker is sharing in the risk you take on. This means that your broker can force you to sell, and count your losses, at a time when you’re planning to ride out a rough patch in hopes of a currency rebound. Make sure your broker has a reputation of minimal intervention.
Define Your Strategy
Research different investment strategies, pick one to master, and commit to mastering it. An investment strategy is based on a specific analysis methodology. There are two different types of analysis you could consider:
- Fundamental analysis is used by forex traders who plan to hold currencies on a long-term basis. It tries to predict the long-term trajectory of economies and currencies by looking at things like the purchase trends for durable goods, payroll trends, the consumer price index, retail sales, and much more.
- Technical analysis looks for trading and pricing trends that predict how currencies are going to behave in the future. If a specific trend has repeated itself several times over, traders will use that information to surmise that the trend may repeat itself. This types of analysis is typically used by traders who plan to buy and sell currencies quickly and repeatedly as they react to sometimes miniscule moves within the forex market.
In order to pick a strategy, you should research several, and make an educated decision based on the amount of risk you can tolerate, how much time you can invest in managing your trades, and whether you’re aiming for short or long-term gains.
Practice Makes Perfect
If you want to try on different strategies, as well as test-drive the trading platforms offered by different brokers, you should request a demo trading account. Most brokers offer demonstration accounts, loaded up with between $50,000 and $100,000 of imaginary funds, which you can use as you see fit. A demo account is a great way to try on a strategy you’re considering, while you also determine if the platform is the best for your trading methodology and preferences.
Trading in forex is definitely not for everyone. You need to have funds available to invest, the willingness to lose money at times, the discipline to stick to a strategy even if things don’t go exactly like you plan, and the nerves to watch your account balance rise and fall in dramatic fashion. However, if you invest the time, and master an investment strategy, the forex market is a place where you’ll always be able to make money online.