Are you thinking about getting started with foreign currency trading? It's truly not as complex as it looks. If you can read a price chart you're half way home. In Forex trading you can make money whether the market goes up or down. You can even profit if it's moving sideways.
The foreign currency market is the largest in the world, dwarfing all US stock markets combined. Total volume of Forex trading now approaches $4 trillion a day. The Forex is a de-centralized, over-the-counter market similar to the NASDAQ. It does not have a central location where trading takes place as the NYSE does.
The high volume makes the Forex market the most liquid in the world. This is why trades can be executed so quickly. For every buyer it's easy to find a seller. For each trader looking to sell a buyer is readily available. This market is open 24 hours a day from Sunday evening (if you live in North America) continuously through til Friday afternoon...about 5 days a week.
Previously Forex trading was only available to banks and other large financial institutions. However due to the proliferation of the internet -and consequent advances in information technology- in recent years an active 'retail' market has developed where smaller companies and individuals now have access to the Forex marketplace.
A distinct feature of Forex trading is the leverage. This is the amount of money you must put up to control a related amount of currency. When trading stocks you can trade "on margin" where you borrow money from your broker to buy stocks. This can give you leverage of 2:1. In Forex you can easily get leverage of 200:1. Some brokers even offer leverage of 400:1. This can be a two-edged sword. Yes, it can dramatically increase your profits; it can also magnify your losses as well. The Commodity Futures Trading Commission (CFTC) is now (spring 2010) considering a measure that would reduce leverage in the Forex market to 10:1.
Understanding these, and other concepts, of the Forex market is why it's crucial to have solid training and some experience before trading the Forex market with real money. Good Forex education is readily available from nearly any broker. You can also find paid training from a number of sources online. Once you have the basics mastered you should open a "paper trading "or demo account offered by most brokers. This will give you experience in what actual trading is like. Paper trade until you're both comfortable and profitable. Only then move into trading with real money.
To get started paper trading you'll need to choose a broker and become familiar with the trading platform they offer. One platform, used by over 200 brokers, is called Meta Trader 4 - MT4. This platform is easy to learn and has loads of indicators available. For these reasons MT4 is a good choice for many traders. Learn the basics of chart reading and how to interpret different price patterns on the chart. This craft is called Technical Analysis. There are tomes of material written on this subject.
Each Forex chart is different although they represent the same price fluctuations. For example, on the daily Forex chart, you can evaluate market trends in the past 24 hours to help you make decisions on the next 24 hours of trading. On the hourly chart, you can spot trends within the day. And, on the 15 minute chart, you get a picture of the recent short-term activity. Using the 5 minute chart gets you closer to the action and is used for very short term trading such as scalping.
These are the basics on how to trade the Forex market. Always remember that aside from the earning potential that is available in the Forex market, there are also considerable downside risks that you have to be aware of. You need to plan your trades and trade your plan. Set rules and guidelines for yourself and then follow them. Discipline is key. The psychology of trading is a subject unto itself that we will address in another article.
