What Is Forex Trading? A Guide For Beginners

by Guest on January 25, 2012

Wine, gold, real estate and collectibles are popular alternative investments to cash and stocks. Trading currencies, or forex, however, is an investment gaining popularity among investors looking for alternatives to the volatile stock market. Here, we will look at how to start trading forex.

Warning: You should always seek professional advice before commencing with forex trading as it is a highly leveraged financial product which comes with risks. Never invest more than you can afford to lose. If in doubt, do NOT trade.

Understanding Foreign Exchange

Forex trading involves trading currencies. Every country in the world uses a currency and needs to change that money into other currencies to trade with other countries. Currencies have been around for thousands of years – the ancient Greeks, Romans and Phoenicians helped pioneer some of the earliest coin-based currencies. In some countries today, you can even trade in cowrie shells and cattle.

Currencies from all the over world are bought and sold at Forex markets. Each currency is represented by 3 letters. Some of the major currencies include Dollar (USD) – United States, Euro (EUR) – European Union Members, Yen (JPY) – Japan, Pound (GBP) – Great Britain, Franc (CHF) – Switzerland, Dollar (CAD) – Canada and Dollar (AUD) – Australia. Exchange rates between two currencies are represented as a ratio e.g USD/GBP 2.14. This means that to buy 2.14 US dollars you will need one British pound.

You might have traded currency on holiday or through an online purchase. Forex trading, however, isn’t to buy currency because you need it but to make a profit. There are risks, and you could lose your entire investment if the market falls. You need to do research beforehand to reduce these risks.

Benefits of Forex Trading

London is the world’s largest FX market, followed by New York, Frankfurt and Tokyo. The trillion-dollar FX markets can even make or break countries. Forex trading does have benefits, though, over more traditional investments:

* The global FX markets are open 24 hours a day, letting you trade when you want.

* You can profit from both rising and falling markets.

* High liquidity. You are trading in cash, so there is no problem withdrawing your profits or making a trade.

* No commission.

* You can buy on margin. Brokers will let you buy more than you have in your account.

* Low transaction costs. These are included in every trade.

Cons of Forex Trading

Although forex trading has some great benefits, it is important to understand there are some cons to forex trading.

* You can quickly lose money. Currencies can fluctuate rapidly and wipe out any profits in the blink of an eye. If you are trading on margin, you may end up owing money, too.

* Scams: there are lots of scams targeting newbie forex traders. From so-called ‘unbeatable’ systems which aren’t worth the paper they are written on, to unlicensed brokers that will take your money and run. It is essential you find a qualified broker beforehand and know what you are getting into.

Getting Started

To begin forex trading, start by finding a reputable broker. Choose one who is registered with the Commodity Futures Trading Commission (CFTC) and National Futures Association – two agencies designed to combat fraud in the futures’ markets.

Fill out the broker’s application forms and provide any ID needed. You can get started with as little as $250 but some brokers may stipulate opening an account with a few thousand. Check first.

Many online brokers let new users paper trade first. This is a good way to understand forex without risking any money. Often, they will give tools to make electronic trades so you can learn how everything works before dipping your toes in the market. They might also have their own software tools to help you get started.

Remember that forex trading is free from commission, so you can make as many or as few trades as you want. Brokers make money on the difference between buying and selling on each transaction. Have fun and enjoy this exciting way of investing.


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