You may have heard about the foreign exchange market (Forex, a contraction of the words Foreign and Exchange) and the investment advantages it offers. Want to try it, but not sure where to start? This article will give you the basics of Forex trading and explain to you why it can be advantageous to participate in this rapidly growing financial market.
Previously, speculation in the Forex market was limited to large players such as national banks and multinational corporations. Later, in the 1980s, the rules changed to allow individual investors to participate in forex trading using margin accounts. Margin accounts are the reason why forex trading has become so popular. With a 100:1 margin account, you can control $100,000 with a mere $1000 investment.
However, forex trading is not so simple, serious Forex training is needed to invest - and win - like a professional. Although it is relatively easy to start trading forex pairs, there are risks that new traders needs to know.
Currency traders usually use a forex broker to handle transactions. Most forex brokers *broker comparison tool* are reputable and are associated with major financial institutions like banks. Reliable and trustworthy brokers are regulated by agencies such as the FSA in England, the AMF in France or the CFTC in the U.S. This regulation of forex brokers protects the interests of traders against questionable business practices.
Opening a Forex trading account is as simple as filling out a form, usually the only document required is proof of identity. The form includes a margin agreement which states that the broker can interfere with any trade it deems to be too risky. This is to protect the interests of the broker, as a margin account, in the case of most trades, involves the use of the broker's money. Once your account is created, you can fund and undertake trading activities in real time.
Most forex brokers offer different types of accounts to meet the needs of their traders. Mini accounts allow you to trade the forex markets online with just 100 euros or dollars, while the minimum deposit on a normal account is often around 1000 euros or dollars, depending on the broker. The amount of leverage - using borrowed money - varies with accounts. A high leverage account gives provides you with access to more money for trading, but the risk increases proportionately.
It is strongly recommended that novice traders first learn the ropes on a demo account with virtual money. Demo accounts usually have a limited duration, but they show traders how the system works while learning how to use the various features of a trading platform.
Almost every broker is present on the Internet. To access their online services, you must have a fairly recent computer, a decent Internet connection and a functional operating system (either Mac or Windows). Forex trading platforms are software which you install on your computer, but there are also platforms that require no downloading and applications for both mobile phones and iPads.
Orders are placed without commissions, which means you can make multiple trades in one day without worrying about paying high brokerage fees. Forex and CFD brokers make money on the difference between the bid and ask prices, which is known as the "spread".
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