, if done the right way, can be a major source of investment income. The forex market trades an average of $5 trillion daily compared to the $22.4 billion traded in the securities market daily. This means that you can make a fortune without investing a lot of money at the beginning. Here are 10 steps to get you started in forex trading right away:
1. Understand the basic forex terminology
- The currency you are buying is called the quote currency, while the one you are selling is the base currency.
- The exchange rate is the amount of quote currency you need to buy base currency.
- A long position is when you want to purchase the base currency and get rid of quote currency e.g. selling U.S. dollars to buy British pounds. In contrast, a short position is when you want to purchase quote currency and get rid of base currency e.g. selling British pounds to buy U.S. dollars.
- The bid price represents that price at which your broker will buy the base currency in exchange for the quote currency. On the other hand, the ask price represents that price at which your forex broker is willing to sell the base currency in exchange for the quote currency.
- The difference between the ask price and the bid price is called the spread.
2. Read a forex quote
The forex quote
has two numbers: on the right there is the ask price, and on the left the bid price.
3. Decide which currency to buy and which to sell
- Predict the economy - if you think the U.S. economy will weaken, then you should sell dollars and buy a currency of a country with a strong economy.
- Consider the trading position of the country - if the country's goods are in demand internationally, then it is likely to export more therefore boosting its currency's value.
- Look at the politics - currency appreciates if the winner of an election has a strong fiscal agenda.
- Read economic reports and how they will affect the value of the currency.
4. Learn how profit is calculated
The increase/decrease in value between two currencies is measured by a pip
. Normally, one pip is equal to 0.0001 of a change in value. By multiplying the exchange rate with the number of pips your account has changed, you will get the increase/decrease in value of your account.
5. Open an online forex brokerage account
- Do research on different brokerages - go for a broker who submits to government oversight, someone with experience, who offers several products, and who has a professional website and great reviews. Also, study the transaction costs of trading with each brokerage.
- Request information on account opening - you can either open a personal account; where you perform your own trades, or a managed account; where your broker performs transactions for you.
- Fill out the required paperwork.
6. Activate your account
Usually, your broker will send an email with a link requiring you to click the link and follow some simple instructions to get started.
7. Analyze the market - this can be done in different methods:
- Technical analysis - entails reviewing historical data or chats to predict how the currency is expected to move in future, based on past events.
- Fundamental analysis - entails looking at the economic fundamentals of a country and making trading decisions based on them.
- Sentiment analysis - is a subjective analysis where you try to make a good guess of the mood in the market.
8. Determine your margin
This is determined depending on the policies of your broker. For instance, your broker will need you to deposit a security of $1000 cash in an account if you're trading 100,000 units at a 1% margin
. Your gains/losses will either add/deduct from your account's value.
9. Place your order
You can either place:
- Market orders - instructs your broker to execute a trade on your behalf, at the current market rate.
- Limit orders - instructs your broker to perform a trade at a certain price.
- Stop orders - is when you choose to buy a currency above its current market price (expecting its value to rise) or when you sell a currency below its current market price (so as to cut losses).
10. Watch your profits & losses
There are so many ups and downs in forex trading as it is a very volatile market. However, if you persevere, keep researching and stick to your strategy, profits will eventually come.