What is currency trading?
Currency trading (forex) may not be for the faint-hearted but the industry is booming with a constant flow of newcomers venturing in to the market everyday. Forex trading is simply about speculating on the worth of one currency versus another and about taking calculated financial risks attempting to realise a profitable return, usually over a very short time frame. The Forex market is the largest financial market in the world - at least in terms of the amount of daily trading volumes and is distinct in many respects; The numbers are absolutely enormous, which means that liquidity is always there. What also makes it stand apart is that the market operates around the clock for six days of the week, giving you as the trader the right of entry to the market any time you decide you need it. Major currency pairs traded in the Forex markets are the US Dollar, the Euro, Japanese Yen, British Sterling and Swiss Franc.
Getting started with a practice account
For the novice to currency trading, the easiest way to get a handle on what currency trading is all about is to open a practice account at any of the online forex brokers. Most online forex brokers offer practice accounts to allow you to experience the real-life price skirmish of the forex market. Practice accounts are furnished with 'virtual' cash, so you have the ability to make trades with no real money at stake. Thus allowing you to gain experience in how margin trading works. Practice accounts also give you a good opportunity to go through the moment-by-moment price movements of the market. You'll be able to see how prices change at various times of the day, as well as how different currency pairs may vary from each other. It's also very interesting to see what happens to the prices when key news and economic information is released. In addition to observing how the forex market actually moves, you can also;
- Start trading in real market conditions without any fear or risk of losing your own money
- Experiment with different methods and separate trading strategies to see how they work
- Improve your understanding of what margin trading and leverage work and what they are all about
- Start analysisng charts and following technical indicators.
It's probably a good idea dea to open practice accounts with a few different forex brokers, because each trading platform has differing competences and functionalities. In addition, the online trading brokers have different trading policies and charting packages.
How it works online
Almost every online trading broker provides a simple 'click-to-deal' way of trading. This means that if you want to be trading on the current market price then you should by clicking either the Buy button or the Sell button within the trading platform. But before you do that - here's a few tips;
- Make sure that you have selected the right currency pair: this may sound daft but it's so important that you have selected the currency pair that you actually want to trade in. When the market gets really busy, and you're switching between your charts and the trading platform it's so very easy for you to mistake EUR/USD for EUR/CHF unless you are super-careful. This same mistake also can happen when different currency pairs are trading at very similar price levels.
- Make sure that you select the right trade amount: Do ensure that you have stated the accurate amount you want to trade.
- Always ensure that you double-check your selections: Remember this is your money; be certain now or pay the price later.
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Do check that you are selecting the right button/option 'Buy' or 'Sell':
Be sure you know which side of the price you want to deal on. If you want to buy, you'll need to click the higher price - the trading platforms offer. If you want to sell, you'll have to click the lower price - the platform's bid. Most platforms have labelled the sides of the prices from the users perspective, so the bid side will be labelled 'Sell' and the offer side will be labelled 'buy'.
Another important point is to ensure that your broker is registered with the appropriate financial authority in the jurisdication where it operates.
Choosing your trading broker
The majority of online forex brokers act as the market-maker for your trading, in a nutshell this means the broker is on the other side of any trade you do - when you buy you are buying from the broker; when you sell, you're selling to the broker. Brokerage firms that are market-makers typically provide both consistent liquidity, this allows you to trade your required amount all the time. Market-makers generally offer either fixed spreads or variable spreads. Whether you decide to choose fixed spreads or variable spreads will largely depend on your type of trading style. If you're a short term trader just looking to make a few pips on each trade that you make, then you will be much better off with variable spreads, which are the tightest in liquid markets. If you trade around the news, fixed spreads will allow you to avoid the inevitable wideniing of spreads that can typically happen around important economic announcements.
- Fixed spreads: These remain at a constant all the time, completely regardless of whatever might be happening in the market. As the broker has to assume the additional market risk of quoting a fixed spread all throughout the day (including the thinly traded and/or the volatile markets), fixed spreads typically tend to be fractionally wider than that of variable spreads.
- Variable spreads: These will fluctuate depending on the market interest. In times of highly liquid periods - such as the overlap between the London and New York sessions - variable spreads will be at their tightest (as low as 2 to 3 pips is GBP/USD and the other heavily traded pairs). In slower periods (such as 19:00hrs eastern time, when New York is closed and Tokyo is not yet fully online), spreads tend to be more wider.
Remember: Before considering joinng the Forex Market, you really must carefully consider your investment objectives, level of experience, and risk appetite. Most important - don't invest money that you can't afford to lose.
To compare forex trading providers on Know Your Money click here.
Author: KYM Editor
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