The FOREX market, which crisscrosses the entire globe, is relatively young in nature, with its origins in 1973. Day in and day out, people young and old sit at their desktops or are on their phones, conducting business of large amounts. The market itself thrives on the ups and downs of fluctuating currency rates, around the world. In spite of the financial risks involved, there’s money to be made. Some of the major traders include international banks, governments and other organizations. How does a new comer begin trading in an international playground such as this?
The first important step is to look at some basics of trading:
- FOREX is usually traded on margin. This means that money used for trading purposes is mostly borrowed and not one’s own.
- While there is the security of not playing with one’s own finances, there is also a risk of making losses on borrowed capital. However, one also gets the opportunity to trade on larger amounts with a comparatively smaller deposit.
- Trading is always done with two currencies, for example- a trader may buy Japanese yen and sell Euro or vice versa. The term ‘long’ refers to the currency bought and ‘short’ refers to the currency sold. A ‘spread’ refers to the difference in the bidding and asking price. If a trader chooses to trade 100,000 yen against the Euro, he will also have to close the position (sell) with the same amount. Whatever difference is shown in the amount of Euro debited and credited, would translate into the trader’s profits or loss. In this case, the Euro will be known as the ‘price currency’. Trading itself is mostly always conducted in US dollars, simply because it has the highest currency value, but other currencies namely francs, marks or yen are also used.
- In trading, it is not uncommon to come across ‘spot’ and ‘forward’ trading deals. In the former, a spot price will be quoted on trading foreign exchange, and is usually settled in two days time, if there are no further steps taken. In a forward deal, a deal is struck between two parties at a fixed rate, but the deal itself however will take place later in time. The time period in some cases extend up to months and even years.
- The exchange rates and interest rates differ from one currency to another. It is important to remember that purchasing currency which has a high interest rate and selling currency, which has a low interest rate, is most beneficial.
- The FOREX is a 24-hour market with no restrictions on daily trade, or trading hours. Trading can be done on the Internet or through a phone.
So, how does one get started?
- Look at what kind of margin amount you are going to trade on. Margin deposits are assets with a considerable amount of value for example cash, bank guarantees etc. For some traders like corporate clients, a sound balance sheet is a good enough guarantee for them.
- There are many online sites, which allow a newcomer to open a free demo account with them, and even allow trading with a very small initial deposit. By making use of a short trial, anybody can get a feel of the real market and also a better understanding of the challenges and risks involved.
- Observe the fluctuations of a currency in the market. Why does the value of a franc keep falling every week, or why does the value of a yen keep rising at a steady rate? This is just an example to point out the importance of a country’s GDP, economic plans for the future, trade deficits/ surpluses etc- just some of the many factors that influence instability in the market. Hence the need to develop both a fundamental analysis (understanding indicators which could determine future trends) and technical analysis (noting patterns of price movements, pie charts etc). It is crucial to watch out for breaking news, which could impact the market.
- Choosing the right broker is of utmost importance. Dealing with a broker who is fair and is always ready to help you, would give any newcomer a lot of confidence. A broker generally makes his profits through the spreads that you make. There are also various kinds of accounts that brokers deal in which offer differing kinds of leverage. Mini accounts, are normally the safest for a starter offering a high leverage on a small deposit. Standard accounts, would entitle you to more benefits and higher leverage. Premium accounts offer access to research and more tools. Articles written on brokerage sites are usually a good reference material to ongoing trends and movements, besides also having pie charts and other analysis tools.
An experienced trader would also count presence of mind, sharp alertness and tough mental attitude as essentials to make money in the FOREX market. Although losses may occur at the start, having your own methods of dealing with uncertainties is important. A method used by a colleague over the years to trade may not necessarily be the correct method for you. But traders all over the world would agree that the key to surviving in this game would be to make huge profits when one is right and to make as few losses as possible when one is wrong. Experience on that level however, itself, comes with trading for a minimum period of a few years.